The board of India Capital Growth Fund Limited published a circular to shareholders ahead of its extraordinary general meeting on 12 June.
In the document, the chairman Elizabeth Scott said: “The company has significantly underperformed its benchmark, India’s BSE Mid Cap Total Return Index, in the recent past.
“This is disappointing and means the company is likely to fail the second part of its three-yearly assessment in August, triggering a continuation vote.”
She said the board had been “carefully assessing” the best options for the company’s future.
“The choice is between winding up the company at a time when Indian mid-cap and small-cap equities are trading at close to their 15-year lows; or taking strong measures to improve performance and provide shareholders with a way to redeem the bulk of their holdings, if they wish, at a set date in the future.”
Changes afoot
After weighing the options, the board believe that the best way forward, among other things, is to take “extensive measures” to improve performance, establish a redemption offer and cut the fee paid to investment manager Ocean Dial.
Shareholders would be given the right to request the redemption of all or part of their shareholding on 31 December 2021 and every second year thereafter at a maximum exit discount of 6% discount to NAV per redemption share.
Ocean Dial’s fees would drop, with effect from 1 July 2020, from the current 1.25% of total assets per annum to the lower of:
- 1.25% of average market cap per annum or
- 1.25% of total assets per annum.
A further fee review would take place in 2022.
To boost the performance, Ocean Dial has strengthened its research team to seven from four.
Recently, Ocean Dial closed its Emerging India Fund, which was a mid-cap and small-cap open ended alternative to the India Capital Growth Fund.
“The closure has significantly reduced the number of stocks under ownership, freeing up the investment team’s bandwidth to the benefit of the company’s shareholders,” the board added.
Changes have also been made to the investment process, but without changing the strategy “per se”, the company added.
Decisions, decisions
The investment outlook for India’s small and mid-cap sector, according to Ocean Dial, is that it “will regain investors’ attention in anticipation of an economic recovery in India back to, at least, the historical growth rate of around 6% a year”.
“The beneficial, longer-term impact of structural reforms made by prime minister Modi should also help drive a higher and more sustainable level of economic growth, improving corporate earnings expectations and equity multiples.
“Analysis of historic market valuations shows that mid and small-cap Indian equities are trading at close to 15-year lows. Therefore, despite the near-term uncertainty around corporate profits, the investment risk/reward outlook is highly attractive,” Ocean Dial added.
Over to shareholders
The India Capital Growth Fund board “considers that there is good potential for the company’s performance to improve markedly” and the directors unanimously recommend that shareholders vote in favour of the proposals at the EGM.
Proxy votes must be submitted no later than 10 June.
