India Capital Growth Fund : Interim Report June 2021

PERFORMANCE

The first half of 2021 saw India suffer a second wave of COVID infections, far larger in scale than the first wave, and which took the Government by surprise. India's health infrastructure struggled to cope with the numbers of seriously ill people.

Despite this troubling backdrop, Indian equity markets rose, and I am pleased to report that the Company's share price rose by 31.7% during the period under review. The Net Asset Value (NAV) per share increased by 25.1%, outperforming the BSE Midcap TR Index by 2.9%. It is encouraging to see the improvement that the Ocean Dial team has made to its investment process coming through in better relative performance.

The Company is subject to both short and long term capital gains tax in India on the growth in value of its investment portfolio. 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 (ICGQ Limited) must accrue for this additional cost as a non-resident capital gains tax provision totalling £3.42m for the six months to 30 June 2021, equivalent to a reduction in the NAV per share of 3.04p or 2.4%. The provision was £Nil at both 31 December 2020 and 30 June 2020. For more information, please see note 11.

DISCOUNT

The Company's share price discount to NAV began the period at 14.1% and at 30 June 2021 stood at 11.8%. This discount is wider than we would like and the Board, the Investment Manager and our advisors continue to look for ways to reduce the discount further over time.

REDEMPTION FACILITY

Following the requisite amendment to the Company's articles of incorporation to include a redemption facility, as approved at an extraordinary general meeting on 12 June 2020, the first redemption point will be 3:00 pm on 31 December 2021. Shareholders may request redemption of part or all of their shareholding at an exit discount of 6% to NAV as at that redemption point. The Company will publish a further announcement on 6 December 2021, reminding shareholders of their right to request redemptions, together with the exit discount applicable. Further details of the redemption facility are set out in Article 132 of the Company's articles of incorporation and in the circular to shareholders (including notice of the extraordinary general meeting) dated 26 May 2020, copies of which are available on the Company's website.

Clearly there is an element of uncertainty as to the level of uptake of the redemption facility and there is the possibility that significant redemption requests may impair the future viability of the Company. The Directors' Report contains further explanation.

Ocean Dial has agreed that if, at any redemption point, the Company receives valid redemption requests in respect of ordinary shares comprising in aggregate more than 50% of the then issued share capital of the Company, the Company shall be entitled to terminate the investment management agreement (the "IMA") with Ocean Dial by not less than six months' written notice. This is a reduction from the 12 months' written notice that would otherwise apply.

Ocean Dial has also agreed that, if at any time, a resolution is put to shareholders that the Company shall continue in existence and should that resolution not be carried (and conversely if a resolution that the Company should not continue in existence be put to shareholders to vote at a general meeting at any time and such resolution be carried) the Company shall be entitled to terminate the IMA by not less than six months' written notice.

THE BOARD

In the Annual Report, I informed shareholders that we were seeking to appoint an additional director to succeed Peter Niven and that we intend to increase the size of the Board from three to four directors. I am delighted to tell you that Lynne Duquemin joined the Board in May 2021. Based in Guernsey, Lynne brings considerable experience of financial markets and wealth management and her contribution to the Board's deliberations have already proved fruitful.

The Board intends to recruit an additional member in early 2022 following the conclusion of the redemption facility after which Peter Niven will retire from the Board.

INVESTOR RELATIONS

We would like to ensure that all shareholders have the opportunity to engage with the Board and the Investment Manager and to access up to date information on the Company as required. During the first half of 2021, shareholders were invited to attend two webinars featuring Gaurav Narain, the Fund Advisor, and other members of the Ocean Dial team. There are plans for webinars during the autumn, so please do let the Ocean Dial team know if you would like to attend. Further details are available on our website (www.indiacapitalgrowth.com).

Although participating in Indian equities is a true test of nerves, this is a thrilling time for investors to be exposed to the world's largest democracy.

For although India has delivered handsome returns in the past (India Capital Growth Fund has compounded its net asset value per share at 14.8% per annum in Sterling since the end of 2011), in relative terms few foreign institutional or retail investors have ever backed this market unreservedly. In fact, the last 16 months has seen almost continual outflows from institutional funds dedicated to Indian equities. Instead, investors choose to "rent" Indian equities rather than have a "buy to hold" strategy hoping to time both the entry and exit points, knowing this is harder than it sounds. As such, without the conviction to ride out the volatility through the cycles, not many will have enjoyed such a healthy CAGR (Compound Annual Growth Rate).

So, what has changed to make us believe that this time is different? Why now do we believe that the fasting period is over as India looks set to join the long-term investors' menu of choice? More importantly perhaps, what does this mean for the market, since much of this positive perception shift may already be priced in.

First has been a critical shift in the Government's focus. Since early in Modi's first term, the PM's focus has been to restore macro-economic stability and shift India away from a patronage-based system of doing business to a rules-based system. This has been an arduous process, problematic to implement and highly disruptive to businesses used to "getting things done" through informal channels. Nowadays, "picking up the phone to Delhi" is no longer an option for Corporate India and although this sea change is encouraging for "ease of doing business", it has had a damaging impact on growth and profitability, particularly on the back of haphazard policy implementation. Whilst there is always more reform to accomplish (the recent news that the Government has rescinded the laws around retrospective taxation is an example), the overriding Government agenda has altered now it is believed that the heavy lifting has been achieved. Policies are now about restoring growth through investment, particularly considering recent Covid induced disruption. The Budget in February set this tone, with an increase in infrastructure spending of 35% year on year, the intended privatisation of several public sector entities, an infrastructure monetisation programme, and the creation of a bad bank to ease banks' balance sheet constraints. Covid's second wave undoubtedly delayed these initiatives (a senior Government Minister closely involved died of Covid), but as life returns to normal, the growth agenda is uppermost once more. Production Linked Incentive Schemes (PLISs) have been introduced across several sectors to encourage, or subsidise, the private sector to invest in capacity to

manufacture products onshore that have been historically imported from China. Foreign Direct Investment (FDI) is reaching all-time highs, as is the value of exports, buoyed by a global economic recovery, significant improvements in India's competitive positioning vis a vis other emerging economies, and multinational corporations adjusting long term strategic planning on China, if only at the margin.

Second is the fast tracking of digitalisation across all levels of Indian society. We can all identify with this phenomenon, but the timing of this mainstreaming for India was particularly significant, coinciding as it did with the completion of India's technology ecosystem, or "stack". The combination of the completion of the biometric identity scheme enabling direct KYC, the opening of one bank account per household, sufficient fibre optic capacity nationwide, smartphone handsets at $50, the cheapest mobile data globally and the United Payments Interface (in total, the "stack") have blended to enable a rapid shift to digital adoption across multiple industries, sectors and subsectors, fast-tracked as it has been by the pandemic.

India is seven to eight years behind China in terms of internet users, e-commerce, and digital adoption, but expects to catch up at a higher growth rate. There is little representation in the listed equity markets currently. Whilst the US Digital and Tech sector represents circa 30% of S&P500 market capitalisation, in India it is barely 1%. However, this is starting to change. In July, Zomato, India's equivalent of Deliveroo, was the first major tech company to list, with a market value of $14bn, 35x subscribed and a share price rising 50% on day one.

This successful listing is expected to trigger a long pipeline of private equity and venture capital investors looking to raise both primary and secondary capital on India's exchanges through the sale of digital and tech companies, giving listed investors the opportunity to benefit from this tectonic shift in consumer and commercial behaviour.

India has the right demand and supply dynamics to enjoy multi decadal growth in the new economy given the large addressable market, the successful role models that exist within the India diaspora, the entrepreneurial and talent availability on the ground (25% of the world's tech engineers are India based), and now the funding. Since January, the digital start up eco system has raised $27bn confirming an inflection point in the capital raising cycle has been reached. Of the circa 800 Unicorns (private companies with a business valuation of > US1bn) in the World, around 53 are in India with an aggregate business value of ~$190bn. Of these, 26 of them have become Unicorns just in the last 18 months. Furthermore, there are already 25-30"soon-icorns" (expected to become Unicorns). How these companies are valued and how the portfolio gains exposure to these themes are issues to be wrestled with, but these