India Investment Study

June 2011

2

Introduction Capital MSL and the London Stock Exchange undertook a research study of international institutional investor attitudes towards investing in India and Indian companies. The aim of the survey was to research the views of fund managers from blue chip institutions in Europe that invest in emerging markets.

This research was conducted ahead of two major conferences hosted in June by the London Stock Exchange in Mumbai and New Delhi for Indian companies interested in understanding how to raise capital domestically and abroad.

We hope you find the following study informative.

Richard Campbell & Nick Bastin Tracey Pierce Director of Equity Primary Markets Capital MSL London Stock Exchange Group +44 207 307 5330 +44 207 7797 4152 www.capitalmsl.com www.londonstockexchangegroup.com

About Capital MSL Capital MSL is an international strategic communications consultancy that delivers advice to many of the world’s leading businesses and financial institutions, often during critical stages in their development. The foundation of our success is the quality of the long term relationships that we nurture

with our clients, our staff and the intermediaries that impact an organisation’s reputation. We lead the industry in client and staff retention.

We are committed to senior advice, and combine deep sector knowledge with a thorough understanding of capital markets.

Part owned by the management team, we are majority owned by MSLGROUP, Publicis Groupe’s flagship specialist communications, PR and events network.

MSLGROUP is the world’s fifth biggest PR firm, with 2,500 communications professionals in 22 countries, including in every major capital market.

Our sister company, Hanmer MSL, is one of India’s largest communications firms. We build corporate reputations that are envied, in sectors that we know and understand. Our teams deliver innovative, bespoke solutions, across a diverse set of stakeholders, that

address the communications demands of organisations, both large and small. Our capabilities are broad, and range from helping to build corporate reputations to

employee and capital market communications, including M&A and IPO support.

Together with our client Essar Energy, Capital MSL was recently awarded the UK’s Chartered Institute for Public Relations (CIPR) Excellence Award in Investor Relations for our work advising Essar Energy on its May 2010 $1.9bn IPO on the London Stock Exchange.

3

Summary

India unquestionably remains of significant interest to foreign investors. While there are some short term issues, such as inflation and rising interest rates, the longer term picture is recognised as being very strong. The key findings of the research are: Top market: 23% of participants gave India and Brazil the most positive ratings as an

investment destination relative to their emerging market peers. China was in third place with 20%.

Strong outlook: The overwhelming majority of investors remain confident in the Indian

growth story in the longer term, with 73% of investors very confident in respect of India’s outlook in 12-18 months time. However, the short term picture is less positive, with only 5% of respondents being very confident of the picture for the next six months, pointing to concerns over the inflation outlook and interest rates.

Investors believe that, despite these issues at play, Indian corporates will continue to

perform well and record strong growth. Macro criteria: When looking at India as an investment destination, 17% of investors cited

inflation and corporate valuation as the most important investment criteria, with GDP growth and regulation cited by 14% and 11% of investors respectively.

Company specific factors: Investors rated corporate governance, disclosure and

transparency equally, with 15% of top ratings each, as the most important considerations when making an investment decision in an Indian company. These were followed closely by management access (14%), regulation (13%) and liquidity (12%).

Sectors: Consumer industries (14% of top ratings), financial services (12%), infrastructure

(11%) and technology (9%) were highlighted as the most attractive sectors, although power (7%) and renewable energy (7%), if combined, would have ranked joint first.

Horizon: 67% of investors said that a one to three year period is the preferred term for

holding investments. This was usually determined by a combination of factors, including investment policy, long term return potential and tax considerations. However, 29% said their time horizon was in excess of three years: a sign of commitment to, and confidence in, the Indian market.

Access: 46% of those surveyed access the Indian market through the domestic exchange, due

to the liquidity available. However, a number cited regulatory constraints as a hindrance, and 24% of respondents prefer to invest through the London Stock Exchange and a further 24% through depositary receipts and / or participatory notes.

4

While the research does show that Indian companies could make improvements that would make them even more attractive to foreign institutional investors, these are eminently resolvable. Those areas highlighted by investors include corporate governance, financial reporting and transparency and access to management:

Reporting standards and transparency Respondents were keen to stress the importance of adequate reporting and the following of best practice standards by Indian companies.

The need for improved corporate governance…

…and more frequent interaction with management All survey respondents agreed that better exposure is required to Indian companies – of all sizes and from all sectors – to improve understanding and access to these businesses.

Is summary, the picture for listed Indian corporates is bright. There is significant interest from international investors that could be converted into capital to fund India’s continued growth and the London Stock Exchange remains an attractive market for Indian companies looking to raise money – either through main market listings or depositary receipts. While there are areas where Indian companies need to improve their interaction with investors, these are easily surmountable.

“I would like to reiterate the importance of reporting standards, which is a hindrance at the moment. We are taking a wait and hold policy, watching progress on this. There is a lot of capital on the sidelines that could potentially find its way if this is addressed.”

“India must improve institutions, governance, regulation & reporting before its

companies can be taken seriously.”

“India is strangled by a public sector that is too big. This encourages conglomerates and discourages transparency.”

“We need to see better corporate governance and better alignment with minority

shareholders.”

“We believe that better roadshows need to be held, whether in London or in India, to give investors wider exposure to Indian companies of all sectors and sizes.”

5

Detailed investor feedback

Investors were asked a series of questions about access, confidence in India, concerns and areas of interest. Almost all investors were currently invested in India and had a good knowledge of the Indian market. Below is an analysis of the survey findings broken down according to the questionnaire. Verbatim comments from respondents are included in italics. To show an accurate picture of the strength of views, we have also shown the conviction of investors by including the percentage of total respondents that gave a 4 or 5 rating from the response scale. Not every investor answered every question.

6

Access

1. What is your preferred route of investing in emerging market / Indian companies? Almost half of the investors surveyed (46%) access the Indian market through the domestic exchange due to the liquidity available. However, a number of respondents cited this as a hindrance due to regulatory constraints. 24% prefer to invest in India through ordinary shares of companies / investment vehicles listed on the London Stock Exchange and an equal number through depositary receipts or participatory notes.

Almost half of the respondents (48%) stated a preference to invest in India through companies listed on the London Stock Exchange or through Depositary Receipts or Participatory Notes.

Just 5% expressed an interest in investing through ordinary shares of companies / investment vehicles listed on other exchanges.

46%

24%

5%

24%

Investing directly through ordinary shares

of companies on domestic exchanges

Through ordinary shares of companies /

investment vehicles listed on the London

Stock Exchange

Through ordinary shares of companies /

investment vehicles listed on the other

exchanges

Through Depositary Receipts or Participatory

Notes

“It is often easier to invest in local markets and exchanges, which opens more options and access to companies.”

“We prefer to go where the liquidity is, for India this is through domestic

exchanges and hence that currently tends to be the preference to invest through.”

“We would prefer to invest in Indian companies and access investment in India through listings on the London Stock Exchange.”

“It must be said that reporting standards at Indian companies leave a lot to be

desired and prove a hindrance. Access is also difficult and takes time to open the market. We would hope to see a lot more of Indian companies come to London in

the near future.”

7

Sentiment

2. As a firm, what is your overall sentiment towards India in the near and long term? The overwhelming majority of investors (73%) remain confident in the Indian growth story in the longer term. However, in the short term there is concern regarding the macro outlook – with respondents citing rising inflation and interest rates.

63% of investors still remain “somewhat confident” towards India in the short term, while 32% chose “neutral” as their response. Notably, a number of respondents voiced caution on the recent volatility and developments in India, saying that they have revised their outlook, but believe that the long term story remains robust.

Investors believe that despite the macro issues at play, Indian corporates continue to perform well and record strong growth: nearly three quarters of survey respondents remaining buoyant on India in the next 12-18 months.

5%

63%

32%

73%

18%

9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Very confident Somewhat confident Neutral

6 months 12 - 18 months

“We are positive towards the longer term.”

“Longer term we are seeing some head winds and expect the market to improve further.”

“We remain positive towards India despite the recent volatility – the long

term story is strong.”

“At the macro level, India is still among the best. Indian companies are witnessing real economic growth and strong performance despite rising inflation.”

8

“We believe the whole market has moved from being optimistic to being more cautious. There are interest rate concerns.”

“We are concerned about inflation as well as interest rates, which have been

rising.”

“India has had a good run in the past 18 months, so we expect a correction. Commodity fears also add to our caution.”

3. How has this changed in the past six months?

An equal number of investors (39%) stated that they had become more cautious over the past six months or their views on the Indian market remained unchanged. About a fifth (22%) of respondents, however, recorded a more positive outlook.

22%

39% 39%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Increased Decreased No change

“We have become more cautious towards emerging markets, including India. The macro picture looks cloudy at the moment. However, we are confident that Indian

corporates are charting the waters comfortably.”

9

4. As an investment destination, please rate the following markets. In terms of the relative attractiveness of India, it was ranked the highest alongside Brazil by the investors surveyed. 23% of participants gave India and Brazil the most positive ratings (a rating of four or five, on a scale of one to five, where one is low and five is high) as an investment destination relative to their emerging market peers, with China in third place with 20%.

0% 20% 40% 60% 80% 100%

Middle East

Frontier markets

Russia

Turkey

Indonesia

China

Brazil

India

1 2 3 4 5

% of respondents who gave a 4 or 5 rating

Scale from 1 to 5, where 1 is low and five is high

2%

7%

8%

8%

10%

20%

23%

23%

0% 5% 10% 15% 20% 25%

Middle East

Frontier markets

Russia

Turkey

Indonesia

China

Brazil

India

10

Investment considerations

5. When investing in India, how important are the following criteria? When looking at India as an investment destination, 17% of investors cited inflation and corporate valuation as the most important investment criteria, followed by GDP growth and regulation which were cited by 14% and 11% respectively by those surveyed.

While political risk and currency stability were not high on the agenda with respect to India, valuation was, and a number of investors were of the view that “Indian stocks are overpriced” and “India is an expensive market.” Concerns around rising inflation in India continue to dominate investor attitudes with inflation ranking closely with valuation as the primary concern. A few investors also highlighted the hindrances regulatory requirements pose in accessing the Indian stock market. These investors stated that they prefer investing in Indian companies listed in London and access exposure to India through depositary receipts.

6%

7%

7%

9%

11%

12%

14%

17%

17%

0% 5% 10% 15% 20%

Volatility

Quality of research

Currency stability

Political risk

Liquidity

Regulation

GDP growth

Inflation

Valuation

% of respondents who gave a 4 or 5 rating

“Indian stocks are overpriced, it is an expensive market.”

“We would like to have access to the market, but this is a headache to get the requisite licenses etc. We prefer to invest in companies listed in London and

through DRs and ADRS.”

11

6. When making an investment in an Indian company, how would you rate the following considerations?

Investors cited corporate governance (15% of top ratings), disclosure (15%) and transparency (15%) as the most important considerations when making an investment decision in an Indian company. This is followed closely by management access (14%), regulation (13%) and liquidity (12%).

% of respondents who gave a 4 or 5 rating

Scale from 1 to 5, where 1 is low and five is high

0%

7%

8%

12%

13%

14%

15%

15%

15%

0% 2% 4% 6% 8% 10% 12% 14% 16%

Dividend yield

Financial communications

Investor relations

Liquidity

Regulation

Management access

Transparency

Disclosure

Corporate governance

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Dividend yield

Financial communications

Investor relations

Liquidity

Regulation

Management access

Disclosure

Transparency

Corporate governance

1 2 3 4 5

12

Corporate governance, disclosure and transparency remain top of mind and the most critical evaluating criteria when fund managers are making an investment decision. A number of respondents stressed the need for better reporting by Indian companies. Disclosure was highlighted as an area for potential improvement, but it was acknowledged that a lot of good work is already done by the larger companies and that this just needs to continue to develop.

Management access ranked highly. Investors stressed the need to meet with management before making an investment decision. Furthermore, they also added that, on average, meetings with management in London or the home country are necessary at least twice a year.

On the issue of dividend yield, this was ranked as a low priority by a majority of investors receiving a ranking of 1to 3 on a scale of 1 to 5, where 1 is low and 5 high. While this may not be totally surprising, given the nature of a fast growing market like India, where share price appreciation is typically the focus, two investors did comment that Indian companies are not on par with other emerging markets in respect of dividend policy and payout.

“Reporting standards can be quite weak for Indian companies.”

“Reporting by companies is usually inversely proportional – with big companies having better structures in place in comparison to smaller ones that report

inadequately.”

“Reporting is an important consideration.”

“Quality of financial disclosure is very important.”

“Management access is always poor and an issue. We like to meet management at least two to three times a year.”

“Compared to other emerging markets, there is poor access to management at

Indian companies.”

“India ranks worst in almost any emerging markets on the matter of dividend yield. I believe this is its greatest failing.”

“Dividend yield is an issue. India’s atrocious policies on this are in stark contrast to those of other emerging markets, especially Brazil and Chile, where they have

good payout ratios.”

13

7. Investment prospects by sector

Consumer industries (14% of top ratings), financial services (12%), infrastructure (11%) and technology (9%) were highlighted as the most attractive sectors, although power (7%) and renewable energy (7%), if combined, would have ranked joint first.

1%

2%

2%

5%

5%

5%

5%

6%

7%

7%

7%

9%

11%

12%

14%

0% 5% 10% 15%

Utilities

Real Estate

Leisure

Transport

Telecommunications

Metals and mining

Oil & gas

Industrials

Healthcare

Power

Renewable energy

Technology

Infrastructure

Financial

Consumer industries

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Utilities

Real estate

Leisure

Transport

Telecommunications

Metals and mining

Oil & gas

Industrials

Healthcare

Power

Renewable energy

Technology

Infrastructure

Financial

Consumer industries

1 2 3 4 5

% of respondents who gave a 4 or 5 rating

Scale from 1 to 5, where 1 is low and five is high

14

8. For what length of time do you usually hold Indian company investments?

67% of investors said that a one to three year period is the preferred term for holding investments. This was usually determined by a combination of factors, including investment policy, long term return potential and tax considerations. However, 29% said their time horizon was in excess of three years.

5%

67%

29%

0%

10%

20%

30%

40%

50%

60%

70%

Under 12 months 1 – 3 years Over 3 years

“We give management time to deliver results and the market to appreciate and correctly value it.”

“We hold if the investment is performing in line with expectations.”

“The generation of cash flows as expected, relative valuation and no “accidents”

are all considerations for the length of tenure.”

“The four things that matter to us are quality, value, change and valuations – these are the criteria we use in determining the term of an investment.”

“We have a buy and hold approach, and invest for over five years. We don’t take

these investments lightly.”

15

Methodology The London Stock Exchange and Capital MSL conducted the research survey amongst key emerging market investors located in Europe to gauge current perceptions of investing in Indian companies from an equity investment perspective. The survey consisted of an online, quantitative survey and a number of telephone interviews with fund managers. A total of 30 fund managers participated in the survey which was conducted on an anonymous basis. The survey was undertaken in May and June 2011.

16

Capital MSL 81 Whitfield Street London W1T 4HG Tel: +44 (0)20 7307 5330 Fax: +44 (0)20 7307 5331 www.capitalmsl.com