Annual Financial Report

LEI: 213800TPOS9AM7INH846

INDIA CAPITAL GROWTH FUND LIMITED

Annual Results for the year ended 31 December 2021

21 March 2022, London - India Capital Growth Fund ("ICGF" or "the Company"), the LSE premium listed investment company established to take advantage of long-term investment opportunities in companies based in India, today reports results for the year ended 31 December 2021.

Highlights

·      In 2021 the NAV rose 38%, underperforming the BSE Midcap TR Index, which was up 40%. A deferred tax charge relating to potential Indian Capital Gains Tax reduced the NAV by over 2% during the year

·      Discount narrowed over the year to just over 11% at the year end. The Board intends to repurchase shares when the discount is inappropriately wide, unless in volatile conditions

·      First Redemption Point on 31 December 2021 resulted in 13.9% shares being redeemed returning £19.7m to shareholders in January 2022. The second Redemption Point will be on 31 December 2023 when the exit discount will be no more than 3%

·      Earnings estimates of Indian companies were being upgraded in 2021 but the recent rise in the oil price is likely to have a negative effect on company profits and the Indian economy

Elisabeth Scott, Chair of India Capital Growth Fund, said:

The Russian invasion of Ukraine has seen the world turned upside down.  While India seems far away from the conflict, the mood of investors has been to reduce exposure to emerging markets and to take risk off the table.  Of course, the Indian equity market has fallen as a result.

Nonetheless, the Board believes that, particularly in this uncertain environment, the Company's focus on high quality companies with strong management capabilities and a clear path to growth will generate positive investment returns over time.

ENQUIRIES

About India Capital Growth Fund

India Capital Growth Fund Limited the LSE premium listed investment company registered and incorporated in Guernsey, was established to take advantage of long-term investment opportunities in companies based in India. ICGF predominantly invests in listed mid and small cap companies, although investments may also be made in large cap and private Indian companies where the Fund Manager believes long-term capital appreciation will be achieved. www.indiacapitalgrowth.com

Chair's statement

2021 saw investors return to emerging markets with optimism that the woes of COVID were coming to an end with the deployment of vaccines and a greater understanding of the economic impact of the pandemic.  This was illustrated by the impact of the second COVID wave suffered by India in April and May 2021, when, unlike the first major wave, economic activity was maintained, tax collections hit an all time high and fiscal discipline was maintained.

Performance

Your Company reported strong absolute returns with the Net Asset Value (NAV) rising by 37.9% over the year and the share price by 42.7%.  However, the Company's NAV underperformed its benchmark, the BSE MidCap Total Return Index, which rose by 39.7% over the same period.  The underperformance can be explained by the recognition of the potential Capital Gains tax liability in the calculation of the NAV, equivalent to reducing the NAV by approximately 2.4%.  Mid and small cap stocks outperformed large cap companies over the period.

The Investment Manager's Review will provide more detail on the Company's portfolio but I am pleased to report that the Manager's long term active style is benefiting performance.  A number of stocks that have been present in the portfolio for some years, such as Welspun India and Ramkrishna Forgings, were key positive contributors. 

Redemption Facility

31 December 2021 saw the first redemption point at which shareholders in the Company could request redemption of part or all of their shareholding at an exit discount of 6%.   Shareholders were reminded of this in the Interim Report and again in market announcements in early December.  15.6m shares were redeemed, representing 13.9% of shares in the Company. 

The second redemption point will be on 31 December 2023.  The Board has announced that the exit discount at this redemption point will be no more than 3%.

Further details of the Redemption Facility are available in the Redemption Facility EGM Circular dated 26 May 2020 which you can access in the Investor Relations/Official Documents section of our website at www.indiacapitalgrowth.com 

Discount

The Company's share price discount to NAV began the period at 14.1% and closed the period at 11.1% as was expected as a consequence of the redemption point at year end. 

In October the Board announced that it intended to use the authority given to it by shareholders to repurchase shares when it believes that the discount is inappropriately wide, unless in volatile conditions.  Over the period 412,444 shares were repurchased and since the year end, a further 80,201 shares have been repurchased.  The Board believes that it is in shareholders' interests that the Company's share price should more closely reflect the value of the Company's investments.  The Board works with the Company's broker, Shore Capital, in this regard.

Board Matters

The Board continued to hold meetings virtually during 2021 as COVID frustrated efforts to meet in person.  We do expect to be able to meet in person and with representatives of the Investment Manager and our other service providers at our meetings in 2022. 

The Company is a member of the Association of Investment Companies and seeks to follow best practice regarding appropriate disclosure and governance.  The governance principles that the Board has adopted are designed to ensure that the Company delivers long term value to its shareholders and treats all shareholders equally.  All shareholders are encouraged to have an open dialogue with the Board throughout the year, and the Board can be contacted via our website or the Company Secretary.

We welcomed Lynne Duquemin to the Board in May 2021.  As you will read in her biography later in this report, Lynne is an experienced financial services professional, based in Guernsey, and she has already demonstrated her considerable expertise in her contribution to the Board thus far.

Peter Niven will retire from the Board at the AGM.  We have engaged a reputable recruitment firm, Fletcher Jones, to help us to identify his successor, whom we expect to have experience of investing in India and emerging markets in general.

Investment Manager

Ocean Dial continues to invest in its fund management team based in Mumbai, with two experienced fund managers (Gaurav Narain and Tridib Pathak) heading the team, which includes five analysts.  If you would like to see examples of the team's research output, I would refer you to the House of Ocean Dial (HOOD) section of the Company's website, where you can read research notes written by the team on individual holdings in the Company's portfolio.

The Board engages with Ocean Dial's parent company, Avendus, regularly.

Sustainability and ESG Matters

Sustainability and ESG matters are covered in more detail later in this report.  However, I thought I should highlight the Board recognises its responsibilities for reporting on ESG and intends to progress towards compliance with the Listing Requirements to report on the four pillars of Governance, Strategy, Risk Management and Metrics & Targets with the assistance and support of the Investment Manager, upon whom the Board is reliant to deliver this ESG reporting of the Company. Further details of the Company's approach to ESG can be found on the Company's website (https://www.indiacapitalgrowth.com/about/esg/).

Investor Relations

The programme of shareholder engagement which began in earnest during 2020 has continued in 2021.  Ocean Dial has conducted a number of webinars for current and prospective shareholders during the year and the Board has been pleased with the level of engagement from shareholders.  We have made considerable efforts to get in touch with shareholders who hold their shares via platforms and encourage any shareholder to get in touch with us via the Company's website or the Company Secretary if you would like to receive notice of upcoming events.

The Company has presented at a number of investor events hosted by publications, platforms and wealth management companies.

The Company retains the services of a PR agency.  With their help, the Company has appeared in more than 30 articles in the UK press, podcasts and webinars.  The Board believes that this is an effective mechanism for drawing attention to the Company, encouraging prospective shareholders to buy shares and, in the long term, to improve the discount at which the Company's shares trade.

Outlook

As I write this, the Russian invasion of Ukraine has seen the world turned upside down.  While India seems far away from the conflict, the mood of investors has been to reduce exposure to emerging markets and to take risk off the table.  Of course, the Indian equity market has fallen as a result.

The growth orientated budget introduced by the Indian Government in February 2021 had been bearing fruit and as a result earnings estimates were being upgraded during much of 2021.  It was Ocean Dial's expectation that this would continue into 2022, but the recent rise in the oil price is likely to have a negative effect on Company profitability. 

Nonetheless, the Board believes that, particularly in this uncertain environment, the Company's focus on high quality companies with strong management capabilities and a clear path to growth will generate positive investment returns over time.

Thank you for your support over the past year.

INVESTMENT POLICY

The Company's investment objective is to provide long-term capital appreciation by investing in companies based in India. The investment policy permits the Company to make investments in a range of Indian equity and equity linked securities and predominantly in listed mid and small cap Indian companies with a smaller proportion in unlisted Indian companies. Investment may also be made in large-cap listed Indian companies and in companies incorporated outside India which have significant operations or markets in India. While the principal focus is on investment in listed equity securities or equity linked securities, the Company has the flexibility to invest in bonds (including non-investment grade bonds), convertibles and other types of securities. The Company may, for the purposes of hedging and investing, use derivative instruments such as financial futures, options and warrants. The Company may, from time to time, use borrowings to provide short-term liquidity and, if the Directors deem it prudent, for longer term purposes. The Directors intend to restrict borrowings on a longer term basis to a maximum amount equal to 25% of the net assets of the Company at the time of the drawdown. It is the Company's current policy not to hedge the exposure to the Indian Rupee.

The portfolio concentration ranges between 30 and 40 stocks; however, to the extent the Company grows, the number of stocks held may increase over time. The Company is subject to the following investment limitations: No more than 10% of Total Assets may be invested in the securities of any one Issuer or invested in listed closed-ended funds.

Investment Manager's report

Introduction

2020 was a good year for investors in India, but 2021 was better still.

Since the pandemic caused human suffering and economic uncertainty in India at a level unmatched elsewhere, the extent of the rally has been surprising but welcome.

In 2021 the Company's net asset value rose 37.9% (10.4% in 2020), whilst its index (S&P BSE Midcap Total Return) rose 39.7%, (13.9% in 2020). Emerging Markets as a whole (MSCI EM GBP) fell 1.5% in 2021, further highlighting India's strong showing. Poor equity performance in China played a supporting role.

One explanation for the performance is the tendency of equity markets to mean revert. Because India fared poorly in both 2018 and 2019, a combination of poor sentiment, oversold markets, and global central bank infused liquidity was enough to cause equities to surprise on the upside.  A more encouraging explanation is that investors are coming round to the view that India's macro economy is demonstrating more resilience in the face of global market volatility, and this is feeding into corporate and consumer confidence. The recent performance has favoured midcap companies which would imply that, although easy liquidity has supported the market generally, investors in India are anticipating the long-awaited economic recovery.

Modi's economic restructuring plan has been ongoing since the 2015 demonetisation experience. It has been extensive and disruptive for both growth and profitability as the transformation from a patronage-based system to a rules-based equivalent beds in. Owing to uncertainty surrounding this change, corporate India had been reluctant to invest, choosing instead to reduce debt and cut costs.  Implementation of reforms such as Goods & Services Tax and Insolvency & Bankruptcy Act was poor, bureaucrats overwhelmed by the size of the challenge and the vested interests of crony capitalists, whilst chief executives were reluctant to expand operations over fears of what was coming next. Banks added little to support economic activity given the extensive clean-up of asset quality and tighter regulations that was forced upon them. In addition, inflation targeting policies (between 2%-6%) led to an extended period of high real rates which also blunted growth. Capping farming subsidies dented rural consumption but supported the journey to lower inflation.

Although there has been a cost to short-term growth, Modi's restructuring agenda has been successful.

Inflation has fallen to within the target range, bond yields have come down, whilst currency reserves have risen to over US$650bn, the fifth highest globally. India's current account deficit has been brought under control, and exports have started to grow as the country takes better advantage of its competitive positioning. Indian families are switching savings away from real assets (gold and real estate) and into financial products including equities, providing much needed support for the market, as foreign investors concentrated their firepower on China. 

A further upshot of these measures was that the economy showed unexpected resilience throughout the pandemic. Earlier reluctance to expand ensured companies coped well, whilst the banking system reported minimal additional stress, since the clean-up was largely behind.  Consumption held up on the back of strong agricultural prices supporting rural incomes and the onset of online shopping, comfortably exceeding expectations. This resilience gave the government the confidence to switch its core policies from reform to growth, supporting the private sector to step up investment spending. Fiscal shackles were eased in early 2021, with incremental firepower being directed to productive spending on infrastructure, roads, railways, and ports. Incentives schemes were announced to support domestic manufacturing and attract multi nationals to build capacity in favour of China as global supply chain diversification took prominence. After years of stagnation resulting from excess supply and tighter regulation, residential property prices climbed as the affordability levels reached new highs. This bodes well for future growth prospects.

Against this supportive backdrop, two catalysts drove the market higher. Domestic equity investors' vast demand for new listing opportunities generated both headlines and flow. On the back of "digital mainstreaming", fast tracked by the pandemic, the market absorbed a huge number of IPOs, sector wide, but digital specific. Fresh capital was raised as private equity shareholders and business entrepreneurs took advantage of market optimism to list both primary, but mainly secondary stock. This is a big event, for it brings India to the attention of a larger investor base, improving liquidity, re-balancing indices and providing listed investors with access to the digital and tech companies, in the way that China and US markets have done for years. It also brings renewed interest from foreign investors.

Most important however is the fact that corporate profit forecasts are being raised after many years, supporting market valuations and, potentially, adding additional further upward momentum. For some time, equity analysts have been over optimistic when forecasting earnings and profitability. Usually on the back of higher growth expectations that have failed to materialise. Now it seems this optimism may be warranted on the back of a solid platform of reform, a cleaner banking system, and stronger than expected profit growth. If this is the story of a new cycle for India, it should be an exciting time for investors.

Outlook

As I write this, the Russian invasion of Ukraine poses a risk to the continuation of India's economic recovery. While India's direct trade exposure to Russia is less than 1% of exports and 2% of imports, India remains vulnerable to rising energy prices. India imports over 80% of its oil. If current oil prices of US$120 a barrel are sustained, India's oil import bill in a year could rise by almost US$60bn from US$130bn estimate for the financial year ended March 2022. Prices of other key imports like coal, fertilizers, sunflower oil etc. have also seen a rise and could add a further US$35bn to the import bill. This implies that the current account deficit could increase to 2.7-3% of GDP and India's balance of payments could turn from positive to negative. Hence the biggest risk is on the currency. We draw comfort from the fact that unlike 2011-12, which was the last time oil was above US$100 a barrel, the economy now is far more resilient. India has amassed record foreign exchange reserves of over US$630bn, inflation is at 5.5% (vs 10% in 2011-12), the current account deficit is 1.5% (vs 4.5% in 2011-12) and the information technology services sector alone has reached scale with annual exports of over US$180bn, well above India's oil imports.

The above crisis however comes at a time when commodity prices were already at historical highs and many companies had resorted to raising their prices to protect margins. We believe companies would find it difficult to pass on further increases without impacting demand. This is relevant not just for India but globally as well. While it is still too early to factor in the impact on demand or margins, the longer the Ukraine crisis lasts, the greater the risk to earnings downgrades. The recent market correction does however factor in some potential cuts to earnings. We are less concerned about stress on the balance sheets of corporate India as most companies have been deleveraging over recent years. Even the banking system is well capitalized with banks sitting on surplus liquidity.

To end on a positive note, assembly elections in five states were just completed and the Modi Government emerged victorious in four of the five states. This included Uttar Pradesh, India's largest state with a population of over 200m people. This is a positive as it reaffirms Prime Minister Modi's popularity, ensures continuity in government policies and provides greater macroeconomic stability. It also puts the Modi government on a strong footing ahead of the general elections in 2024.

Portfolio attribution

Over the year the net asset value of the portfolio rose by 37.9%. This compared to the portfolio's benchmark S&P BSE Midcap TR index returning 39.7%. Strong stock selection was the main driver of positive performance, although sector allocation also played its part.

At a sector level the main contributors to positive performance were consumer discretionary, information technology, materials and communication services. Sectors that dragged performance lower were led by financials, with utilities, industrials and energy also detracting. Cash, which averaged 2.7% over the period, pulled relative performance lower in the rising market.

At a stock level IT services company Persistent Systems rose over 200%, along with Tech Mahindra (IT sector) which rose 90%. Dixon Technologies (electrical equipment manufacturing) expanded the outsize gains made last year by rising 103% in 2021 driven by healthy earnings growth and multiple re-rating. This was also the case with long-term holding Welspun (integrated textiles) which rose 114%. New portfolio entrant Sona BLW (precision engineering, see below) rose 112% as investors priced in substantial growth expectations. Elsewhere, Sagar Cement (up 105%) and Ramkrishna Forgings (up 97%) outperformed from the materials sector, whilst Affle India (digital advertising through mobiles) was also a significant outperformer. Adverse stock selection was the major contributor to negative attribution in financials, led by City Union Bank, Indusind Bank and Multi Commodity Exchange. Performance has started to pick up more recently in this sector as the market starts to believe that asset quality issues and excess provisioning may soon be replaced by improving loan growth leading to recovering profitability. Underperformance in industrials was a combination of both adverse stock selection and insufficient allocation though this was partially offset by outperformance by portfolio heavyweight Kajaria Ceramics which rose 85%. It was a similar story in the utilities sector whereby the portfolio missed out on outperformance over the period despite a strong showing by Gujarat Gas. The portfolio finished the year with one stock fewer. Exide Industries, ICICI Lombard General Insurance, BLS Services, Bajaj Consumer Care and Arihant Foundations were sold. Portfolio additions were four, made up of Affle India, Sona BLW, Bajaj Electricals and Jubilant Foodworks. A short description of each is included below.

Affle India (Affle) is a digital ad-tech company operating only in the mobile space. Using data science algorithms, Affle enables advertisers to drive targeted marketing campaigns to acquire new customers or engage existing ones. It earns 89% of revenue through a "cost-per-converter-user revenue model" where Affle is paid once a customer is converted. It has a strong position in markets such as India (revenue c. 48%) and other emerging markets across Asia, Middle East, and Latin America. With increasing smartphone usage and online shopping both accelerated by Covid-19, we believe Affle provides exposure to a large market opportunity across the digital ecosystem. Advertisers continue moving towards digital marketing and away from the traditional media, and within digital, programmatic advertising (as adopted by Affle), is winning incremental share.

Sona BLW Precision Forgings (Sona BLW), an automotive ancillary company. It supplies critical components such as differential assemblies, differential gears, starter motors and traction motors to automotive companies across the world. Sona BLW is a direct beneficiary of electric vehicle (EV) adoption globally as differential assemblies and gears are a critical component to manage high torque requirements in EV. In FY21, EV contributed 14% of revenues, out of which Tesla accounts for 13%. The company's strength comes from in-house design, knowledge of metallurgy and warm forging capability, making it one of the most integrated players in the sector. Unlike many automotive ancillary players, Sona BLW is in a strong position to benefit from EV adoption both in India (in time) and globally.

Bajaj Electricals Limited (BJE) is a leading player in the Fast-Moving Electric Goods (FMEG) space, selling appliances, fans, and lighting products to consumers. BJE's strength lies in its strong brand, distribution, and after-sales service. The company also has an engineering, procurement, and construction (EPC) division which focuses on areas such as lighting, transmission towers and power distribution. This is now being demerged. Along with cost efficiencies coupled with operating leverage, there is a structural change in the company's margin trajectory.   The company has not only deleveraged its balance sheet through healthy operating cash flows but has also stepped up investments in branding and new products. Going forwards, we feel the company is well on track to achieve over 22% ROCE from FY22E onwards. We expect its increase in sales and PAT CAGR from FY21E to FY23E to be 17% and 48% respectively.

Jubilant Foodworks is the largest food service company in India operating two international brands - Domino's Pizza and Dunkin' Donuts. Domino's is the largest quick service restaurant (QSR) brand in India with 1,435 stores across 307 cities. We believe Jubilant is fast converting into a food powerhouse with multiple brands backed by strong digital capabilities. Because of Covid-19, India is witnessing increased scrutiny on hygiene, which will benefit strong QSR brands driving market share gains from informal players such as street food vendors.  Currently, 85% of orders are from the delivery channel which is expected to fall to 75% as the economy opens gradually post-Covid.  We forecast 55% CAGR in earnings from FY21-24 driven by a healthy store addition pipeline and margin resilience due to high same store sales growth and operating leverage.

 For the year ended 31 December 2021

The total column of this statement represents the Company's statement of comprehensive income, prepared in accordance with IFRS as adopted by the EU. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies, as disclosed in the Basis of Preparation in Note 1.

The profit after tax is the "total comprehensive income" as defined by IAS 1. There is no other comprehensive income as defined by IFRS and all the items in the above statement derive from continuing operations.

Audited statement of financial position

  As at 31 December 2021

For the year ended 31 December 2021

For the year ended 31 December 2020

  For the year ended 31 December 2021

Notes to the financial statements

1. Accounting Policies

Basis of accounting

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and interpretations adopted by the International Accounting Standards Board (IASB). 

Basis of preparation

The financial statements for the year ended 31 December 2021 have been prepared under the historical cost convention adjusted to take account of the revaluation of the Company's investments to fair value.

Where presentational guidance set out in the Statement of Recommended Practice (SORP) for Investment Trust Companies and Venture Capital Trusts issued by the Association of Investment Companies (AIC) in November 2014, and subsequently revised in November 2019, is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. In particular, supplementary information which analyses the statement of comprehensive income between items of a revenue and capital nature has been presented alongside the statement of comprehensive income.

Going concern

The Board made an assessment of the Company's ability to continue as a going concern for the twelve months from the date of approval of these financial statements taking into account all available information about the future including the liquidity of the investment portfolio held both by the Company and its subsidiary, ICG Q Limited (73.9% of the portfolio can be liquidated within 5 days); the performance of the investment portfolio (the net asset value of the Company increased 37.9% in the year); the overall size of the Company and its impact on the Ongoing Charges of the Company (the net asset value of the Company exceeded £100m throughout the year); the level of operating expenses covered by highly liquid investments held in the portfolio (operating expenses are 48 times covered by highly liquid investments); and the length of time to remit funds from India to Mauritius and Guernsey to settle ongoing expenses (no more than 10 days to have investments liquidated and sterling funds in Guernsey).

Given the Company's previous performance, the Directors proposed a continuation ordinary resolution at the Extraordinary General Meeting held on 12 June 2020, at which the Shareholders approved that the Company continue as currently constituted and introduce a redemption facility which gives the ordinary shareholders the ability to redeem part or all of their shareholding at a Redemption Point every two years. The first Redemption Point was on 31 December 2021 when valid redemption requests were received in respect of 15,608,872 ordinary shares (13.9% of the then issued share capital) which were subsequently redeemed under the redemption facility at a total cost of £19.7m in accordance with the announced timetable. The next date at which shareholders will be able to request the redemption of some or all of the shares will be 31 December 2023.

The Directors are satisfied that the Company has sufficient liquid resources to continue in business for the foreseeable future therefore the financial statements have been prepared on a going concern basis.

Impact of IFRS 10 'Consolidated Financial Statements'

As set out under IFRS 10, a parent entity that qualifies as an investment entity should not consolidate its subsidiaries. The Company meets all the following criteria to qualify as an investment entity: -

(i)   Obtaining funds from one or more investors for the purpose of providing those investors with investment management services - the Board of Directors of the Company has delegated this function to its investment manager, Ocean Dial Asset Management Limited;

(ii)   Commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both - funds are invested in ICG Q Limited for the sole purpose of achieving capital appreciation via further placements in Indian listed securities; and

(iii)  Measures and evaluates the performance of substantially all of its investments on a fair value basis - on a monthly basis, the Company's investment in ICG Q Limited is revalued at the prevailing Net Asset Value at the corresponding valuation date.       

The IFRS 10 Investment Entity Exemption requires investment entities to fair value all subsidiaries that are themselves investment entities. As the subsidiary meets the criteria of an investment entity, it has not been consolidated. On the basis of the above, these financial statements represent the stand-alone figures of the Company.

Expenses

Expenses are accounted for on an accruals basis. Other expenses, including management fees, are allocated to the revenue column of the statement of profit or loss and other comprehensive income.

Taxation

Full provision is made in the statement of profit or loss and other comprehensive income at the relevant rate for any taxation payable in respect of the results for the year.

Deferred taxation

Deferred taxation is recognised in respect of all temporary differences at the Statement of Financial Position date, where transactions or events that result in an obligation to pay more tax in the future or right to pay less tax in the future have occurred at the Statement of Financial Position date. This is subject to deferred taxation assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the temporary differences can be deducted. Deferred taxation assets and liabilities are measured at the rates applicable to the legal jurisdictions in which they arise, using enacted taxation rates that are expected to apply at the date the deferred taxation position is unwound.

Investments

The Company's investment in ICG Q Limited is designated at fair value through profit or loss as the Company meets the definition of an investment entity under IFRS 10. It is initially recognised at fair value, being the cost incurred at acquisition. Transaction costs are expensed in the statement of comprehensive income. Gains and losses arising from changes in fair value are presented in the statement of comprehensive income in the period in which they arise.

The investment is designated at fair value through profit or loss at inception because it is managed and its performance evaluated on a fair value basis in accordance with the Company's investment strategy as documented in the Admission Document and information thereon is evaluated by the management of the Company on a fair value basis.

The basis of the fair value of the investment in the underlying subsidiary, ICG Q Limited, is its Net Asset Value. ICG Q Limited's investments are designated at fair value through profit and loss.

Portfolio investments held by the Company are stated at the mid-market price quoted on the Indian Stock Exchanges. Purchases and sales are recognised on the trade date - the date on which the Company commits to purchase or sell the investment.  Realised gains and losses are calculated with reference to book cost on a FIFO (First in First out) basis.

The financial asset is derecognised when the rights to receive cash flows from the investment have expired or the Company has transferred substantially all risks and rewards of ownership.

Impairment of financial assets

The Company holds only cash and cash equivalents with reputable institutions at amortised cost and, as such, has chosen to apply an approach similar to the simplified approach for expected credit losses (ECL) under IFRS 9. Therefore, the Company does not track changes in credit risk, but instead, recognises a loss allowance based on lifetime ECLs at each reporting date. The Company's approach to ECLs reflects a probability-weighted outcome, the time value of money and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

Receivables and Payables

Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method (EIR), less impairment, such impairment to be determined using the simplified expected credit losses approach in accordance with IFRS 9. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in profit or loss. The losses arising from impairment are recognised in profit or loss.

Other financial liabilities include all financial liabilities, other than those classified as at FVPL. The Company includes in this category short-term payables.

Foreign currency translation

The Company's shares are denominated in Sterling ("£") and the majority of its expenses are incurred in Sterling. Accordingly, the Board has determined that the functional currency is Sterling. Sterling is also the presentational currency of the financial statements.

Monetary foreign currency assets and liabilities are translated into Sterling at the rate of exchange ruling at the statement of financial position date. Investment transactions and income and expenditure items are translated at the rate of exchange ruling at the date of the transactions. Gains and losses on foreign exchange are included in the statement of comprehensive income.

Cash and cash equivalents

Cash consists of Bank current accounts. Cash equivalents are short-term highly liquid investments that are readily convertible into known amounts of cash and which are subject to insignificant changes in value.

Share capital

The share capital of the Company consists of Ordinary Shares which have all the features and have met all the conditions for classification as equity instruments under IAS 32 (amended) and have been classified as such in the financial statements.

Standards, interpretations and amendments to published statements effective but not material to the financial statements

.

The following standards (some of which are amendments to existing standards) are effective for the first time for the financial period beginning 1 January 2021 and are relevant to the Company's operations:

Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform - Phase 2 (issued on 27 August 2020)

The following standards and amendments have been issued and are mandatory for accounting periods beginning on or after 1 January 2021 but are not relevant or have no material effect on the Company's operations or financial statements:

Standards, interpretations and amendments to published statements not yet effective

·      Amendments to IAS 12 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current and Classification of Liabilities as Current or Non-current - Deferral of Effective Date (issued on 23 January 2020 and 15 July 2020 respectively)

·      Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting policies (issued on 12 February 2021)

·      Amendments to IAS 8 Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates (issued on 12 February 2021)

·      Amendments to IAS 12 Income Taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction (issued on 7 May 2021)

Other standards in issue, but not yet effective, are not expected to have a material effect on the financial statements of the Company in future periods and have not been disclosed.

Definition of Accounting Estimates - Amendments to IAS 8

In February 2021, the IASB issued amendments to IAS 8, in which it introduces a definition of 'accounting estimates'. The amendments clarify the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors. Also, they clarify how entities use measurement techniques and inputs to develop accounting estimates.

The amendments are effective for annual reporting periods beginning on or after 1 January 2023 and apply to changes in accounting policies and changes in accounting estimates that occur on or after the start of that period. Earlier application is permitted as long as this fact is disclosed.

The amendments are not expected to have a material impact on the Company.

Disclosure of Accounting Policies - Amendments to IAS 1 and IFRS Practice Statement 2

In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements, in which it provides guidance and examples to help entities apply materiality judgements to accounting policy disclosures. The amendments aim to help entities provide accounting policy disclosures that are more useful by replacing the requirement for entities to disclose their 'significant' accounting policies with a requirement to disclose their 'material' accounting policies and adding guidance on how entities apply the concept of materiality in making decisions about accounting policy disclosures.

The amendments to IAS 1 are applicable for annual periods beginning on or after 1 January 2023 with earlier application permitted. Since the amendments to the Practice Statement 2 provide non-mandatory guidance on the application of the definition of material to accounting policy information, an effective date for these amendments is not necessary.

The Company is currently assessing the impact of the amendments to determine the impact they will have on the Company's accounting policy disclosures.

2. Critical accounting judgements and key sources of estimation uncertainty

IFRS require management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equate to the related actual results. The main use of accounting estimates and assumptions occurs in the calculation of the sensitivity analysis in note 10. In relation to the valuation of the unlisted investment, actual results may differ from the estimates. It is management's judgement that the Net Asset Value (NAV) of ICG Q Limited is an appropriate proxy for fair value as the Company can control the sale of the subsidiary's investments which are all listed on stock exchanges in India and therefore are mostly regarded as highly liquid.

3. Operating expenses

4. Earnings/(loss) per share

Earnings/(loss) per Ordinary Share and the fully diluted loss per share are calculated on the profit for the year of £41,604,000 (2020 - profit of £10,353,000) divided by the weighted average number of Ordinary Shares of 112,089,729 (2020 - 112,502,173).

5. Financial assets designated at fair value through profit or loss

Financial assets at fair value through profit or loss consists of investments in securities listed on Indian stock markets, namely the National Stock Exchange or the Bombay Stock Exchange, as well as investment in the wholly owned subsidiary, ICG Q Limited. A summary of movements is as follows:

The net realised and unrealised gains totalling £42,315,000 (2020: £10,900,000) on financial assets at fair value through profit and loss comprise of gains on the Company's holding in ICG Q Limited to the extent of £40,229,000 (2020: gains of £11,733,000) and gains of £2,086,000 (2020: losses of £833,000) arising from investments in securities listed on Indian stock markets. The movement arising from the Company's holding in ICG Q Limited is driven by the following amounts within the financial statements of ICG Q Limited, as set out below.

The equity investment represents ICG Q Limited, the Company's wholly owned subsidiary. ICG Q Limited is incorporated and has its principal place of business in the Republic of Mauritius. The Company holds Participating Shares in ICG Q Limited, which confer voting rights to the Company, hence controlling interests.

6. Taxation

Guernsey

India Capital Growth Fund Limited is exempt from taxation in Guernsey on non-Guernsey sourced income. The Company is exempt under The Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 (as amended) and paid the annual exemption fee of £1,200. For the year ended 31 December 2021, the Company had a tax liability of £Nil (2020: £Nil).

India

Capital gains arising from equity investments in Indian companies are subject to Indian Capital Gains Tax Regulations. Consequently with effect from April 2020, the Company and its subsidiary, ICG Q Limited, have been subject to both short and long term capital gains tax in India on the growth in value of their investment portfolios at the rate of 15% and 10% respectively. Although this additional tax only becomes payable at the point at which the underlying investments are sold and profits crystallised, the Company and its subsidiary must accrue for this additional cost as a deferred taxation liability, notwithstanding that they seek to minimise the impact of these taxation rates applicable to capital gains by maintaining its investment strategy of investing in a concentrated portfolio for long term capital appreciation. The deferred taxation liability relating to Indian capital gains tax for the Company was £198,000 at 31 December 2021 (2020: £Nil) and for its subsidiary was £4,388,000 at 31 December 2021 (2020: £Nil).

Dividend withholding tax

The Company and its subsidiary are also subject to withholding tax on their dividend income in India. The withholding tax charge for the Company for the year ended 31 December 2021 was £19,000 (2020: £10,000) and for its subsidiary was £226,000 (2020: £80,000).  

7. Segmental information

The Board has considered the provisions of IFRS 8 in relation to segmental reporting and concluded that the Company's activities form two segments under the standard. From a geographical perspective, the Company's activities are focused in two areas - Mauritius and India. The subsidiary, ICG Q Limited, focuses its investment activities in listed securities in India. Additional disclosures have been provided in this Annual Report as elaborated in the Directors'' Report to disclose the underlying information.

8. Share capital

Authorised Share Capital

Unlimited number of Ordinary Shares of £0.01 each

The Ordinary Shares of the Company carry the following rights:

i.          The holders of Ordinary Shares have the right to receive in proportion to their holdings all the revenue profits of the Company (including accumulated revenue reserves) attributable to the Ordinary Shares as a class available for distribution and determined to be distributed by way of interim and/or final dividend at such times as the Directors may determine.

ii.          On a winding-up of the Company, after paying all the debts attributable to and satisfying all the liabilities of the Company, holders of the Ordinary Shares shall be entitled to receive by way of capital any surplus assets of the Company attributable to the Ordinary Shares as a class in proportion to their holdings.

iii.         Subject to any special rights or restrictions for the time being attached to any class of shares, on a show of hands every member present in person has one vote. Upon a poll every member present in person or by proxy has one vote for each share held by him.

In light of the redemption facility available to the Company as per its prospectus, there was a buy back of 412,444 ordinary shares during the year ended 31 December 2021. These shares were transferred from Issued Share Capital Account to Treasury Shares Account and were traded at a discount to the Net Asset Value per share on occasion, as per below:

9. Fair value of financial instruments

The following tables shows financial instruments recognised at fair value, analysed between those whose fair value is based on:

·      Quoted prices in active markets for identical assets or liabilities (Level 1);

·      Those involving inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and

·      Those with inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

The analysis as at 31 December 2021 is as follows:

The analysis as at 31 December 2020 is as follows:

The Company's investment in ICG Q Limited, the Company's wholly owned subsidiary is priced based on the subsidiary's net asset value as calculated as at the reporting date. The Company has the ability to redeem its investment in ICG Q Limited at the net asset value at the measurement date therefore this is categorised as level 2. The classification within the hierarchy does not necessarily correspond to the Investment Manager's perceived risk of the investment, nor the level of the investments held within the subsidiary. All the underlying investments of ICG Q Limited are categorised as level 1 at 31 December 2021 and 2020. The year-end fair value of those investments, together with cash held in ICG Q Limited, comprise all but an insignificant proportion of the net asset value of the subsidiary.

There has been no movement between levels for the year ended 31 December 2021. There were no changes in valuation techniques during the year ended 31 December 2021.

10. Financial instruments and risk profile

The primary objective of the Company is to provide long-term capital appreciation by investing predominantly in companies based in India. The investment policy permits making investments in a range of equity and equity linked securities of such companies. The portfolio of investments comprises of listed Indian companies, predominantly mid cap and small cap. The specific risks arising from exposure to these instruments and the Investment Manager's policies for managing these risks, which have been applied throughout the period, are summarised below:

Capital management

The Company is a closed-ended investment company and thus has a fixed capital for investment. It has no legal capital regulatory requirement. The Board has the power to purchase shares for cancellation thus reducing capital and the Board considers on a regular basis whether it is appropriate to exercise such powers. In the year ended 31 December 2021, the Board determined that it was inappropriate to exercise such powers, although continuation of these powers will be sought at the Annual General Meeting.

The Board also considers from time to time whether it may be appropriate to raise new capital by a further issue of shares. The raising of new capital would, however, be dependent on there being genuine market demand.

Market Risk

Market price risk arises mainly from the uncertainty about future prices of the financial instrument held by the Company and its subsidiary, ICG Q Limited ("the Group"). It represents the potential loss the Group may suffer through holding market positions in the face of price movements.

The Group's investment portfolio is exposed to market price fluctuations which are monitored by the Investment Manager in pursuance of the investment objectives and policies and in adherence to the investment guidelines and the investment and borrowing powers set out in the Admission Document. The Group's investment portfolio is concentrated and, as at 31 December 2021, comprised investment in less than 35 companies. Thus, the Group has higher exposure to market risk in relation to individual stocks than more broadly spread portfolios.

The Group's investment portfolio consists predominantly of mid cap and small cap listed Indian securities, and thus the effect of market movements is not closely correlated with the principal market index, the BSE Sensex. The BSE Mid Cap Total Return Index provides a better (but not ideal) indicator of the effect of market price risk on the portfolio. Assuming perfect correlation, the sensitivity of the Group's investment portfolio to market price risk can be approximated by applying the percentage of funds invested (2021: 93.7%; 2020: 90.4%) to any movement in the BSE Mid Cap Total Return Index. 

At 31 December 2021, with all other variables held constant, this approximation would produce a movement in the net assets of the Group's investment portfolio of £14,584,000 (2020: £10,774,000) for a 10% (2020: 10%) movement in the index which would impact the Company via a fair value movement of the same magnitude in its holding in ICG Q Limited and its investments.

Foreign currency risk

Foreign currency risk arises mainly from the fair value or future cash flows of the financial instruments held by the Group fluctuating because of changes in foreign exchange rates. The Group's investment portfolio consists of predominantly Rupee denominated investments but reporting, and in particular the reported Net Asset Value, is denominated in Sterling. Any appreciation or depreciation in the Rupee would have an impact on the performance of the Company. The underlying currency risk in relation to the Group's investment portfolio is the Rupee. The Group's policy is not to hedge the Rupee exposure. The Group may enter into currency hedging transactions but appropriate mechanisms on acceptable terms are not expected to be readily available.

At 31 December 2021, if the Indian Rupee had strengthened or weakened by 10% (2020: 10%) against Sterling with all other variables held constant, pre-tax profit for the period would have been £14,281,000  (2020: £10,115,000) higher or lower, respectively, mainly as a result of foreign exchange gains or losses on translation of Indian Rupee denominated financial assets designated at fair value through profit or loss in ICG Q Limited, the consequent impact on the fair value of the Company's investment in ICG Q Limited and in the Company's investment portfolio.

Credit risk

Credit risk arises mainly from an issuer or counterparty being unable to meet a commitment that it has entered into with the Group. Credit risk in relation to securities transactions awaiting settlement is managed through the rules and procedures of the relevant stock exchanges. In particular settlements for transactions in listed securities are effected by the custodian on a delivery against payment or receipt against payment basis. Transactions in unlisted securities are effected against binding subscription agreements.

The principal credit risks are in relation to cash held by the custodian. Kotak Mahindra Bank Limited ("Kotak") acts as the custodian to the Group. The aggregate exposure to Kotak at 31 December 2021 was £1,688,130 (2020: £2,047,000).

Kotak acted as custodian of the Group's assets during the period. The securities held by Kotak as custodian are held in trust and are registered in the name of the Group. Kotak has a long-term credit rating of AAA (CRISIL Ratings - a S&P company).

Interest rate risk

Interest rate risk represents the uncertainty of investment return due to changes in the market rates of interest. The direct effect of movements in interest rates is not material as any surplus cash is predominantly in Indian Rupees, and foreign investors are not permitted to earn interest on Rupee balances.

Liquidity risk

Liquidity risk arises mainly from the Group encountering difficulty in realising assets or otherwise raising funds to meet financial commitments. As the trading volume on the Indian stock markets is lower than that of more developed stock exchanges the Group may be invested in relatively illiquid securities. The Group has no unlisted securities and its focus is to invest predominantly in mid and small cap listed stocks. However, there remain holdings where there is relatively little market liquidity, which may take time to realise. The Directors do not believe that the market is inactive enough to warrant a discount for liquidity risk on the Group's investment portfolio. ICG Q Limited seeks to maintain sufficient cash to meet its working capital requirements. The Directors do not believe it to be appropriate to adjust the fair value of the Company's investment in ICG Q Limited for liquidity risk, as it has the ability to effect a disposal of any investment in ICG Q Limited's investment portfolio at the prevailing market price and the distribution of proceeds back to the Company should it so wish.

All liabilities are current and due on demand.

Taxation risk

Taxation risk arises mainly from the taxation of income and capital gains of ICG Q Limited and the Company increasing as a result of changes in the tax regulations and practice in Guernsey, Mauritius and India. The Company and ICG Q Limited are registered with the Securities and Exchange Board of India ("SEBI") as a foreign portfolio investor ("FPI") with a Category I licence, and ICG Q Limited holds a Global Business Licence in Mauritius and has obtained a Mauritian Tax Residence Certificate ("TRC") which have been factors in determining its resident status under the India-Mauritius Double Taxation Avoidance Agreement ("DTAA") and General Anti Avoidance Rules ("GAAR") under the Income Tax Act 1961 ("ITA").

However, with effect from April 2017, the DTAA was amended such that the advantages of investing in India via Mauritius were removed and capital gains arising from investments in Indian companies are subject to Indian Capital Gains Tax regulations. Consequently, tax on short term capital gains (for investments held less than 12 months) of 15% and long-term capital gains (for investments held for 12 months or longer) of 10% apply to the investment portfolio.

The Group seeks to minimise the impact of these changes in the taxation rates applicable to its capital gains by maintaining its investment strategy of investing in a concentrated portfolio for long term capital appreciation.

11. Related party transactions and material contracts

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. The Directors are responsible for the determination of the investment policy and have overall responsibility for the Company's activities. Directors' fees are disclosed in the unaudited Directors' remuneration report.

During the year 2021, the investment management fee was equivalent to 1.25 per cent per annum of the aggregate value of its assets less current liabilities, calculated and payable monthly in arrears. The Investment Manager earned £1,507,000 in management fees during the year ended 31 December 2021 (2020: £664,000) of which £144,000 was outstanding at 31 December 2021 (2020: £98,000).

Under the terms of the Administration Agreement, Apex Fund and Corporate Services (Guernsey) Limited is entitled to a minimum annual fee of US$41,000 or a fee of 5 basis points of the NAV of the Company, whichever is greater. The Administrator is also entitled to reimbursement of all out-of-pocket expenses recoverable by way of a fixed disbursement charge of US$50 per month excluding all international calls and courier. The Administrator earned £55,000 for administration and secretarial services during the year ended 31 December 2021 (2020: £42,000) of which £30,000 was outstanding at 31 December 2021 (2020: £10,000).

12. Contingent liabilities

The Directors are not aware of any contingent liabilities as at 31 December 2021 and at the date of approving these financial statements.

13. Subsequent events

During the month of January 2022, 15,608,872 ordinary shares, equivalent to 13.9 per cent of the shares in issue as at 31 December 2021 (excluding treasury shares), were redeemed at 126.2613p per Redemption Share. These Redemption Shares were held in treasury following the redemption, with 200,000 shares subsequently being sold from treasury. The redemption of shares paid in January 2022 resulted in a £19.7m reduction in the net asset value of the Company since the year end.  

The Company bought 30,201 ordinary shares at a price of 108.00p per share on 18 February 2022 and 50,000 ordinary shares at a price of 105.50p per share on 23 February 2022 as part of the share buyback initiative.

Following the transactions, the Company's issued share capital comprises:

-               96,600,656 ordinary shares (excluding treasury and redemption shares)

-               15,901,517 ordinary shares held in treasury (including redemption shares)

-               112,502,173 ordinary shares (including treasury and redemption shares)