N-2/A
As filed with the Securities and Exchange Commission on
July 9, 2009
Securities Act Registration
No. 333-159611
Investment Company Act File
No. 811-8266
U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form N-2
(Check appropriate box or boxes)
þ
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
þ
Pre-Effective Amendment No. 1
o
Post-Effective Amendment No.
and/or
þ
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940
þ
Amendment No. 12
The India
Fund, Inc.
(Exact
name of Registrant as Specified in Charter)
345 Park
Avenue, New York, New York 10154
(Address
of Principal Executive Offices)
1-866-800-8933
(Registrants telephone
number, including area code)
Prakash
A. Melwani
Director and President
The India Fund, Inc.
345 Park Avenue,
New York, New York 10154
(Name and Address of Agent for
Service)
Copies to:
Sarah E. Cogan, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
Approximate Date of Proposed Public
Offering: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered
on a delayed or continuous basis in reliance on Rule 415
under the Securities Act of 1933, other than securities offered
in connection with a dividend reinvestment plan, check the
following
box. o
It is proposed that this filing will become effective (if
appropriate, check box)
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when declared effective pursuant to section 8(c).
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If appropriate, check the following boxes:
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o
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This [post-effective] amendment designates a new effective date
for a previously filed [post-effective amendment] [registration
statement].
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o
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This Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
and the Securities Act registration statement number of the
earlier effective registration statement for the same offering
is .
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF
1933
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Securities
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Amount Being
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Offering Price Per
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Aggregate
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Registration
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Being Registered
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Registered(1)
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Unit(2)
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Offering Price(3)
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Fee(3)
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Common Stock ($.001 par value per share)
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16,032,758 shares
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$
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25.05
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$
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401,620,587.90
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$
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22,410.43
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(1) This amount includes
shares to be issued pursuant to oversubscription, as described
herein.
(2) Estimated solely for the
purpose of calculating the registration fee.
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(3)
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The registration fee for the
securities offered hereby has been calculated under
Rule 457(d) of the Securities Act based on the net asset
value per share of the registrant on July 2, 2009. The
Registrant has previously paid $55.80.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act, or until the Registration Statement shall
become effective on such dates as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The India
Fund, Inc.
Cross-Reference
Sheet
Parts A
and B of Prospectus*
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Items in Parts A and B of Form N-2
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Location in Prospectus
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Item 1.
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Outside Front Cover
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Cover of Prospectus
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Item 2.
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Cover Pages; Other Offering Information
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Cover of Prospectus
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Item 3.
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Fee Table and Synopsis
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Summary of Expenses
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Item 4.
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Financial Highlights
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Financial Highlights
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Item 5.
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Plan of Distribution
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Not Applicable
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Item 6.
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Selling Shareholders
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Not Applicable
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Item 7.
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Use of Proceeds
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The Offer; Use of Proceeds; Investment Objective and Policies;
Additional Investment Activities
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Item 8.
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General Description of the Registrant
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Cover of Prospectus; The Fund; Investment Objective and
Policies; Additional Investment Activities; Semi- Annual
Repurchases of Securities; Investment Restrictions; Risk
Factors; Description of Capital Stock; Net Asset Value;
Financial Statements
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Item 9.
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Management
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Management of the Fund; Investment Management and Other
Services; Description of Capital Stock; Enforceability of Civil
Liabilities; Custodians, Transfer Agent, Dividend Paying Agent
and Registrar
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Item 10.
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Capital Stock, Long-Term Debt, and Other Securities
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Dividends and Distributions; Dividend Reinvestment and Cash
Purchase Plan; Taxation; Description of Capital Stock; Risk
Factors
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Item 11.
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Defaults and Arrears on Senior Securities
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Not Applicable
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Item 12.
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Legal Proceedings
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Not Applicable
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Item 13.
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Table of Contents of the Statement of Additional Information
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Table of Contents of the Statement of Additional Information
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Item 14.
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Cover Page
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Cover Page of the Statement of Additional Information
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Item 15.
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Table of Contents
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Table of Contents of the Statement of Additional Information
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Item 16.
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General Information and History
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Not Applicable
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Item 17.
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Investment Objective and Policies
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Investment Objective and Policies; Additional Investment
Activities; Investment Restrictions; Portfolio Transactions
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Item 18.
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Management
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Management of the Fund; Investment Management and Other
Services; Custodians, Transfer Agent, Dividend Paying Agent and
Registrar; Statement of Additional Information
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Item 19.
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Control Persons and Principal Holders of Securities
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Control Persons and Principal Holders of Securities; Management
of the Fund
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Item 20.
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Investment Advisory and Other Services
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Investment Management and Other Services; Custodians, Transfer
Agent, Dividend Paying Agent and Registrar; Experts
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Item 21.
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Portfolio Managers
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Portfolio Manager
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Item 22.
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Brokerage Allocation and Other Practices
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Portfolio Transactions
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Item 23.
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Tax Status
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Dividends and Distributions; Dividend Reinvestment and Cash
Purchase Plan; Taxation
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Item 24.
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Financial Statements
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Financial Statements
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* |
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All information required to be set forth in Part B:
Statement of Additional Information has been included in
Part A: The Prospectus, except for the
Funds proxy voting policies and procedures, which are
required to be disclosed pursuant to Item 18 of
Form N-2
and which are included in the Statement of Additional
Information. All items required to be included in
Part C: Other Information are set forth in
Part C. |
Asia
Advisors L.L.C.
The India Fund, Inc.
Rights Offering
Expires August 14, 2009*
Important Dates
Record Date: July 20, 2009
Subscription Period: July 20, 2009 to August 14, 2009*
Expiration Date: August 14, 2009*
*unless extended
Contact your financial advisor for more information
The
information in this preliminary prospectus supplement is not
complete and may be changed. This preliminary prospectus
supplement and the accompanying prospectus are not an offer to
sell these securities, and we are not soliciting offers to buy
these securities in any jurisdiction where the offer or sale is
not permitted.
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SUBJECT TO COMPLETION, DATED
July 9, 2009
PROSPECTUS
THE INDIA
FUND, INC.
12,826,207
Shares of Common Stock
Issuable Upon Exercise of Non-Transferable
Rights to Subscribe for Shares of Common Stock
The India Fund, Inc. (the Fund) is offering to its
common stockholders of record as of July 20, 2009
non-transferable rights. These rights will allow you to
subscribe for one share of common stock for each three rights
held. You will receive one right for each whole share of common
stock that you hold of record as of July 20, 2009. You need
three rights to purchase one share at the subscription price.
The Fund will not issue fractional shares upon the exercise of
less than three rights. The rights will not be listed for
trading on the New York Stock Exchange (the NYSE) or
any other exchange. The subscription price will be equal to 95%
of the net asset value per share of the Funds common stock
at the close of business on the date on which the offer expires.
THE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN DAYLIGHT TIME,
ON AUGUST 14, 2009, UNLESS EXTENDED TO NOT LATER THAN
AUGUST 19, 2009 OR TERMINATED EARLY AS DESCRIBED HEREIN.
The Fund announced the offer after the close of business on
May 29, 2009. The last reported sale price of a share of
the Funds common stock on the NYSE on May 29, 2009
and July 2, 2009 was $29.38 and $30.90, respectively. The
net asset value per share at the close of business on
May 29, 2009 and July 2, 2009 was $26.72 and $26.37,
respectively. Because the expiration date and the date upon
which the price of the rights will be determined will be the
same date, stockholders who exercise their rights and submit
their subscription certificates will not know the purchase price
of the shares when they make their investment decision. Once you
subscribe for shares and the Fund receives payment or a
guarantee of payment, you will not be able to change your
decision. The market price of the Funds common stock may,
and has in the past, fluctuated below 95% of the Funds net
asset value. If the market price of the Funds common stock
is below the subscription price, it may not be in your interest
to participate in this offering because you could purchase
shares of the Fund on the open market for less than the
subscription price. (continued on following page)
Investment in the Fund involves certain special
considerations and risks arising in part from the Funds
investment in securities of Indian companies, which are not
associated with investments in securities of U.S. companies
or certain other
non-U.S. issuers.
These risks relate to, among other things, political, social and
economic conditions in India, and are described in greater
detail elsewhere in this prospectus. The Fund may also invest in
debt obligations that may be rated below investment grade or in
comparable unrated debt obligations. Debt obligations of below
investment grade quality are regarded as having predominately
speculative characteristics with respect to capacity to pay
interest and repay principal and are commonly referred to as
junk bonds. There are special risks and
considerations associated with investing in such high yield/high
risk debt obligations. In addition, although the Funds
shares of common stock have recently traded on the NYSE at a
premium to their net asset value, the issuance of
non-transferable rights may reduce or eliminate that premium or
the Funds shares may instead trade at a discount to net
asset value. You could lose some or all of your investment and
you should carefully consider the risk factors
beginning on page 36 of this prospectus before participating in
this offer.
Stockholders who do not fully exercise their rights will own a
smaller proportional interest in the Fund. In addition, because
the subscription price will be less than the net asset value per
share, the offer will result in an immediate dilution of the net
asset value per share for all stockholders. See Risk
Factors on page 36 of this prospectus.
This prospectus sets forth concisely the information about the
Fund that a prospective investor ought to know before investing.
Investors are advised to read this prospectus and to retain it
for future reference.
For information regarding the offer, contact Georgeson
Shareholder Communications Inc., the information agent, at
1-866-297-1264.
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
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Estimated Price to
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Sales
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Estimated Proceeds
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Public(1)
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Load(2)
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to the Fund(2)
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Per Share
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$
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25.05
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None
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$
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24.99
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Total(3)
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$
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321,296,485
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None
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$
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320,509,075
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(1)
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The estimated subscription price to
the public is based upon 95% of the Funds net asset value
per share on July 2, 2009.
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(2)
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After deduction of expenses payable
by the Fund, estimated at $787,410.
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(3)
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Assumes all rights are exercised at
the estimated subscription price. If the Fund increases the
number of shares subject to subscription by 25%, the Estimated
Price to the Public, Estimated Sales Load and Estimated Proceeds
to the Fund will be $401,620,588, $0 and $400,833,178,
respectively. See The Offer Over-Subscription
Privilege.
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The Fund may increase the number of shares of common stock
subject to subscription by up to 25%, or up to an additional
3,206,551 shares, for an aggregate total of 16,032,758 shares.
The shares will be ready for delivery on or about
August 28, 2009.
The date of this prospectus
is .
The information in this prospectus is not complete and may be
changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
(continued from previous page)
The Fund is a closed-end investment company whose shares of
common stock are listed and traded on the NYSE under the symbol
IFN and whose investment goal is long-term capital
appreciation by investing primarily in Indian equity securities.
Under normal market conditions, at least 80% of the Funds
total assets are invested in the equity securities of Indian
companies. These are fundamental policies that may not be
changed without the approval of a majority of the Funds
outstanding voting securities. The Fund operates under an
interval fund structure pursuant to which it conducts
semi-annual repurchase offers for between 5% and 25% of the
Funds outstanding common stock. See Semi-Annual
Repurchases of Securities and Risk
Factors Risks Related to the Funds
Operations The Funds interval fund
structure involves certain risks and special considerations not
typically associated with other closed-end funds in this
prospectus.
The information contained herein is not in the form of a
prospectus or a statement in lieu of prospectus as per the
provisions of the (Indian) Companies Act, 1956 and has not been
or will not be registered as a prospectus or a statement in lieu
of prospectus. The information set out herein does not
constitute, and may not be used for or in connection with, an
offer or solicitation to do business or purchase any securities
or ownership interests by any person in India or in any other
jurisdiction in which such offer or solicitation is not
authorized or to any person to whom it is unlawful to make such
an offer or solicitation.
This prospectus contains important information you should know
before investing. Please read it before you invest and keep it
for future reference. A Statement of Additional Information
dated ,
2009 containing additional information about the Fund has been
filed with the Securities and Exchange Commission and legally
forms a part of this prospectus. The table of contents of the
Statement of Additional Information appears on page 80 of this
prospectus. You may obtain a copy of the Statement of Additional
Information free of charge by contacting Blackstone Asia
Advisors L.L.C., the Funds investment manager, 345 Park
Avenue, New York, New York 10154, by calling 1-866-800-8933 toll
free or on the Internet at www.blackstone.com. In addition, the
Funds Annual Report, containing the funds financial
statements for the fiscal year ended December 31, 2008, as
filed on
Form N-CSR,
is available free of charge by contacting Blackstone Asia
Advisors L.L.C. as indicated above. The Funds Statement of
Additional Information and Annual Report and other information
about the Fund, including material incorporated by reference
into this prospectus, are also available free of charge on the
SECs website at www.sec.gov.
TABLE OF
CONTENTS
The information contained in this prospectus speaks only as
of the date of this prospectus unless the information
specifically indicates that another date applies. No dealer,
salesperson or other person has been authorized to give any
information or to make any representations other than those
contained in this prospectus in connection with the offer
contained herein and, if given or made, such information or
representations must not be relied upon as having been
authorized by the Fund.
In this prospectus and except as the context otherwise requires
or indicates:
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The Fund means The India Fund, Inc., a Maryland
corporation.
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Blackstone Advisors or Investment
Manager means Blackstone Asia Advisors L.L.C., a Delaware
limited liability company.
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Blackstone India or Country Adviser
means Blackstone Fund Services India Private Limited, a
company organized under the laws of India.
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In this prospectus, unless otherwise indicated, all references
to U.S. dollars, US$,
dollars and $ are to United States
dollars, the lawful currency of the United States of America,
and all reference to rupees and Rs. are
to Indian rupees. On July 3, 2009, the U.S. dollar
value of the Indian rupee was Rs. 47.824 = US$1.00, as
reported in The Wall Street Journal on July 3, 2009.
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FORWARD-LOOKING
STATEMENTS
The Fund may not claim the safe harbor for forward-looking
statements contained in the federal securities laws of the
United States because that safe harbor does not apply to
investment companies. Nevertheless, you should note that certain
statements in this prospectus are forward-looking statements,
which involve known and unknown risks, uncertainties and other
factors that may cause the Funds actual results or level
of performance to be materially different from any future
results or level of performance expressed or implied by such
forward-looking statements. Such factors include, among others,
those listed under Risk Factors,
Appendix B: Republic of India,
Appendix C: The Indian Securities Market and
elsewhere in this prospectus. As a result of these and other
factors, the Fund cannot give you any assurances as to its
future results or level of performance. To the extent required
by law, the Fund undertakes to amend or reflect any material
changes to it after the date of this prospectus.
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PROSPECTUS
SUMMARY
You should read the entire prospectus, including the
Statement of Additional Information that legally forms part of
this prospectus, before you decide whether to exercise your
rights. In particular, you should carefully read the risks of
investing in the shares, as discussed under Risk
Factors.
THE OFFER
AT A GLANCE
The
Offer
The India Fund, Inc., or the Fund, is offering to its common
stockholders of record as of July 20, 2009 non-transferable
rights. These rights will allow you to subscribe for one share
of common stock, par value $.001 per share, for each three
rights held. You will receive one right for each whole share of
common stock that you hold of record as of July 20, 2009.
You need three rights to purchase one share at the
subscription price. The Fund will not issue fractional shares
upon the exercise of less than three rights. The rights will not
be listed for trading on the NYSE or any other exchange. Rights
may be exercised at any time from July 20, 2009 through
5:00 p.m., Eastern daylight time, on August 14, 2009,
unless extended to not later than August 19, 2009 or
terminated early as described herein. See The Offer-
Expiration, Extension and Early Termination of the Offer.
Since the expiration date is the same date as the pricing date,
stockholders who exercise their rights will not know the
subscription price at the time they exercise their rights and
subscription certificates are submitted. The market price of the
Funds common stock may, and has in the past, fluctuated
below 95% of the Funds net asset value. If the market
price of the Funds common stock is below the subscription
price, it may not be in your interest to participate in this
offering because you could purchase shares of the Fund on the
open market for less than the subscription price. Once you
subscribe for shares and the Fund receives payment or a
guarantee of payment, you will not be able to change your
decision. In certain instances described below under
Over-Subscription Privilege, the Fund
may increase the number of shares of common stock subject to
subscription by up to 25% of the shares. We refer to any such
additional shares as additional shares. See
The Offer.
The Fund previously completed rights offerings for approximately
13.2 million shares in August 2006 and 9.4 million
shares in January 2005. The net proceeds of each rights
offering, approximately $448 million and $250 million,
respectively, were fully invested in accordance with the
Funds investment objective and policies within
approximately three months of the completion of each respective
offering. As a result of the August 2006 offering, the
Funds net asset value was diluted by 1.54%.
Purposes
of the Offer
The Board of Directors of the Fund has determined that it would
be in the best interests of the Fund and its stockholders to
increase the assets of the Fund through this offer because it
may provide the following benefits: (i) a greater ability
to take advantage of investment opportunities without being
required to sell current portfolio positions that the Investment
Manager believes should be retained; (ii) additional
investment flexibility in a period when increased political
stability may drive positive market-oriented reforms over the
long-term; (iii) additional opportunity to capitalize on
attractive investment opportunities in India, including initial
public offerings, privatizations, placements and mid- and
small-cap companies with attractive valuations;
(iv) improved market visibility for the Fund;
(v) enhanced liquidity of the trading market for the
Funds shares on the NYSE; (vi) additional capital to
meet the demand for repurchases and dividend distributions
without having to liquidate attractive holdings; and
(vii) an opportunity for existing stockholders by providing
them with an opportunity to purchase additional shares
potentially at a price below the current market price without
incurring significant transaction costs. See The
Offer Purposes of the Offer.
The increased assets to the Fund as a result of the offer will
result in increased fees to all of the Funds service
providers whose fees are based on the Funds net assets,
including fees paid to the Investment Manager, Country Adviser
and Administrator. See The Fund At A
Glance Investment Manager and Country Adviser,
The Fund At A Glance
Fund Administrators and Investment Management
and Other Services.
1
Subscription
Price
The subscription price will be equal to 95% of the net asset
value per share of the Funds common stock at the close of
business on the date on which the offer expires. See The
Offer Subscription Price.
Over-Subscription
Privilege
Each stockholder as of the record date who fully exercises all
rights issued to him or her will be entitled to subscribe for
additional shares that were not subscribed for by other
stockholders. This is known as the over-subscription
privilege. If sufficient shares are available, all record
stockholders over-subscription requests will be honored in
full. If sufficient shares are not available to honor all
requests for over-subscription, the Fund may increase the number
of shares available by up to 25%, or 3,206,551 shares, in
order to satisfy over-subscription requests. If the requests for
additional shares exceed the shares available, the available
shares, including any additional shares, will be allocated pro
rata among stockholders who over-subscribe based on the number
of rights originally issued to them by the Fund. See The
Offer Over-Subscription Privilege.
How to
Exercise Rights
Rights may be exercised by stockholders who fill in and sign the
accompanying subscription certificate and mail it in the
envelope provided or deliver the completed and signed
subscription certificate to the subscription agent, together
with any required payment for the shares as described below
under The Offer Payment for Shares.
Rights may also be exercised by a stockholder contacting his or
her broker, bank or trust company, which can arrange, on the
stockholders behalf, to guarantee delivery, by using a
notice of guaranteed delivery, of a properly completed and
executed subscription certificate and payment for the shares.
The broker, bank or trust company may charge a fee for this
service. Stockholders who choose to exercise their rights will
not know at the time of exercise the subscription price for
shares being acquired and will be required initially to pay for
such shares at the estimated subscription price of
$25.05 per share. In the event that the estimated
subscription price is greater than the actual subscription price
determined at the close of the subscription period, a refund is
owed to the exercising rights holder. Fractional shares will not
be issued. Completed subscription certificates must be received
by the subscription agent prior to 5:00 p.m., Eastern
daylight time, on the expiration date, which is August 14,
2009 (unless payment is to be effected by means of a notice of
guaranteed delivery). See The Offer Payment
for Shares.
Rights
May Not Be Purchased or Sold
You may not purchase or sell the rights, and they will not trade
on any exchange. If you do not exercise your rights before the
conclusion of this offer, your rights will expire without value.
However, the shares to be issued pursuant to the offer will be
listed on the NYSE, subject to the NYSE being officially
notified of the issuance of those shares.
Restrictions
on Foreign Stockholders
The Fund will not mail subscription certificates to stockholders
whose record addresses are outside the United States. PNC
Global Investment Servicing (U.S.) Inc. (formerly known as PFPC
Inc.) will hold the rights to which subscription certificates
relate for foreign stockholders accounts until instructions are
received to exercise the rights. If no instructions are received
prior to the expiration date, which is August 14, 2009, the
rights will expire. Foreign stockholders holding shares through
a U.S. broker-dealer should contact the broker-dealer
regarding this offer. See The Offer
Restrictions on Foreign Stockholders.
Obtaining
Subscription Information
If you have any questions or requests for assistance, please
contact Georgeson Shareholder Communications Inc., the
information agent, toll-free at 1-866-297-1264. You may also
call your broker or nominee for information with respect to this
offer. See The Offer Information Agent
and The Offer Subscription Agent. Please
note that the dates in the table may change if the offer is
extended.
2
Important
Dates to Remember
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Event
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Date
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Record Date
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July 20, 2009
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Subscription Period*
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July 20, 2009 to August 14, 2009
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Expiration Date*
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August 14, 2009
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Pricing Date*
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August 14, 2009
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Subscription Certificate and Payment for Shares or Notice of
Guaranteed Delivery Due*
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August 14, 2009
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Subscription Certificate and Payment for Shares Due for
Those Using Notice of Guaranteed Delivery*
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August 19, 2009
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Confirmation to Participants*
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August 26, 2009
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Final Payment for Shares*
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August 28, 2009
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* |
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Unless extended or terminated early as described herein. |
Tax
Consequences
For federal income tax purposes, neither the receipt nor the
exercise of the rights will result in taxable income to you. You
will not realize taxable loss if your rights expire without
being exercised. See The Offer United States
Federal Income Tax Consequences of the Offer.
Use of
Proceeds
We estimate the net proceeds of this offer to be approximately
$320,509,075. If the Fund increases the number of shares subject
to subscription by 25%, then the total net proceeds of the offer
will be approximately $400,833,178. These figures assume
(i) all rights are exercised in full, (ii) a
subscription price of $25.05 and (iii) payment of offering
expenses estimated to be approximately $787,410.
The offering is designed to raise funds to be invested
consistent with the Funds investment objectives and
policies. The Fund anticipates that investment of the net
proceeds of this offer in accordance with the Funds
investment objective and policies may take up to six months from
their receipt by the Fund, depending on market conditions and
the availability of appropriate securities. See Use of
Proceeds and Risk Factors Risks Related
to the Funds Operations.
THE
FUND AT A GLANCE
The
Fund
The Fund is a Maryland corporation organized on
December 27, 1993 and is a non-diversified, closed-end
management investment company. As of July 2, 2009, the net
assets of the Fund were 1,014,520,399. Assuming that all rights
are exercised at the estimated subscription price, including the
additional shares that may be issued under the over-subscription
privilege, the net assets of the Fund would be approximately
$1.4 billion. For the purposes of the FII Regulations (as
defined below), the Fund is a broad based fund.
Investment
in India
The Funds investment objective and policies reflect the
Investment Managers opinion that economic and political
developments and changes in the last several years and the
recent election have well positioned India to experience a
period of continued economic growth. The Investment Manager
believes that India should continue to grow as an economic force
and that investment in its securities markets will continue to
offer significant potential for returns. For a detailed
description of India and its securities market, see
Appendix B: Republic of India and
Appendix C: The Indian Securities Market.
3
The Fund invests in India pursuant to the Securities and
Exchange Board of India (Foreign Institutional Investors)
Regulations, 1995, which we refer to as the FII
Regulations and which were established by the Securities
and Exchange Board of India (SEBI) to regulate
investment by foreign institutional investors in Indian
securities. The FII Regulations allow direct investment in
Indian securities by registered foreign institutional investors
or their clients, also known as
sub-accounts.
Under the FII regulations, the Fund invests in India as a
sub-account
of the Investment Manager, which is registered with SEBI as a
foreign institutional investor. The Investment Manager in its
capacity as a foreign institutional investor acts on behalf of
the Fund and other approved clients. The Funds investments
are held in the Funds name through the Funds
custodian, Deutsche Bank AG. See Risk Factors
Risks Related to the Funds Operations and
Investment in India.
Investment
Objective and Policies
The Funds investment objective is long-term capital
appreciation by investing primarily in the equity securities of
Indian companies, subject to applicable laws. Under normal
market conditions, at least 80% of the Funds total assets
are invested in equity securities of Indian companies. These are
fundamental policies that may not be changed without the
approval of a majority of the Funds outstanding voting
securities. Equity securities include common and preferred stock
(including convertible preferred stock), American, global or
other types of depositary receipts, convertible bonds, notes and
debentures, equity interests in trusts, partnerships, joint
ventures or similar enterprises and common stock purchase
warrants and rights. Most of the equity securities purchased by
the Fund are traded on an Indian or other foreign stock exchange
or
over-the-counter
market. However, the Fund may invest to a limited extent in
securities that are not publicly traded and in investment funds,
including unregistered funds, that invest at least 80% of their
total assets in the equity securities of Indian companies in
which the Fund is authorized to invest. The Fund invests in such
investment funds when the Investment Manager believes that such
investments may be more advantageous to the Fund than a direct
market purchase of such securities. For temporary defensive
purposes, the Fund may invest without limitation in temporary
investments. No assurance can be given that the Funds
investment objective will be realized. See Investment
Objective and Policies and Risk Factors
Risks Related to the Funds Operations.
Indian companies are companies that:
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are organized under the laws of India;
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regardless of where organized, derive at least 50% of their
revenues from goods produced or sold, investments made, or
services performed, in India, or have at least 50% of their
assets in India; or
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have securities which are traded principally on any Indian stock
exchange or in the Indian
over-the-counter
market.
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See Investment Objective and Policies
Portfolio Structure for other eligible investments.
Up to 20% of the Funds total assets may be invested,
subject to certain restrictions, in:
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equity securities of companies (other than companies meeting the
definition of Indian companies), regardless of where organized,
which the Investment Manager and the Country Adviser believe
derive, or will derive, at least 25% of their revenues from
business in or with India, or have at least 25% of their assets
in India;
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debt securities including high yield/high risk and unrated debt
(commonly referred to as junk bonds), denominated in
Indian rupees or issued or guaranteed by an Indian company, the
Government of India or an Indian governmental entity; and
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short-term debt securities of the type described under
Investment Objective and Policies Temporary
Investments.
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Up to 20% of the Funds total assets may also be utilized
to purchase and sell options on securities, financial futures,
fixed income indices and other financial futures contracts,
enter into interest rate transactions and to enter into currency
transactions, sell securities short and loan portfolio
securities. The Fund will only invest in such assets in order to
hedge against financial risks. With respect to interest rate
transactions, the Fund may enter into interest
4
rate swaps and may purchase or sell interest rate caps and
floors. Currency transactions may include currency forward
contracts, exchange listed currency futures contracts, exchange
listed and over-the-counter options on currencies and currency
swaps. For additional discussion of these types of transactions
in which the Fund may invest see
Appendix A General Characteristics and
Risks of Hedging. Although the Fund does not presently do
so or intend to do so to any significant extent, the Fund may
from time to time sell securities short. See Additional
Investment Activities Short Sales for more
information. The Fund will not be obligated, however, to do any
hedging and makes no representation as to the availability of
these techniques at this time or at any time in the future. See
Risk Factors Risks Related to the Funds
Operations The Funds ability to successfully
hedge against financial risks may adversely affect the
Funds net asset value and Additional
Investment Activities Hedging.
The Funds assets may be invested in debt securities,
including high yield/high risk and unrated debt (commonly
referred to as junk bonds) (other than temporary
investments) when the Investment Manager believes that, based
upon factors such as relative interest rate levels and foreign
exchange rates, such securities offer opportunities for
long-term capital appreciation.
See Risk Factors Risks Related to the
Funds Operations and The Extent to
which the Fund invests in high yield/high risk and unrated debt
may adversely affect the Funds performance.
Listing
The Funds common stock is listed and traded on the NYSE
under the symbol IFN.
Dividends
and Distributions
The Fund intends to distribute annually to holders of common
stock substantially all of its net investment income and to
distribute any net realized capital gains at least annually.
Under the Funds dividend reinvestment and cash purchase
plan, all dividends and distributions are automatically
reinvested in additional shares of common stock of the Fund
unless a stockholder elects to receive cash. Participants also
have the option of making additional cash payments, annually, to
be used to acquire additional shares of common stock of the Fund
in the open market. Stockholders whose shares are held in the
name of a broker or nominee should contact such broker or
nominee to confirm that they are able to participate in the
plan. See Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan.
Semi-Annual
Share Repurchases
The Fund operates as an interval fund structure, pursuant to
which the Fund conducts semi-annual repurchase offers for
between 5% and 25% of the Funds outstanding common stock.
In accordance with the Funds fundamental periodic
repurchase policy, the Funds next repurchase offer is
expected to occur immediately following the expiration of the
Offer. See Semi-Annual Repurchases of Securities.
Investment
Manager and Country Adviser
The Investment Manager is Blackstone Advisors, an affiliate of
The Blackstone Group (Blackstone). For more
information on the Investment Manager, see Investment
Management and Other Services Investment
Manager.
The Country Adviser is Blackstone India, an affiliate of
Blackstone and Blackstone Advisors. For more information on the
Country Adviser, see Investment Management and Other
Services Country Adviser.
Under the existing management agreement, the Fund pays the
Investment Manager a monthly fee at an annual rate of:
(i) 1.10% for the first $500,000,000 of the Funds
average weekly net assets; (ii) 0.90% for the next
$500,000,000 of the Funds average weekly net assets;
(iii) 0.85% for the next $500,000,000 of the Funds
average weekly net assets; and (iv) 0.75% of the
Funds average weekly net assets in excess of
$1,500,000,000 for its services. Under the existing country
advisory agreement, the Investment Manager pays the Country
Adviser a monthly fee at an annual rate of 0.10% of the
Funds average weekly net assets.
5
Because the Investment Manager and the Country Adviser receive
fees based on net assets, they will benefit from the increase in
assets that will result from this offer. It is not possible to
state precisely the amount of additional compensation that the
Investment Manager and the Country Adviser might receive as a
result of this offer because it is not known how many shares
will be subscribed for and because the proceeds of this offer
will be invested in additional portfolio securities, which will
fluctuate in value. However, assuming that the value of the
Funds assets remained constant prior to the offer at
$1.0 billion (its approximate value as of July 2,
2009) and after the offer at $1.4 billion (which
assumes that all rights are exercised at the estimated
subscription price, including the additional shares that may be
issued under the over-subscription privilege), the annual
compensation received by the Investment Manager and the Country
Adviser would be increased by approximately $3.4 million
and $400,833, respectively. The Country Advisers fee is
paid by the Investment Manager and not directly by the Fund.
The advisory fees paid by the Fund may be higher than those paid
by most other investment companies that invest predominantly in
the securities of U.S. companies, primarily due to the
additional time and expense required of the Investment Manager
and the Country Adviser in pursuing the Funds objective,
which is long-term capital appreciation by investing primarily
in the equity securities of Indian companies.
Fund Administrators
Blackstone Advisors, the Funds Investment Manager, also
serves as the Funds administrator. The Fund pays
Blackstone Advisors a monthly fee at an annual rate of:
(i) 0.20% of the value of the Funds average monthly
net assets for the first $1,500,000,000 of the Funds
average monthly net assets and (ii) 0.15% of the value of
the Funds average monthly net assets in excess of
$1,500,000,000 of the Funds average monthly net assets.
Because the Fund administrator receives fees based on net
assets, it will benefit from the increase in assets that will
result from this offer. Blackstone Advisors subcontracts certain
of its services to PNC Global Investment Servicing (U.S.) Inc.
(formerly known as PFPC Inc.). Assuming that the value of the
Funds assets remained constant prior to the offer at
$1.0 billion (its approximate value as of July 2,
2009) and after the offer at $1.4 billion (which
assumes that all rights are exercised at the estimated
subscription price, including the additional shares that may be
issued under the over-subscription privilege), the annual
compensation received by the Funds administrator would be
increased by approximately $801,666.
Multiconsult Ltd. serves as the Funds Mauritius
administrator. The Fund pays Multiconsult Ltd. a monthly fee of
$1,500 for its services and is reimbursed for certain additional
expenses.
See Investment Management and Other Services
Administrator and Investment Management and Other
Services Mauritian Administrator.
Custodian,
Transfer Agent, Dividend Paying Agent and Registrar
Deutsche Bank AG is the domestic custodian of the assets of the
Fund. Deutsche Bank (Mauritius) Limited acts as offshore
custodian of the Fund. PNC Global Investment Servicing (U.S.)
Inc. acts as transfer agent, dividend paying agent and registrar
for the Fund.
RISK
FACTORS AND SPECIAL CONSIDERATIONS AT A GLANCE
You should carefully consider the following factors, as well
as the other information in this prospectus, before making an
investment in the Fund under this offer.
As a result of this offer, you will incur immediate
economic dilution, and, if you do not exercise all of your
rights, you may incur dilution of ownership, voting rights and
your share of any distributions made by the Fund.
You should expect that you will, at the completion of this
offer, experience immediate dilution of net asset value per
share because the subscription price will be less than the net
asset value per share, and the number of shares outstanding
after the offer will have increased proportionately more than
the increase in the size of the Funds net assets. This
dilution of net asset value will disproportionately affect
stockholders who do not exercise their rights. In addition,
whether or not you exercise your rights, you will experience a
dilution of net asset value because you will indirectly bear the
expenses of this offer, which include, among other items, SEC
registration fees, state
6
blue sky qualification fees, printing expenses and
the fees assessed by service providers (including the cost of
the Funds counsel and accountants). We cannot state
precisely the amount of any decrease because we do not know at
this time how many shares will be subscribed for or what the net
asset value per share will be at the pricing date. The following
example, assuming (i) a net asset value of
$1.0 billion (the Funds approximate net asset value
on July 2, 2009), (ii) a subscription price of $25.05
(which is 95% of the Funds approximate net asset value per
share on July 2, 2009) and (iii) that all rights
are exercised at the estimated subscription price, including the
additional shares that may be issued under the over-subscription
privilege, demonstrates the dilution of net asset value.
Example:
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NAV per share
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Assumed
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following offering
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Reduction in
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NAV as of
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subscription
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NAV per share as of
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(after payment of
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NAV per
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July 2, 2009
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price
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July 2, 2009
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expenses)
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share
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$1.0 billion
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$
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25.05
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$
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26.37
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$
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25.96
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$
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0.41
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In addition to the economic dilution described above, if you do
not exercise all of your rights, you may incur dilution of
ownership and voting rights, as well as dilution of your share
of any distributions made by the Fund, as a result of this
offer. This dilution may occur because you could own a smaller
interest in the Fund after the offer than you owned prior to the
offer. If you do not submit a subscription request pursuant to
the over-subscription privilege, you will also experience
dilution in your Fund ownership if the Fund offers additional
shares for subscription. In addition, regardless of whether you
participate in the current offering, to the extent the Fund
engages in subsequent rights offerings, your investment may be
diluted by any such offering.
See The Offer Dilution and Risk
Factors Risks Relating to the Offer As a
result of this offer, you will incur immediate economic
dilution, and, if you do not exercise all of your rights, you
may incur dilution of ownership, voting rights and your share of
any distributions made by the Fund.
You
may lose money by investing in the Fund, including the
possibility that you may lose all of your
investment.
An investment in the Fund is not a deposit in a bank and is not
insured or guaranteed by the U.S. Federal Deposit Insurance
Corporation or any other governmental agency.
Among the principal risks of investing in the Fund is market
risk, which is the risk that the value of your investment may
fluctuate as stock markets fluctuate.
As an investment company that primarily holds common stocks, the
Funds portfolio is subject to the possibility that common
stock prices will decline over short or even extended periods.
The Fund may remain substantially fully invested during periods
when stock prices generally rise and also during periods when
they generally decline. Risks are inherent in investments in
equities, and Fund stockholders should be able to tolerate
significant fluctuations in the value of their investment in the
Fund.
In addition, the Fund may invest up to 20% of its assets in debt
securities whose value will tend to decrease as interest rates
rise.
The Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating on
short-term stock market movements. Investors should not consider
the Fund a complete investment program. See Risk
Factors-Risks Related to the Offer You may lose
money by investing in the Fund, including the possibility that
you may lose all of your investment.
Investing
in India involves certain risks and special considerations not
typically associated with investing in U.S.
companies.
Investing in an emerging market such as India, involves certain
risks and special considerations not typically associated with
investing in the securities of established U.S. companies,
including: (i) greater political, economic and social
uncertainty; (ii) significantly greater price volatility,
substantially less liquidity and much smaller market
capitalization of securities markets; (iii) less developed
corporate disclosure and governance standards; (iv) greater
7
difficulty in enforcing judgments; (v) restrictions on
foreign investment and repatriation of capital;
(vi) exchange control regulations; (vii) currency
devaluations and exchange rate fluctuations, which may increase
the costs associated with conversion of investment principal and
income from one currency to another; (viii) higher rates of
inflation; and (ix) greater governmental involvement in the
economy. These risks are described in more detail under
Risk Factors Risks Related to the Funds
Operations.
In addition, future actions of the Indian Government or
religious and ethnic unrest could have a significant impact on
the economy, which could adversely affect private sector
companies in which the Fund invests. In addition, accounting,
auditing and financial reporting standards in India differ from
U.S. standards, meaning that disclosure of certain material
information may not be made, and less information may be
available to the Fund than would be the case if the Fund
invested primarily in U.S. issuers. There is also generally
less governmental regulation of the securities industry in India
than in the United States, and it may be more difficult to
obtain a judgment in a court outside the United States. The Fund
will be subject to withholding taxes, including withholding
taxes imposed on dividends, interest and realized capital gains
by the government of India. See Risk Factors
Risks Related to the Funds Operations and
Taxation.
The
Funds investments in illiquid securities may restrict its
ability to dispose of its investments in a timely fashion and at
a price approximating the value at which the Fund carries the
securities on its books.
The Fund may invest up to 20% of its total assets in illiquid
securities, for which there may be no or only a limited trading
market and for which a low trading volume of a particular
security may result in abrupt and erratic price movements. The
Fund may encounter substantial delays and could incur losses in
attempting to resell illiquid securities. See Additional
Investment Activities and Risk Factors
Risks Related to the Funds Operations The
Funds investments in illiquid securities may restrict its
ability to dispose of its investments in a timely fashion and at
a price approximating the value at which the Fund carries the
securities on its books.
The
concentration of the Funds investments in specific
economic sectors and related industries may expose it to greater
risk of loss with respect to its portfolio
securities.
From time to time, the Fund may invest a greater proportion of
its assets in the securities of companies that are part of
specific sectors and related industries of the Indian economy.
For example, at March 31, 2009, the Fund maintained
approximately 19.72% of its total assets in the securities of
Indian companies in the petroleum sector and related industries.
The Fund is therefore subject to greater risk of loss with
respect to its portfolio securities as a result of its
concentration in such sectors and related industries. See
Risk Factors Risks Related to the Funds
Operations The concentration of the Funds
investments in specific economic sectors and related industries
may expose it to greater risk of loss with respect to its
portfolio securities.
Recent
Developments in Financial Markets and Impact on the
Fund.
Worldwide economic conditions have recently deteriorated
significantly affecting the global financial markets and have
caused significant reductions in available capital and liquidity
from banks and other providers of credit, substantial reductions
in equity and currency values in financial markets and extreme
volatility in credit, equity and fixed income markets and
general economic uncertainty. Conditions in the debt and equity
capital markets in the United States and abroad have caused
firms in the financial services sector to take significant
losses relating to, among other things, subprime mortgages and
the re-pricing of credit risk in the broadly syndicated loan
market. While the economic crisis has not, at present, affected
the Indian economy to the same extent as in the U.S. or
European economies, the Indian economy and the Fund may be
impacted in the future. The timing and nature of any recovery in
the credit and financial markets remains uncertain, and there
can be no assurance that market conditions will improve in the
near future or that our results will not be materially and
adversely affected.
A
change in the Funds tax status could adversely affect the
Funds return on its investments.
The Fund currently operates through a branch in the Republic of
Mauritius to take advantage of favorable tax treatment by the
Indian government pursuant to a taxation treaty between India
and Mauritius. Recently, the
8
Supreme Court of India upheld the validity of this tax treaty in
response to a lower court challenge contesting the treatys
applicability to entities such as the Fund. Any change in the
provision of this treaty or in its applicability to the Fund
could result in the imposition of withholding and other taxes on
the Fund by India, which would reduce the return to the Fund on
its investments. See Risk Factors Risks
Related to the Funds Operations A change in
the Funds tax status could adversely affect the
Funds return on its investments,
Taxation-U.S. Stockholders and
Taxation Mauritian Tax Status.
In addition, prior to Blackstone Advisors assuming management,
the Fund may have failed to qualify to be taxed as a regulated
investment company (a RIC) under Subchapter M of the
Internal Revenue Code of 1986, as amended (the Internal
Revenue Code) for the taxable year ended December 31,
2004. For the year ended December 31, 2005, a provision of
$25,507,350 was made for U.S. federal income tax purposes
as, at that time, it was unclear whether the Fund qualified to
be taxed as a RIC under Subchapter M of the Code for the taxable
year ended December 31, 2004. In order to preserve the
Funds tax status as a RIC under Subchapter M of the Code
for the taxable year ended December 31, 2004, on
April 20, 2006 the Fund distributed a deficiency dividend
(within the meaning of Section 860 of the Internal Revenue
Code) to shareholders in the amount of $1.07 per share, of which
$0.95 per share was designated as a capital gain dividend. Under
the deficiency dividend procedure, the maximum amount that the
Fund will be obligated to pay to the Internal Revenue Service in
interest and penalties is approximately $4,956,314. Accordingly,
a reversal of $20,551,036 was made in 2006 to the prior
years tax provision to reflect the decrease in the amount
of the tax liability due to the deficiency dividend distributed
to shareholders. There can be no assurance that the Fund will be
able to further reduce the liability. See Risk
Factors Risks Related to the Funds
Operations A change in the Funds tax status
could adversely affect the Funds return on its
investments and Taxation The Fund.
The
Funds shares have traded and may in the future trade at a
discount to net asset value.
Although the Funds shares of common stock have recently
traded on the NYSE at a premium to their net asset value, the
Funds shares have in the past traded at a discount to
their net asset value. There can also be no assurance that the
Funds shares will trade at a premium in the future or that
the present premium is sustainable. The Funds shares have
traded at discounts of as much as 40%.
In addition, you should note that shares of closed-end
investment companies frequently trade at a discount from net
asset value. This characteristic is a risk separate and distinct
from the risk that the Funds net asset value will decrease
as a result of its investment activities. The Fund cannot
predict whether its shares will trade at, above or below net
asset value. The Fund also cannot predict the effect of this
offer on the market price of its shares because the market price
of the Funds shares is, among other things, determined by
the supply and demand for the Funds shares, the
Funds investment performance and investor perception of
the Funds overall attractiveness as an investment as
compared with alternative investments. The Fund is intended
primarily for long-term investors and should not be considered
as a vehicle for trading purposes. See Risk
Factors Risks Related to the Funds
Operations The Funds shares have traded and
may trade in the future at a discount to net asset value.
The
Funds interval fund structure involves certain
risks and special considerations not typically associated with
other closed-end funds.
The Fund has adopted an interval fund structure whereby the Fund
conducts semi-annual repurchase offers for between 5% and 25% of
the Funds outstanding common stock. The Funds
required semi-annual repurchases are likely to continually
decrease the overall size of the Fund which could over time:
(i) harm investment performance in part by limiting the
extent to which the Fund may pursue its investment strategy;
(ii) increase the Funds expense ratio as the
Funds assets decrease; and (iii) jeopardize the
Funds viability and continued existence. Moreover, there
are additional risks associated with the Funds repurchase
offers, including the risk that: (i) if the repurchase
offer is over-subscribed, stockholders may be unable to
liquidate all or a given percentage of their investment at net
asset value during the repurchase offer; (ii) because the
Fund expects to liquidate portfolio securities in order to fund
repurchase offers, the need to sell such securities may in turn
affect the market for such securities and accordingly diminish
the value of the Funds investments; (iii) share
values may decrease as a result of currency fluctuations between
the date of tender and the repurchase pricing date;
(iv) the repurchase offer may not eliminate any discount,
if any, at which the Funds shares trade; and (v) due
to the potential for proration if the repurchase offer is over-
9
subscribed, some investors may tender more shares than they wish
to have repurchased in order to ensure the repurchase of a
specific number of shares. See Risk Factors
Risks Related to the Funds Operations The
Funds interval fund structure involves certain
risks and special considerations not typically associated with
other closed-end funds and Semi-Annual Repurchases
of Securities.
The
Funds status as a non-diversified investment
company may expose it to greater risk of loss with respect to
its portfolio securities.
The Fund is classified as a non-diversified
investment company under the U.S. Investment Company Act of
1940, as amended (the 1940 Act), which means that
the Fund is not limited in the proportion of its assets that may
be invested in the securities of a single issuer. However, the
Fund intends to comply with the diversification requirements
imposed by the Internal Revenue Code for qualification as a
regulated investment company. As a non-diversified investment
company, the Fund may invest a greater proportion of its assets
in the securities of a smaller number of issuers and, as a
result, is subject to greater risk of loss with respect to its
portfolio securities. See Risk Factors Risks
Related to the Funds Operations The
Funds status as a non-diversified investment
company may expose it to greater risk of loss with respect to
its portfolio securities and Taxation
The Fund.
There
are no fixed limitations regarding portfolio
turnover.
Frequency of portfolio turnover is not a limiting factor if the
Fund considers it advantageous to purchase or sell securities.
The Fund anticipates that its annual portfolio turnover rate
will not exceed 150%. For the year ended December 31, 2008,
the Funds portfolio turnover rate was 49.41%. A high rate
of portfolio turnover involves correspondingly greater aggregate
payments for brokerage commissions than a lower rate, which
expenses must be borne by the Fund and its stockholders, while a
lower rate of portfolio turnover involves correspondingly lower
aggregate payments and stockholder expenses. See Risk
Factors Risks Related to the Funds
Operations There are no fixed limitations regarding
portfolio turnover.
The
extent to which the Fund invests in high yield/high risk and
unrated debt may adversely affect the Funds
performance.
The Fund has not established any rating criteria for the debt
securities in which it may invest. Securities rated in medium to
low rating categories of nationally recognized statistical
rating organizations and unrated securities of comparable credit
quality, or high yield/ high risk securities, are
speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and
generally involve a greater volatility of price than securities
in higher-rated categories. These securities are commonly
referred to as junk bonds. The value of Indian debt
securities held by the Fund may be expected to vary inversely in
relation to fluctuations in interest rates in India. See
Risk Factors Risks Related to the Funds
Operations The extent to which the Fund invests in
high yield/high risk and unrated debt may adversely affect the
Funds performance.
The
Funds ability to successfully hedge against financial
risks may adversely affect the Funds net asset
value.
The Fund may purchase and sell options on securities, financial
futures, fixed income indices and other financial instruments,
enter into financial futures contracts, enter into interest rate
transactions, enter into currency transactions, enter into
equity swaps and related transactions, enter into securities
transactions on a when-issued or delayed delivery basis, enter
into repurchase agreements, sell securities short and lend
portfolio securities. Hedging involves special risks, including
possible default by the other party to the transaction,
illiquidity and, to the extent the Investment Managers
view as to certain market movements is incorrect, the risks that
the use of hedging could result in losses greater than if they
had not been used. The extent to which the Fund can engage in
such investment practices in India may be limited. See
Additional Investment Activities, Investment
Objective and Policies Other Investments
Risk Factors Risks Related to the Funds
Operations The Funds ability to successfully
hedge against financial risks may adversely affect the
Funds net asset value and Appendix A:
General Characteristics and Risks of Hedging.
10
The
extent to which the Fund utilizes leverage to hedge against
financial risks may increase its expenses and adversely affect
the Funds performance.
Although the Fund has no present intention to do so to any
significant extent, the Fund may utilize leverage by borrowing
or by issuing preferred stock or short-term debt securities in
an amount up to 25% of the Funds total assets. Leverage by
the Fund creates an opportunity for increased return but, at the
same time, creates special risks. For example, leverage may
exaggerate changes in the net asset value of the Funds
common stock and in the return on the Funds portfolio.
Although the principal of any leverage will be fixed, the
Funds assets may change in value during the time the
leverage is outstanding. Leverage will create expenses for the
Fund that can, during any period, exceed the income from the
assets acquired with the proceeds of the leverage. All expenses
associated with leverage would be borne by common stockholders.
Furthermore, an increase in interest rates could reduce or
eliminate the benefits of leverage and could reduce the value of
the Funds securities. The Fund may also borrow by entering
into reverse repurchase agreements, which will subject the Fund
to additional market risk, as well as credit risk with respect
to the buyer of the securities under such an agreement. See
Risk Factors Risks Related to the Funds
Operations The extent to which the Fund utilizes
leverage to hedge against financial risks may increase its
expenses and adversely affect the Funds performance.
The
anti-takeover provisions in the Funds charter and amended
and restated by-laws and certain provisions of Maryland law may
limit your ability to sell your shares at a
premium.
The Funds charter and amended and restated by-laws and
Maryland law contain certain anti-takeover provisions that,
among other things, may have the effect of inhibiting the
Funds possible conversion to open-end status and delaying
or limiting the ability of other persons to acquire control of
the Fund. In certain circumstances, these provisions may also
inhibit the ability of holders of common stock to sell their
shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the
Fund. The Funds Board of Directors has determined that
these provisions are in the best interests of the Fund and its
stockholders. See Risk Factors-Risks Related to the
Funds Operations The anti-takeover provisions
in the Funds charter and amended and restated by-laws and
certain provisions of Maryland law may limit your ability to
sell your shares at a premium.
The
operating expenses of the Fund may be higher than investment
companies that invest primarily in the securities of U.S.
companies.
The Funds estimated annual operating expenses may be
higher than those of most other investment companies that invest
predominately in the securities of U.S. companies,
primarily because of the additional time and expense required of
the Investment Manager and the Country Adviser in pursuing the
Funds objective of long-term capital appreciation through
investing in equity securities of Indian companies. Investments
in Indian equity securities require additional time and expense
because the available public information regarding such
securities is more limited in comparison to, and not as
comprehensive as, the information available for U.S. equity
securities. In addition, brokerage commissions, custodial fees
and other fees are generally higher for investments in foreign
securities markets. As a result of these higher expected
operating expenses, the Fund needs to generate higher relative
returns to provide investors with an equivalent economic return.
See Risk Factors Risks Related to the
Funds Operations The operating expenses of the
Fund may be higher than investment companies that invest
primarily in the securities of U.S. companies.
Future
market disruptions resulting from terrorist attacks in the
United States and elsewhere or U.S. military action abroad could
negatively and adversely affect the market for the Funds
common stock.
The aftermath of the war with Iraq, instability in the Middle
East and terrorist attacks in the United States and around the
world may have a substantial impact on the U.S. and world
economies and securities markets. The nature, scope and duration
of the occupation of Iraq cannot be predicted with any
certainty. Terrorist attacks closed some of the
U.S. securities markets in 2001, and similar events cannot
be ruled out in the future. The war and occupation, terrorism
and related geopolitical risks have led, and may in the future
lead to, increased short-term market volatility and may have
adverse long-term effects on U.S. and world economies and
markets generally. These risks may adversely affect individual
issuers and securities markets, interest rates, secondary
trading, ratings,
11
investor psychology, credit risk, inflation and other factors
relating to the Funds common shares. High-yield securities
tend to be more volatile than higher rated securities so that
these events and any actions resulting from them may have a
greater impact on the prices and volatility of high yield
securities than on higher rated securities. See Risk
Factors Risks Related to the Funds
Operations Future market disruptions resulting from
terrorist attacks in the United States and elsewhere or
U.S. military action abroad could negatively and adversely
affect the market for the Funds common stock.
SUMMARY
OF EXPENSES
|
|
|
|
|
Stockholder transaction expenses
sales load
|
|
|
None
|
|
Dividend reinvestment and cash purchase plan fees
|
|
|
|
*
|
Repurchase offer fees
|
|
|
2.00
|
%**
|
Offering costs(1)
|
|
|
0.06
|
%
|
Annual expenses (as a percentage of average net assets
attributable to common stock) Management fees(2)
|
|
|
0.96
|
%
|
Interest payments in borrowed funds
|
|
|
none
|
|
Other expenses(3)
|
|
|
0.34
|
%
|
Total annual expenses(3)
|
|
|
1.30
|
%
|
Example
The following example demonstrates the projected dollar amount
of total cumulative expense that would be incurred over various
periods with respect to a hypothetical investment in the Fund.
These amounts are based upon payment by the Fund of investment
management and advisory fees and other expenses at the levels
set forth in the above table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
|
You will pay the following expenses on a $1,000 investment,
assuming a 5% annual return:
|
|
$
|
13
|
|
|
$
|
42
|
|
|
$
|
72
|
|
|
$
|
159
|
|
|
|
|
* |
|
Participants in the Funds dividend reinvestment and cash
purchase plan pay only transaction-based charges. Actual costs
will vary for each participant depending on the nature and
number of transactions made. See Dividends and
Distributions; Dividend Reinvestment and Cash Purchase
Plan. |
|
** |
|
Participants in the Funds repurchase offers pay a
repurchase fee of up to 2% of the value of the shares
repurchased. See Semi-Annual Repurchases of
Securities. |
|
|
|
(1) |
|
The percentage shown is based on the net assets of the Fund at
July 2, 2009 and after giving effect to this offer
(excluding the issuance of additional shares pursuant to the
oversubscription privilege). These costs include those incurred
in connection with this offer, which are estimated at $787,410
or approximately 0.25% of the total estimated net proceeds of
the offer without giving effect to the issuance of additional
shares pursuant to the over-subscription privilege. |
|
|
|
(2) |
|
The percentage shown is based upon the net assets of the Fund at
July 2, 2009 and after giving effect to this offer
(excluding the issuance of additional shares pursuant to the
over-subscription privilege) and reflects the effects of
breakpoints in the management fee schedule for assets in excess
of $1.0 billion. |
|
|
|
(3) |
|
Based upon estimated expenses for the current fiscal year after
giving effect to this offer (excluding the issuance of
additional shares pursuant to the over-subscription privilege). |
This example further assumes that the percentage amounts listed
under Annual Expenses in the table above remain the same in the
years shown, the reinvestment of all dividends and distributions
at net asset value and the full exercise of all the rights. The
above tables and the assumption in the example of a 5% annual
return and reinvestment at net asset value are required by
regulation of the U.S. Securities and Exchange Commission,
which we refer to as the SEC, and are applicable to
all investment companies, and the assumed 5% annual return is
not a
12
prediction of, and does not represent, the projected performance
of the Funds common stock. In addition, although the
example assumes reinvestment of all distributions at net asset
value, this may not be the case for participants in the dividend
reinvestment and cash purchase plan. See Dividends and
Distributions; Dividend Reinvestment and Cash Purchase
Plan.
We have prepared the foregoing table and example to assist
you in understanding the various costs and expenses that you
will bear, directly or indirectly. You should not consider this
example or the foregoing table as a representation of future
expenses or rate of return. The Funds actual expenses may
be more or less than those shown.
13
FINANCIAL
HIGHLIGHTS
The financial highlights table is intended to help you
understand the Funds financial performance for the periods
presented and reflects financial results for a single Fund
share. The information for each of the years presented has been
derived from financial statements audited by
PricewaterhouseCoopers LLP, the Funds independent
registered public accounting firm, whose report is included in
the Funds financial statements which are incorporated by
reference in this prospectus. The following information should
be read in conjunction with the financial statements and notes,
which legally form a part of this prospectus and are available
upon request.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005*
|
|
|
2004
|
|
|
|
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
64.78
|
|
|
$
|
42.65
|
|
|
$
|
34.07
|
|
|
$
|
28.47
|
|
|
$
|
23.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
(0.07
|
)(2)
|
|
|
(0.14
|
)(2)
|
|
|
(0.14
|
)(2)
|
|
|
0.04
|
(2)
|
|
|
0.08
|
(2)
|
|
|
|
|
Net realized and unrealized gain (loss) on investments, foreign
currency holdings, and translation of other assets and
liabilities denominated in foreign currency
|
|
|
(40.28
|
)
|
|
|
31.82
|
|
|
|
13.83
|
|
|
|
11.35
|
|
|
|
6.14
|
|
|
|
|
|
Income tax (expense) reversal
|
|
|
|
|
|
|
|
|
|
|
0.56
|
(3)
|
|
|
(0.80
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations after income
taxes
|
|
|
(40.35
|
)
|
|
|
31.68
|
|
|
|
14.25
|
|
|
|
10.59
|
|
|
|
6.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: dividends and distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.26
|
)
|
|
|
(0.13
|
)
|
|
|
(0.14
|
)
|
|
|
(0.06
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
Short term capital gains
|
|
|
(0.52
|
)
|
|
|
(0.82
|
)
|
|
|
(0.14
|
)
|
|
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
Long term capital gains
|
|
|
(6.34
|
)
|
|
|
(8.66
|
)
|
|
|
(4.84
|
)
|
|
|
(3.89
|
)
|
|
|
(1.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends and distributions
|
|
|
(7.12
|
)
|
|
|
(9.61
|
)
|
|
|
(5.12
|
)
|
|
|
(4.46
|
)
|
|
|
(1.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Share Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive (dilutive) effect of Share Repurchase Program
|
|
|
0.07
|
|
|
|
0.06
|
|
|
|
|
(5)
|
|
|
(0.01
|
)
|
|
|
0.01
|
|
|
|
|
|
Anti-dilutive effect of Tender Offer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Rights Offer
|
|
|
|
|
|
|
|
|
|
|
(0.55
|
)
|
|
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital share transactions
|
|
|
0.07
|
|
|
|
0.06
|
|
|
|
(0.55
|
)
|
|
|
(0.53
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
17.38
|
|
|
$
|
64.78
|
|
|
$
|
42.65
|
|
|
$
|
34.07
|
|
|
$
|
28.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value, end of period
|
|
$
|
18.30
|
|
|
$
|
62.26
|
|
|
$
|
45.90
|
|
|
$
|
39.73
|
|
|
$
|
29.63
|
|
|
|
|
|
Total investment return based on market value(1)
|
|
|
(57.73
|
)%
|
|
|
59.57
|
%
|
|
|
29.05
|
%
|
|
|
49.32
|
%
|
|
|
23.51
|
%
|
|
|
|
|
Ratios/Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (in 000s)
|
|
$
|
671,087
|
|
|
$
|
2,754,124
|
|
|
$
|
1,913,341
|
|
|
$
|
1,083,714
|
|
|
$
|
644,672
|
|
|
|
|
|
Ratios of expenses after income taxes to average net assets
|
|
|
1.28
|
%
|
|
|
1.21
|
%
|
|
|
0.00
|
%
|
|
|
4.13
|
%
|
|
|
1.64
|
%
|
|
|
|
|
Ratios of expenses before income taxes to average net assets
|
|
|
1.28
|
%
|
|
|
1.21
|
%
|
|
|
1.41
|
%
|
|
|
1.49
|
%
|
|
|
1.64
|
%
|
|
|
|
|
Ratios of net investment income (loss) to average net assets
|
|
|
(0.17
|
)%
|
|
|
(0.28
|
)%
|
|
|
(0.34
|
)%
|
|
|
0.12
|
%
|
|
|
0.33
|
%
|
|
|
|
|
Portfolio turnover
|
|
|
49.41
|
%
|
|
|
29.39
|
%
|
|
|
35.02
|
%
|
|
|
50.28
|
%
|
|
|
35.90
|
%
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
12.72
|
|
|
$
|
11.93
|
|
|
$
|
16.18
|
|
|
$
|
23.21
|
|
|
$
|
8.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
0.11
|
(2)
|
|
|
0.09
|
|
|
|
0.07
|
|
|
|
(0.16
|
)
|
|
|
(0.10
|
)
|
Net realized and unrealized gain (loss) on investments, foreign
currency holdings, and translation of other assets and
liabilities denominated in foreign currency
|
|
|
11.00
|
(2)
|
|
|
0.76
|
|
|
|
(4.29
|
)
|
|
|
(7.27
|
)
|
|
|
14.36
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
11.11
|
|
|
|
0.85
|
|
|
|
(4.22
|
)
|
|
|
(7.43
|
)
|
|
|
14.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: dividends and distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
(0.13
|
)
|
|
|
(0.09
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
Distributions from net realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends and distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Share transactions
|
|
|
(0.13
|
)
|
|
|
(0.09
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive effect of Share Repurchase Program
|
|
|
0.06
|
|
|
|
0.01
|
|
|
|
0.04
|
|
|
|
0.40
|
|
|
|
0.10
|
|
Anti-dilutive effect of Tender Offer
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Rights Offer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital share transactions
|
|
|
0.06
|
|
|
|
0.03
|
|
|
|
0.04
|
|
|
|
0.40
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
23.76
|
|
|
$
|
12.72
|
|
|
$
|
11.93
|
|
|
$
|
16.18
|
|
|
$
|
23.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value, end of year
|
|
$
|
25.20
|
|
|
$
|
10.59
|
|
|
$
|
9.50
|
|
|
$
|
12.06
|
|
|
$
|
16.75
|
|
Total investment return based on market value(1)
|
|
|
139.04
|
%
|
|
|
12.36
|
%
|
|
|
(20.69
|
)%
|
|
|
(27.99
|
)%
|
|
|
165.35
|
%
|
Ratios/Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (in 000s)
|
|
$
|
556,811
|
|
|
$
|
350,838
|
|
|
$
|
366,491
|
|
|
$
|
504,769
|
|
|
$
|
768,948
|
|
Ratios of expenses after income taxes to average net assets
|
|
|
1.76
|
%
|
|
|
1.73
|
%
|
|
|
1.70
|
%
|
|
|
1.59
|
%
|
|
|
1.84
|
%
|
Ratios of expenses before income taxes to average net assets
|
|
|
1.76
|
%
|
|
|
1.73
|
%
|
|
|
1.70
|
%
|
|
|
1.59
|
%
|
|
|
1.84
|
%
|
Ratios of net investment income (loss) to average net assets
|
|
|
0.72
|
%
|
|
|
0.65
|
%
|
|
|
0.57
|
%
|
|
|
(0.75
|
)%
|
|
|
(0.68
|
)%
|
Portfolio turnover
|
|
|
33.89
|
%
|
|
|
39.36
|
%
|
|
|
16.06
|
%
|
|
|
19.24
|
%
|
|
|
18.65
|
%
|
|
|
|
* |
|
Advantage Advisers, Inc. (Advantage Advisers), a
subsidiary of Oppenheimer Asset Management Inc. and an affiliate
of Oppenheimer & Co. Inc. served as the Funds
investment adviser from August 1, 1997 to December 4,
2005. |
|
(1) |
|
Total investment return is calculated assuming a purchase of
common stock at the market price on the first day and a sale at
the market price on the last day of each period reported.
Dividends and distributions, if any, are assumed, for purposes
of this calculation, to be reinvested at prices obtained under
the Funds dividend reinvestment plan. Total investment
return does not reflect brokerage commissions or sales charges
and is not annualized. Past performance is not a guarantee of
future results. |
|
(2) |
|
Based on average shares outstanding. |
15
|
|
|
(3) |
|
A reversal of $20,551,036 was made in 2006 to the prior
years tax provision (see Note B to the Funds
Consolidated Financial Statements for the fiscal year ended
December 31, 2008 incorporated herein by reference). |
|
|
|
(4) |
|
A provision of $25,507,350 was made for U.S. federal income tax
purposes for the fiscal year ended December 31, 2005. This
provision was made as, at that time, it was unclear whether the
Fund qualified to be taxed as a RIC under Subchapter M of the
Internal Revenue Code for the taxable year ended
December 31, 2004 (see Note B to the Funds
Consolidated Financial Statements for the fiscal year ended
December 31, 2008 incorporated herein by reference). |
|
|
|
(5) |
|
Less than $0.01 per share. |
THE
FUND
The Fund, which was incorporated in Maryland on
December 27, 1993, is a non-diversified, closed-end
management investment company registered under the 1940 Act. The
Funds investment objective is long-term capital
appreciation, which it seeks to achieve by investing primarily
in the equity securities of Indian companies. Under normal
market conditions, at least 80% of the Funds total assets
are invested in the equity securities of Indian companies. These
are fundamental policies that may not be changed without the
approval of a majority of the Funds outstanding voting
securities. The Fund cannot assure that its investment objective
will be realized. Due to the risks inherent in international
investments generally, you should consider the Fund as a vehicle
for investing a portion of your assets in foreign securities
markets and not as a complete investment program.
INVESTMENT
IN INDIA
The Funds investment objective and policies reflect the
Investment Managers opinion that economic and political
developments and changes in the last several years and the
recent election have well positioned India to experience a
period of continued economic growth. The Investment Manager
believes that India should continue to grow as an economic force
and that investment in its securities markets will continue to
offer significant potential for returns. For a description of
India and its securities market, see Appendix B:
Republic of India and Appendix C: The Indian
Securities Market.
Background
Foreign investment in Indian securities is regulated by the
Foreign Exchange Management Act, 1999 and the rules, regulations
and notifications issued thereunder. This Act is the principal
legislation that governs foreign investment and foreign exchange
transactions in India.
In 2000, the Reserve Bank of India issued the Indian Foreign
Exchange Management (Transfer or Issue of Security by a Person
Resident Outside India) Regulations, 2000, which we refer to as
the FEMA regulations, to regulate the issue of
Indian securities to persons who reside outside India and the
transfer of Indian securities by or to such persons. As a
non-resident of India, the Fund must comply with FEMA
Regulations. Under the FEMA regulations, a foreign investor may
invest in Indian securities through the foreign direct
investment route. Under the foreign direct investment route,
investment may be made through the automatic route,
which does not require the prior approval of the Reserve Bank of
India/Foreign Investment Promotion Board, subject to certain
conditions, or through the approval route, which
requires the prior permission of the Reserve Bank of
India/Foreign Investment Promotion Board but which is
nonetheless subject to government-imposed foreign investment
restrictions in certain economic sectors. The FEMA regulations
also prescribe rules for the transfer of Indian securities
between foreign, domestic, Indian and non-Indian security
holders. Such transfers often require the approval of either the
Indian government or the Reserve Bank of India.
Investments
by Foreign Institutional Investors
A foreign investor may also invest in Indian securities through
the foreign institutional investment route. Foreign
institutional investors and
sub-accounts
thereof are regulated by the Securities and Exchange Board of
India (Foreign Institutional Investors) Regulations, 1995 which
we refer to as the FII Regulations.
16
Foreign institutional investors and
sub-accounts
wishing to invest and trade in Indian securities in India are
required to register with SEBI and obtain special permission
from the Reserve Bank of India. Once qualified under applicable
Indian law, a foreign institutional investor or its
sub-account,
subject to the restrictions noted below, may:
|
|
|
|
|
buy and sell securities of Indian companies;
|
|
|
|
realize capital gains on investments;
|
|
|
|
participate in rights offerings for shares;
|
|
|
|
appoint a domestic custodian for custody of investments
made; and
|
|
|
|
repatriate capital, capital gains, dividends, interest income
and any proceeds received in connection with the sale of Indian
securities.
|
Under applicable Indian law, a foreign institutional investor or
a
sub-account
may only invest in the following Indian securities:
|
|
|
|
|
securities in the primary and secondary Indian markets including
shares, debentures and warrants of Indian companies, unlisted,
listed or to be listed on a recognized stock exchange in India;
|
|
|
|
securities of Indian mutual funds, including the Unit Trust of
India, whether or not listed on a recognized stock exchange,
units of a scheme floated by a collective investment scheme;
|
|
|
|
dated government securities;
|
|
|
|
|
|
Indian depositary receipts;
|
|
|
|
|
|
derivatives traded on a recognized Indian stock
exchange; and
|
|
|
|
commercial paper.
|
FII investments are substantially restricted and controlled.
These restrictions, such as the maximum percentage holding of
any single equity, are controlled by SEBI, the RBI and are also
subject to the Government of India Guidelines issues in this
regard. Further, the operational mechanism for purchase, sale,
settlement and movement of funds is restricted. For example,
FIIs shall, subject to certain exceptions, deliver securities
only in dematerialized form for settlement of their transactions
undertaken on a recognized stock exchange
Investments by all foreign institutional investors and
sub-accounts
under the FEMA regulations in the primary and secondary markets
are subject to an aggregate ceiling of 24% of the equity capital
or the value of each series of convertible debentures of any
Indian company, with certain exceptions. This ceiling can be
increased to the applicable statutory cap by a board resolution
of the Indian company. The ceiling would apply to the total
holdings of foreign institutional investors collectively in an
Indian company. The FII Regulations prescribe that each broad
based foreign institutional investor investing on its own behalf
or on the behalf of its
sub-account
(broad based) can invest up to 10% of the equity capital of an
Indian company. A foreign corporate or individual
sub-account
can invest only up to 5% of the equity capital of an Indian
company. Under the FII Regulations a broad based
fund is defined as a fund established or incorporated
outside of India, which has at least 20 investors, with no
single individual investor holding more than 49% of the shares
or units of the fund, provided that if the broad based fund has
institutional investor(s) it shall not be necessary for the fund
to have 20 investors, provided further that if the broad based
fund has an institutional investor who holds more than 49% of
the shares or units in the fund, then the institutional investor
must itself be a broad based fund.
Investments by the foreign institutional investor made in its
own behalf would be registered in the name of the foreign
institutional investor while investments by the
sub-accounts
in Indian securities may be registered in the name of either the
foreign institutional investor or the
sub-account.
Foreign institutional investors are also limited in their
ability to invest in certain industries, such as the banking
sector, insurance sector, telecom sector etc. In such
industries, there is often a ceiling on total foreign holdings,
against which holdings of foreign institutional investors are
counted. To the extent that the ceiling has been reached in that
industry, further investment by foreign institutional investors
may not be permitted. Further, pursuant to Press Note 2 of
2009 issued by the Department of Industrial Policy and Promotion
(Ministry of Commerce and Industry),
17
investments by foreign institutional investors is also included
in the computation of indirect foreign investment in Indian
companies. This may further restrict the ability of the Fund to
invest in companies incorporated in India which operate in
sectors that are subject to foreign investment caps.
If a foreign institutional investor or a
sub-account
wishes to invest in securities through the Indian secondary
market, it must, with certain exceptions, conduct its securities
transactions through brokers certified by SEBI.
With some exceptions, the total investments in equity and
equity-related instruments, such as convertible debentures and
tradeable warrants, made by a foreign institutional investor,
whether on account of itself or its
sub-accounts,
cannot be less than 70% of the aggregate of all the investments
of the foreign institutional investor in India, made on its own
or through its various
sub-accounts.
Pursuant to SEBI circular dated October 16, 2008, in order
to provide flexibility to FIIs to allocate investments across
equity and debt, SEBI has decided to do away with the
abovementioned restrictions on the ratio of equity and debt
investments. Please note that no formal amendments to the FII
Regulations have been made in this regard. It may be noted that
there are certain industry-wide ceilings for FII investments in
debt and accordingly, investment in debt would be subject to
available headroom (discussed below). It may be noted that
debt securities under the FII Regulations are
defined to include government securities, commercial papers and
treasury bills. Additionally, applicable Indian law imposes
aggregate investment limitations on the dollar amount of certain
Indian securities held by a foreign institutional investor. As
per SEBI circular dated March 13, 2009, the cumulative debt
investment limits for FIIs in corporate debt is
$15 billion, of which $8 billion will be allocated on
an open bidding platform and the remaining limit will be
allocated on a first come first serve basis, subject to a
ceiling of Rs. 2.49 billion per registered entity.
Pursuant to SEBI circular dated January 31, 2008,
investments by FIIs in units of debt oriented mutual funds are
considered as investments in corporate debt and are reckoned
within the stipulated limit earmarked for FII investments in
corporate debt. The applicable investment limit for FIIs and
sub-accounts
is up to $5 billion in government securities and treasury
bills and $500 million for investment in innovative
perpetual debt instruments issued by banks. These limits are
monitored by SEBI across all FIIs.
Currently, the following types of derivatives contracts are
traded on the NSE and BSE: (a) index futures;
(b) index options; (c) single stock futures;
(d) single stock options; (e) interest rate
derivatives (f) mini derivative contract on Index (Sensex
and Nifty) and (g) exchange traded currency derivatives.
The position limits for FII/sub-accounts are prescribed by SEBI
on the basis of the type of derivative contract, the type of
underlying i.e. index, single stock, interest rate/fixed income)
and entity (i.e. FII or
sub-account).
The position limits are computed on a gross basis at the FII
level and on a net basis at the level of
sub-accounts
and proprietary positions.
The open position for all derivative contracts is the open
interest multiplied with the closing price of the respective
underlying in the cash market. Set out below is a summary of the
current position limits for derivative contracts:
|
|
|
|
|
Index Futures, Options and Mini Derivative Contracts on Index at
Sub-Account
Level. Disclosure must be given by any person or persons acting
in concert who together own 15% or more of the open interest of
all futures and options contracts on a particular underlying
index on the exchange.
|
|
|
|
Stock Futures and Options at
Sub-Account
Level. The gross open position of a
sub-account
across all futures and options contracts on a particular
underlying security should not exceed the higher of: (i) 1%
of the free float market capitalization (in terms of number of
shares), or (ii) 5% of the open interest in the derivative
contracts on a particular underlying stock (in terms of number
of contracts). These position limits are applicable on the
combined position in all futures and options contracts on an
underlying security on the exchange.
|
|
|
|
Interest Rate Derivative at the
Sub-Account
Level. The position limits for FII
sub-accounts
are the same as the client level position limits specified for
exchange traded interest rate derivatives. Therefore, the
position limit for a
sub-account
in near month exchange traded interest rate derivative contracts
is the higher of: (i) Rs. 1000 million; or
(ii) 15% of the total open interest in the market in
exchange traded interest rate derivative contracts.
|
18
|
|
|
|
|
Exchange traded currency derivatives. The gross open position of
a client across all contracts shall not exceed 6% of the total
open interest or $10 million, whichever is higher. This
position limit is specific to an exchange and not to the
exchange traded currency derivative market as a whole.
|
A
sub-account
is not permitted to issue any off-shore derivative instruments
such as participatory notes, equity-linked notes or other
similar instruments against securities listed or proposed to be
listed on an Indian stock exchange as the underlying. Only an
entity registered as a foreign institutional investor is
permitted to issue such offshore derivate instruments, only to
entities which are regulated by an appropriate foreign
regulatory authority and subject to the compliance of know
your client requirements. As a person regulated by an
appropriate foreign regulatory authority, the Fund may subscribe
to offshore derivative instruments issued by foreign
institutional investors registered with SEBI. Further, a foreign
institutional investor shall ensure that there is no further
downstream issue or transfer of any offshore derivative
instrument to any person other than a person regulated by an
appropriate foreign regulatory authority. Moreover, a foreign
institutional investor is required to disclose periodically
certain information relating to off-shore derivative instruments
entered into by such foreign institutional investor with respect
to Indian securities such as the name of the parties involved,
and the principal terms of, such off-shore derivative
transactions.
Pursuant to applicable laws, there are limits on ownership by
(i) persons resident in India,
(ii) non-resident Indian,
(iii) persons of Indian origin or
(iv) overseas corporate bodies of shares of
certain foreign institutional investor
sub-accounts.
See Appendix C: The Indian Securities
Market Regulatory Structure Restricted
Persons. Such limits could apply to Fund shares.
At present, foreign institutional investor and
sub-account
registrations are granted on a permanent basis subject to the
payment of the prescribed fees every three years.
Registered foreign institutional investors and
sub-accounts
are generally subject to tax under Section 115AD of the
Indian Income Tax Act of 1961. There is uncertainty under Indian
law as to the tax regime applicable to foreign institutional
investors or
sub-accounts
that hold and trade in American depositary shares. See
Taxation Indian Taxes.
Pricing
Regulations in Relation to Acquisition of Shares Through
Secondary Purchase
Generally, for transfers of shares between residents and
non-residents resulting from purchase or sale transaction, no
prior permission of the Foreign Investment Promotion Board or
the Reserve Bank of India is required if the transfer of shares
is done in compliance with the guidelines issued by the Reserve
Bank of India and the price for such transfer is in accordance
with the pricing guidelines issued by the Reserve Bank of India.
With regard to unlisted securities, the Reserve Bank of India
pricing guidelines prescribe a floor price in relation to
transfer of shares from a resident to a nonresident, and a cap
in relation to the transfer of shares from a non-resident to a
resident. As a FII or a
sub-account,
purchases and sales on the stock exchange are to be effected at
the prevailing market price (except if executed through the
block deal route).
Exchange
Controls
A foreign institutional investor or its
sub-account
may open both foreign currency denominated accounts and
special non-resident rupee accounts with Indian
banks, and any amount that the investor or its
sub-account
transfers between these accounts may occur at the prevailing
rate of exchange. However, under rules and policies promulgated
by the Reserve Bank of India, a foreign institutional investor
or its
sub-account
may only invest in Indian securities out of its special
non-resident rupee account. In addition, it may only repatriate
amounts from its foreign currency account after its designated
bank or custodian has deducted and paid all withholding taxes
relating to any capital gains.
19
THE
OFFER
Terms of
the Offer
The Fund is offering to stockholders of record as of the close
of business on July 20, 2009 non-transferable rights to
subscribe for 12,826,207 shares of common stock of the
Fund. The Fund may increase the number of shares of common stock
subject to subscription by up to 25% of the shares, or up to
3,206,551 additional shares, for an aggregate total of
16,032,758 shares.
Each stockholder is being issued one right for each whole share
of common stock owned on the record date. The rights entitle you
to acquire at the subscription price one share for each three
rights held. You need three rights to purchase one share at the
subscription price. The Fund will not issue fractional shares
upon the exercise of less than three rights.
Rights may be exercised at any time during the subscription
period, which commences on July 20, 2009 and ends at
5:00 p.m., Eastern daylight time, on August 14, 2009,
unless extended by the Fund to not later than August 19,
2009 or terminated early as described herein (such date, as it
may be extended, is referred to in this prospectus as the
expiration date, and such period, as it may be
extended, is referred to in this prospectus as the
subscription period). See
Expiration, Extension and Early Termination of
the Offer below. A stockholders right to acquire one
additional share for each three rights held during the
subscription period at the subscription price is referred to as
the primary subscription. The rights are evidenced
by subscription certificates, which will be mailed to
subscribing stockholders.
In addition, any stockholder who fully exercises all rights
issued to him or her is entitled to subscribe for additional
shares, which were not otherwise subscribed for in the primary
subscription, at the subscription price, which we refer to as
the over-subscription privilege. Shares acquired
pursuant to the over-subscription privilege are subject to
allotment and may be subject to increase, which is more fully
discussed below under Over-Subscription
Privilege.
The subscription price will be equal to 95% of the net asset
value per share of the Funds common stock at the close of
business on the date on which the offer expires.
Because the expiration date and the date upon which the price of
the rights will be determined will be the same date,
stockholders who exercise their rights and submit subscription
certificates will not know the purchase price of the shares when
they make their investment decision. The market price of the
Funds common shares may, and has in the past, fluctuated
below 95% of the Funds net asset value. If the market
price of the Funds common stock is below the subscription
price, it may not be in your interest to participate in this
offering because you could purchase shares of the Fund on the
open market for less than the subscription price. Once you
subscribe for shares and the Fund receives payment or a
guarantee of payment, you will not be able to change your
decision.
The rights are non-transferable. Therefore, only the underlying
shares, and not the rights, will be listed for trading on the
NYSE.
Purposes
of the Offer
The Board of Directors of the Fund has determined that it would
be in the best interests of the Fund and its stockholders to
increase the assets of the Fund through this offer.
In consultation with the Investment Manager, the board
determined that this offer may provide the following benefits:
|
|
|
|
|
a greater ability to take advantage of investment opportunities
without being required to sell current portfolio positions that
the Investment Manager believes should be retained;
|
|
|
|
additional investment flexibility in a period when increased
political stability may drive positive market-oriented reforms
over the long-term;
|
|
|
|
additional opportunity to capitalize on attractive investment
opportunities in India, including initial public offerings,
privatizations, placements and mid- and small-cap companies with
attractive valuations;
|
20
|
|
|
|
|
improved market visibility for the Fund;
|
|
|
|
|
|
enhanced liquidity of the trading market for the Funds
shares on the NYSE;
|
|
|
|
|
|
additional capital to meet the demand for repurchases and
dividend distributions without having to liquidate attractive
holdings; and
|
|
|
|
an opportunity for existing stockholders by providing them with
an opportunity to purchase additional shares potentially at a
price below the current market price without incurring
significant transaction costs.
|
Prior to reaching this conclusion, the Funds Board of
Directors, in consultation with the Investment Manager and
others, reviewed the structure, timing and terms of this offer,
as well as its dilutive effect on both stockholders who exercise
their rights and those who do not and other potentially adverse
consequences resulting from this offer. The Board of Directors
also considered the fact that the Funds semi-annual
repurchase offers will tend to diminish assets over time and
that diminution in assets will offset in whole or in part the
potential benefits discussed above. After careful consideration,
the Board of Directors voted unanimously to approve the terms of
this offer. However, there can be no assurance that the offer
will provide any of the benefits listed above.
Two of the Funds Directors who voted to authorize this
offer are affiliated with the Investment Manager and the Country
Adviser, and therefore could benefit indirectly from this offer.
The other six Directors are not interested persons
of the Fund within the meaning of the 1940 Act. Subject to
certain conditions as noted above, the Investment Manager, as
well as the Country Adviser, may also benefit from this offer
because their fees will be based on the net assets of the Fund.
The Funds Board of Directors considered this in its
evaluation of the offer and determined that, in its business
judgment, these increased fees were offset by the potential
benefits of the offer to the Fund and its stockholders. See
Investment Management and Other Services. It is not
possible to state precisely the amount of additional
compensation the Investment Manager and the Country Adviser
might receive as a result of this offer because it is not known
how many shares will be subscribed for and because the proceeds
of this offer will be invested in additional portfolio
securities, which will fluctuate in value. However, assuming
that the value of the Funds assets remained constant prior
to the offer at $1.0 billion (its approximate value as of
July 2, 2009) and after the offer at $1.4 billion
(which assumes that all rights are exercised at the estimated
subscription price, including the additional shares that may be
issued under the over-subscription privilege), the annual
compensation received by the Investment Manager and the Country
Adviser would increase by approximately $4.2 million (including
fees paid to the Investment Manager in its capacity as the
Funds Administrator) and $400,833, respectively. The
Country Advisers fee is paid by the Investment Manager and
not directly by the Fund.
The Fund has no current plans to make additional rights
offerings. However, the Fund may, in the future, choose to make
additional rights offerings if the Funds Board of
Directors determines that a rights offering would be in the best
interests of the Fund and its stockholders and would result in a
net benefit to the stockholders. Any such future rights
offerings, if any, will be made in accordance with the
then-applicable requirements of the 1940 Act and the
U.S. Securities Act of 1933, as amended (the
1933 Act).
There can be no assurance that the Fund or its stockholders will
achieve any of the foregoing objectives or benefits through this
offer.
Over-Subscription
Privilege
If some stockholders as of the record date do not exercise all
of the rights initially issued to them, any shares for which
subscriptions have not been received from stockholders will be
offered by means of the over-subscription privilege to those
stockholders as of the record date who have exercised all of the
rights initially issued to them and who wish to acquire
additional shares. Stockholders who exercise all of the rights
initially issued to them should indicate on the subscription
certificate how many shares they are willing to acquire through
this over-subscription privilege. If sufficient shares are
available, all over-subscription requests will be honored in
full. If sufficient shares are not available to honor all
requests for over-subscription, the Fund may increase the number
of shares available by up to 25%, or 3,206,551 shares in
order to satisfy over-subscription requests.
To the extent that there are not sufficient shares to honor all
over-subscription requests, the available shares will be
allocated among those who over-subscribe based on the number of
rights originally issued to them by the
21
Fund, so that the number of shares issued to stockholders who
subscribe through the over-subscription privilege will generally
be in proportion to the number of shares of the Fund owned by
them on the record date. The percentage of remaining shares each
over-subscribing stockholder may acquire may be rounded down to
the nearest whole share to result in delivery of whole shares.
The allocation process may involve a series of allocations in
order to ensure that the total number of shares available for
over-subscriptions is distributed, as nearly as may be
practicable, on a pro rata basis. The Fund will not offer or
sell any shares that are not subscribed for through the primary
subscription or the over-subscription privilege.
Subscription
Price
The subscription price will be equal to 95% of the net asset
value per share of the Funds common stock at the close of
business on the date on which the offer expires.
The Fund announced the offer after the close of business on
May 29, 2009. The last reported sale price of a share of
the Funds common stock on the NYSE on May 29, 2009
and July 2, 2009 was $29.38 and $30.90, respectively. The
net asset value per share at the close of business on
May 29, 2009 and July 2, 2009 was $26.72 and $26.37,
respectively.
Rights
May Not Be Purchased or Sold
The rights are non-transferable. You may not purchase or sell
them. The rights will not trade on the NYSE or any other
exchange. The shares to be issued upon the exercise of the
rights, however, will trade on the NYSE under the symbol
IFN. If you do not exercise your rights before the
conclusion of this offer, your rights will expire without value.
Expiration,
Extension and Early Termination of the Offer
The expiration date is 5:00 p.m., Eastern daylight time, on
August 14, 2009, unless extended by the Fund to not later
than August 19, 2009 or terminated early as described
herein. The Fund may elect to extend the offer in order to,
among other things, increase potential stockholder participation
in the offer or allow stockholders additional time to evaluate
the terms of the offer. Moreover, the Fund may extend the offer
upon the occurrence of the events described below under
Notice of Net Asset Value Decline-Possible
Suspension or Withdrawal of the Offer.
The rights will expire on the expiration date and may not be
exercised after that date. Because the expiration date and the
date upon which the price of the rights will be determined will
be the same date, stockholders who exercise their rights will
not know the purchase price of the shares when they make their
investment decision. Once you subscribe for shares and the Fund
receives payment or a guarantee of payment, you will not be able
to change your decision except as provided under
Notice of Net Asset Value Decline-Possible
Suspension or Withdrawal of the Offer.
The Fund may elect to terminate the offer early if, in the
judgment of the Funds Board of Directors, market
circumstances significantly change and the Funds board
determines that the offer no longer constitutes a net benefit to
the Fund or the Funds stockholders. In such event, the
Funds board would likely determine that the risks
associated with proceeding with the offer would be greater to
the Fund and the Funds stockholders than the risks
associated with early termination, which risks could include
negative public perception of the Fund and a negative impact on
the Funds performance.
Subscription
Agent
The subscription agent for this offer is The Colbent
Corporation, which will receive, for its administrative,
processing, invoicing and other services as subscription agent,
an estimated fee of $100,000 and reimbursement for all
out-of-pocket
expenses related to this offer. Stockholder inquiries may be
directed to Georgeson Shareholder Communications Inc., the
information agent, toll-free at 1-866-297-1264.
22
THE SIGNED SUBSCRIPTION CERTIFICATES SHOULD BE SENT TO THE
COLBENT CORPORATION, by one of the following methods:
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By First Class Mail:
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By Express Mail or
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The Colbent Corporation
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Overnight Courier:
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The India Fund, Inc. Rights Offering
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The Colbent Corporation
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Att: Corporate Actions
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The India Fund, Inc. Rights Offering
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PO Box 859208
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Att: Corporate Actions
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Braintree, MA
02185-9208
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161 Bay State Road
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Braintree, MA 02184
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By Facsimile Transmission:
1-781-930-4939
Confirm by Telephone:
1-781-930-4900
The Fund will only accept subscription certificates actually
received on a timely basis. If you deliver the certificates to
an address other than as set forth above, that delivery will not
be effective.
Information
Agent
Any questions or requests for assistance may be directed to the
information agent at its telephone number listed below:
Georgeson Shareholder Communications Inc.
Toll Free: 1-866-297-1264
Stockholders may also call their nominees, who hold shares for
the account of others, for information with respect to this
offer.
The Fund will pay an estimated fee of $100,000 to Georgeson
Shareholder Communications Inc. and reimburse it for all
out-of-pocket
expenses related to its services as information agent.
Method
for Exercising Rights
Rights may be exercised by stockholders who fill in and sign the
accompanying subscription certificate and mail it in the
envelope provided or deliver the completed and signed
subscription certificate to the subscription agent, together
with any required payment for the shares as described below
under Payment for Shares. Rights may
also be exercised by a stockholder contacting his or her broker,
bank or trust company, which can arrange, on the
stockholders behalf, to guarantee delivery, using a
notice of guaranteed delivery, of a properly
completed and executed subscription certificate and payment for
the shares. The broker, bank or trust company may charge a fee
for this service. Fractional shares will not be issued.
Completed subscription certificates must be received by the
subscription agent prior to 5:00 p.m., Eastern daylight
time, on the expiration date (unless payment is to be effected
by means of a notice of guaranteed delivery at the offices of
the subscription agent. See Payment for
Shares.
Depending on your status, the following methods of delivery
should be used:
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For stockholders who are record
owners. Stockholders who are record owners can
choose between either option set forth below under
Payment for Shares. If time is of the
essence, option (1) set forth below under
Payment for Shares will permit delivery
of the subscription certificate and payment after the expiration
date.
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For investors whose shares are held through a
nominee. Stockholders whose shares are held by a
nominee such as a broker, bank or trust company must contact
that nominee to exercise their rights. In that case, the nominee
will complete the subscription certificate on behalf of the
stockholder and arrange for proper payment by one of the methods
set forth below under Payment for Shares.
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For nominees. Nominees, who hold shares for
the account of others, should notify the respective beneficial
owners of such shares as soon as possible to ascertain the
beneficial owners intentions and to obtain instructions
with respect to the rights. If the beneficial owner so
instructs, the nominee should complete the subscription
certificate and submit it to the subscription agent, together
with the proper payment described below under
Payment for Shares.
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Payment
for Shares
Stockholders who acquire shares in the primary subscription or
pursuant to the over-subscription privilege may choose between
the following methods of payment:
(1) If, prior to 5:00 p.m., Eastern daylight time, on
the expiration date, the subscription agent has received a
notice of guaranteed delivery by facsimile or otherwise from a
bank, trust company or a NYSE member firm guaranteeing delivery
of (a) payment of the full subscription price for the
shares subscribed for in the primary subscription and any
additional shares subscribed for through the over-subscription
privilege and (b) a properly completed and executed
subscription certificate, the subscription will be accepted by
the subscription agent. The bank, trust company or NYSE member
firm may charge you a fee for this service. The subscription
agent will not honor a notice of guaranteed delivery if a
properly completed and executed subscription certificate is not
received by the subscription agent by the close of business on
August 19, 2009.
(2) Alternatively, a record owner can send payment for the
shares acquired in the primary subscription, together with the
subscription certificate, to the subscription agent based on an
estimated subscription price of $25.05 per share. To be
accepted, such payment, together with the subscription
certificate, must be received by the subscription agent prior to
5:00 p.m., Eastern daylight time, on the expiration date.
If the second method described above is used, payment by
check must accompany any subscription certificate for the
subscription certificate to be accepted.
If the market price of the Funds common stock is below the
subscription price, it may not be in your interest to
participate in this offering. You will have no right to rescind
your subscription after receipt of your payment for shares by
the subscription agent, except as provided below under
Notice of Net Asset Value Decline/Possible
Suspension or Withdrawal of the Offer.
The subscription agent will deposit all checks received by it
prior to the final due date into a segregated interest bearing
and insured account at a non-affiliated bank pending
distribution of the shares. Interest will accrue to the benefit
of the Fund, and not the stockholder, regardless of whether
shares are issued by the Fund.
The method of delivery of subscription certificates and
payment of the subscription price to the Fund will be at your
election and risk, but, if sent by mail, we recommend that you
send the subscription certificates and payment by registered
mail, properly insured with return receipt requested, and that a
sufficient number of days be allowed to ensure delivery to the
Fund prior to 5:00 p.m., eastern daylight time, on the
expiration date. The Fund reserves the right not to accept your
payment if payment is not received in a timely fashion. You are
therefore strongly encouraged to pay, or arrange for payment, by
means of a certified or bank cashiers check.
A confirmation will be sent by the subscription agent to each
stockholder (or, if the Funds shares on the record date
are held by a nominee, to such nominee) by August 26, 2009,
showing:
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the number of shares acquired pursuant to the primary
subscription;
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the number of shares, if any, acquired through the
over-subscription privilege;
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the per share and total purchase price for the shares; and
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any additional amount payable by the stockholder to the Fund or
any excess to be refunded by the Fund to the stockholder, in
each case based on the subscription price as determined on the
Pricing Date.
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In the event that the estimated subscription price is greater
than the actual subscription price determined at the close of
the subscription period, a refund is owed to the exercising
rights holder.
24
In the case of any stockholder who exercises his or her right to
acquire shares pursuant to the over-subscription privilege, any
excess payment which would otherwise be refunded to the
stockholder will be applied by the Fund toward payment for
additional shares acquired pursuant to exercise of the
over-subscription privilege. Any additional payment required
from a stockholder must be received by the subscription agent by
August 28, 2009. Any excess payment to be refunded by the
Fund to a stockholder will be mailed by the subscription agent
to such stockholder as promptly as possible after
August 28, 2009. All payments by a stockholder must be made
in United States dollars by money order or check drawn on a bank
located in the United States of America and payable to The India
Fund, Inc.
Issuance and delivery of certificates for the shares purchased
are subject to collection of checks and actual payment through
any notice of guaranteed delivery.
If a stockholder who acquires shares pursuant to the primary
subscription or over-subscription privilege does not make
payment of all amounts due by August 28, 2009, the Fund
reserves the right, among other things, to:
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find other purchasers for such subscribed and unpaid shares;
and/or
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apply any payment actually received by it toward the purchase of
the greatest number of whole shares which could be acquired by
such stockholder upon exercise of the primary subscription
and/or
over-subscription privilege.
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All questions concerning the timeliness, validity, form and
eligibility of any exercise of rights will be determined by the
Fund, whose determinations will be final and binding. The Fund
may, in its sole discretion, waive any defect or irregularity,
or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of
any right. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived
or cured within such time as the Fund determines in its sole
discretion. The Fund will not be under any duty to give
notification of any defect or irregularity in connection with
the submission of subscription certificates or incur any
liability for failure to give such notification.
Notice of
Net Asset Value Decline/Possible Suspension or Withdrawal of the
Offer
The Fund has, as required by the SEC, undertaken to suspend this
offer until it amends this prospectus if, subsequent to the
effective date of the Funds Registration Statement, the
Funds net asset value declines more than 10% from its net
asset value as of the effective date. Accordingly, the Fund will
notify stockholders of any such decline and thereby permit them
to cancel their exercise of rights.
Delivery
of Share Certificates
Participants in the Funds dividend reinvestment and cash
purchase plan will have any shares acquired in the primary
subscription and pursuant to the over-subscription privilege
credited to their accounts in the plan. Stock certificates will
not be issued for shares credited to plan accounts. Stockholders
whose shares are held of record by a nominee on their behalf
will have any shares acquired in the primary subscription and
pursuant to the over-subscription privilege credited to the
account of such nominee. For all other stockholders, the Fund
will issue stock certificates for shares acquired through
subscription only upon request made at the time of exercise of
the rights. If a request is made, stock certificates will be
mailed promptly after August 28, 2009 and after full
payment for the subscribed shares has been received and cleared.
If a stockholder holds shares in more than one account, each
account will be treated as a separate holder for purposes of the
offer.
Restrictions
on Foreign Stockholders
The Fund will not mail subscription certificates to stockholders
whose record addresses are outside the United States. PNC Global
Investment Servicing (U.S.) Inc. will hold the rights to which
subscription certificates relate for foreign stockholders
accounts until instructions are received to exercise the rights.
If no instructions are received prior to the expiration date,
which is August 14, 2009, the rights will expire. Foreign
stockholders holding shares through a U.S. broker-dealer
should contact the broker-dealer regarding this offer.
25
United
States Federal Income Tax Consequences of the Offer
Stockholders who receive rights pursuant to this offer will not
recognize taxable income for United States federal income tax
purposes upon their receipt of the rights. If rights issued to a
stockholder expire without being exercised, no basis will be
allocated to such rights, and the stockholder will not recognize
any gain or loss for U.S. federal income tax purposes upon
such expiration.
Provided that the fair market value of the rights distributed
pursuant to this offer is less than 15% of the fair market value
of the Funds common stock at the time of distribution, the
tax basis of a stockholders common stock will remain
unchanged, and the stockholders basis in the rights will
be zero. A stockholder may, however, elect to allocate his basis
in his common stock between his rights and common stock based on
their relative fair market values on the date of distribution of
the rights; this allocation is mandatory if the fair market
value of the rights distributed pursuant to this offer is at
least equal to 15% of the fair market value of the Funds
common stock at the time of distribution. A stockholder who
exercises rights will not recognize any gain or loss for United
States federal income tax purposes upon the exercise. The basis
of the newly acquired common stock will equal the subscription
price paid for the common stock plus the basis allocated to the
rights that are exercised, if any. Upon a sale or exchange of
the common stock so acquired, the stockholder will recognize
gain or loss measured by the difference between the proceeds of
the sale or exchange and the cost basis of such common stock.
Assuming the stockholder holds the common stock as a capital
asset, any gain or loss realized upon its sale will generally be
treated as a capital gain or loss, and the gain or loss will be
long-term capital gain or loss if the common stock has a holding
period of more than one year at the time of the sale. However,
any loss recognized upon the sale of shares of common stock with
a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any capital gain
distribution previously received or deemed received by the
stockholder with respect to such shares, and a loss may be
disallowed under wash sale rules to the extent that the
stockholder purchases additional common stock (including by
reinvestment of distributions) within 30 days before or
after the sale date. The holding period for common stock
acquired upon the exercise of rights will begin on the date of
exercise of the rights.
The foregoing is a summary of certain U.S. federal income
tax consequences of this offer under the provisions of the
Internal Revenue Code and applicable existing and proposed
regulations thereunder, all as currently in effect and all
subject to change at any time, perhaps with retroactive effect.
It does not include any state, local or foreign tax consequences
of this offer. This summary is generally applicable to
stockholders that are United States persons as defined in the
Internal Revenue Code. Further, this summary is not intended to
be, nor should it be, construed as legal or tax advice, and
stockholders are urged to consult their own tax advisors to
determine the tax consequences to them of this offer and their
ownership of rights and common stock.
Dilution
As a result of this offer, you will incur immediate economic
dilution, and, if you do not exercise all of your rights, you
may incur dilution of ownership, voting rights and your share of
any distributions made by the Fund.
You should expect that you will, at the completion of this
offer, experience immediate dilution of net asset value per
share because the subscription price will be less than the net
asset value per share, and the number of shares outstanding
after the offer will have increased proportionately more than
the increase in the size of the Funds net assets. This
dilution of net asset value will disproportionately affect
stockholders who do not exercise their rights. In addition,
whether or not you exercise your rights, you will experience a
dilution of net asset value because you will indirectly bear the
expenses of this offer, which include, among other items, SEC
registration fees, state blue sky qualification
fees, printing expenses and the fees assessed by service
providers (including the cost of the Funds counsel and
accountants). We cannot state precisely the amount of any
decrease because we do not know at this time how many shares
will be subscribed for or what the net asset value per share
will be at the pricing date. The following example, assuming
(i) a net asset value of $1.0 billion (the Funds
approximate net asset value on July 2, 2009), (ii) a
subscription price of $25.05 (which is 95% of the Funds
approximate net asset value per share on
26
July 2, 2009) and (iii) that all rights are
exercised at the estimated subscription price, including the
additional shares that may be issued under the over-subscription
privilege, demonstrates the dilution of net asset value.
Example:
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NAV per share
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Assumed
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following offering
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NAV as of
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subscription
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NAV per share as
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(after payment of
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Reduction in NAV
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July 2, 2009
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price
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of July 2, 2009
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expenses)
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per share
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$
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1.0 billion
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$
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25.05
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$
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26.37
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$
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25.96
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$
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0.41
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In addition to the economic dilution described above, if you do
not exercise all of your rights, you may incur dilution of
ownership and voting rights, as well as dilution of your share
of any distributions made by the Fund, as a result of this
offer. This dilution may occur because you could own a smaller
interest in the Fund after the offer than you owned prior to the
offer. If you do not submit a subscription request pursuant to
the over-subscription privilege, you will also experience
dilution in your Fund ownership if the Fund offers additional
shares for subscription. In addition, regardless of whether you
participate in the current offering, to the extent the Fund
engages in subsequent rights offerings, your investment may be
diluted by any such offering.
USE OF
PROCEEDS
We estimate the net proceeds of this offer to be approximately
$320,509,075. If the Fund increases the number of shares subject
to subscription by 25%, then the total net proceeds of the offer
will be approximately $400,833,178. These figures assume all
rights are exercised in full, a subscription price of $25.05,
and payment of offering expenses of approximately $787,410.
The offering is designed to raise funds to be invested
consistent with the Funds investment objectives and
policies. The Investment Manager anticipates that investment of
the net proceeds of this offer in accordance with the
Funds investment goal and policies may take up to six
months from their receipt by the Fund depending on market
conditions and the availability of appropriate securities. See
Risk Factors Risks Related to the Funds
Operations. Pending investment, the net proceeds of this
offer will be held in the types of short- term debt securities
and instruments in which the Fund may invest. See
Investment Objective and Policies. As a result of
this short-term investment of the proceeds, a lower yield may be
realized.
INVESTMENT
OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital
appreciation, which it seeks to achieve by investing primarily
in the equity securities of Indian companies. Equity securities
include common and preferred stock (including convertible
preferred stock), American, global or other types of depositary
receipts, or ADRs, convertible bonds, notes and debentures,
equity interests in trusts, partnerships, joint ventures or
similar enterprises and common stock purchase warrants and
rights. Most of the equity securities purchased by the Fund are
expected to be traded on an Indian stock exchange or in an
Indian over-the-counter market.
The Funds investment objective and its policy to invest,
under normal market conditions, at least 80% of its total assets
in equity securities of Indian companies are fundamental
policies of the Fund that may not be changed without the
approval of a majority of the Funds outstanding voting
securities. See Investment Restrictions.
Portfolio
Structure
Under normal market conditions, at least 80% of the Funds
total assets are invested in equity securities of Indian
companies. Indian companies are companies that:
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are organized under the laws of India,
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regardless of where organized, derive at least 50% of their
revenues or profits from goods produced or sold, investments
made, or services performed, in India, or have at least 50% of
their assets in India, or
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27
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have securities which are traded principally on any Indian stock
exchange or in the Indian over-the-counter market.
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Up to 20% of the Funds total assets may be invested,
subject to certain restrictions, in:
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equity securities of companies (other than companies considered
Indian companies under the above criteria),
regardless of where organized, which the Investment Manager
believes derive, or will derive, at least 25% of their revenues
from business in or with India, or have at least 25% of their
assets in India,
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debt securities including high yield/high risk and unrated debt
(commonly referred to as junk bonds), denominated in
Indian rupees or issued or guaranteed by an Indian company, the
Government of India or an Indian governmental entity, and
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debt securities of the type described below under
Temporary Investments. We refer to these
securities as temporary investments.
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Up to 20% of the Funds assets may also be utilized to
purchase and sell options on securities, financial futures,
fixed income indices and other financial futures contracts,
enter into interest rate transactions and to enter into currency
transactions, sell securities short and loan portfolio
securities. The Fund will only invest in such assets in order to
hedge against financial risks. With respect to interest rate
transactions, the Fund may enter into interest rate swaps and
may purchase or sell interest rate caps and floors. Currency
transactions may include currency forward contracts, exchange
listed currency futures contracts, exchange listed and
over-the-counter options on currencies and currency swaps. For
additional discussion of these types of transactions in which
the Fund may invest see Appendix A
General Characteristics and Risks of Hedging. Although the
Fund does not presently do so or intend to do so to any
significant extent, the Fund may from time to time sell
securities short. See Additional Investment
Activities Short Sales for more information.
The Fund will not be obligated, however, to do any hedging and
makes no representation as to the availability of these
techniques at this time or at any time in the future. See
Risk Factors Risks Related to the Funds
Operations The Funds ability to successfully
hedge against financial risks may adversely affect the
Funds net asset value and Additional
Investment Activities Hedging.
The Funds assets may be invested in debt securities, other
than temporary investments, when the Investment Manager believes
that, based upon factors such as relative interest rate levels
and foreign exchange rates, such securities offer opportunities
for long-term capital appreciation. The Fund may invest up to
100% of its assets in temporary investments for temporary
defensive purposes due to political, market or other factors
affecting markets in India.
The Fund may invest in investment funds, including unregistered
funds, that invest at least 80% of their total assets in the
equity securities of Indian companies in which the Fund is
authorized to invest. The Fund may invest in investment funds as
a means of investing in other equity securities in which the
Fund is authorized to invest when the Investment Manager
believes that such investments may be more advantageous to the
Fund than a direct market purchase of such securities. Under the
1940 Act, the Fund is restricted in the amount it may invest in
such funds. See Additional Investment
Activities Investment Funds.
The Fund may invest its assets in a broad spectrum of
industries. In selecting industries and companies for
investment, the Investment Manager will consider overall growth
prospects, financial condition, competitive position,
technology, research and development, productivity, labor costs,
raw material costs and sources, profit margins, return on
investment, structural changes in local economies, capital
resources, the degree of government regulation or deregulation,
management and other factors. See Investment
Restrictions.
While the Fund invests a substantial portion of its assets in
the securities of established Indian companies, it also may
invest in the securities of less seasoned and smaller and
mid-capitalization Indian companies. There are risks associated
with investments in securities of small and medium
capitalization companies that are not customarily associated
with investments in securities of more established and larger
capitalized companies. Although the opportunities for growth may
be greater with these companies, they also involve greater
risks. For example, they are more susceptible to abrupt and
erratic price movements and adverse general market and economic
developments, and it may be more difficult to obtain information
about these companies because they tend to be less well known
and
28
followed by fewer securities analysts. See Risk
Factors-Risks Related to the Funds Operations-Investments
in unseasoned and small and mid-capitalization Indian companies
may expose the Fund to greater investment risk.
Temporary
Investments
The Fund may hold
and/or
invest its assets in cash
and/or
temporary investments for cash management purposes, pending
investment in accordance with the Funds investment
objective and policies and to meet operating expenses. In
addition, the Fund may take a temporary defensive posture and
invest without limitation in temporary investments. The Fund may
assume a temporary defensive posture when, due to political,
market or other factors broadly affecting markets, the
Investment Manager determines that either opportunities for
capital appreciation in those markets may be significantly
limited or that significant diminution in value of the
securities traded in those markets may occur. To the extent that
the Fund invests in temporary investments, it may not achieve
its investment objective.
Specifically, temporary investments are debt
securities denominated in U.S. dollars or in another freely
convertible currency including:
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short-term (less than 12 months to maturity) and
medium-term (not greater than five years to maturity)
obligations issued or guaranteed by:
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the U.S. government or the Indian government or their
agencies or instrumentalities, or
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international organizations designated or supported by multiple
foreign governmental entities to promote economic reconstruction
or development;
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finance company obligations, corporate commercial paper and
other short-term commercial obligations, in each case rated, or
issued by companies with similar securities outstanding that are
rated, Prime-1 or A or better by Moodys Investors Service,
Inc. or A-1
or A or better by Standard & Poors Ratings
Services, a division of the McGraw Hill Companies, Inc., or, if
unrated, of comparable quality as determined by the Investment
Manager;
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obligations (including certificates of deposit, time deposits,
demand deposits and bankers acceptances) of banks, subject
to the restriction that the Fund may not invest more than 25% of
its total assets in bank securities; and
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repurchase agreements with respect to securities in which the
Fund may invest. The banks whose obligations may be purchased by
the Fund and the banks and broker-dealers with which the Fund
may enter into repurchase agreements include any member bank of
the U.S. Federal Reserve System and any broker-dealer or
any foreign bank that has been determined by the Investment
Manager to be creditworthy.
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Repurchase agreements are contracts pursuant to which the seller
of a security agrees at the time of sale to repurchase the
security at an agreed upon price and date. When the Fund enters
into a repurchase agreement, the seller will be required to
maintain the value of the securities subject to the repurchase
agreement, marked to market daily, at not less than their
repurchase price. Repurchase agreements may involve risks in the
event of insolvency or other default by the seller, including
possible delays or restrictions upon the Funds ability to
dispose of the underlying securities.
Other
Investments
Illiquid securities. The Fund may invest up to
20% of its total assets in illiquid securities for which there
may be no or only a limited trading market and for which a low
trading volume of a particular security may result in abrupt and
erratic price movements. The Fund does not currently intend to
invest in privately placed securities other than those where no
term, other than price and payment terms, is negotiated. The
Fund may be unable to dispose of its holdings in illiquid
securities at then-current market prices and may have to dispose
of such securities over extended periods of time. See Risk
Factors-Risks Related to the Funds Operations
The Funds investments in illiquid securities may restrict
its ability to dispose of its investments in a timely fashion
and at a price approximating the value at which the Fund carries
the securities on its books. In some cases, illiquid
securities will be subject to contractual or legal restrictions
on transfer. In addition, issuers whose securities are not
publicly
29
traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their
securities were publicly traded.
Rule 144A securities. The Fund may
purchase certain restricted securities, or Rule 144A
securities, for which there is a secondary market of qualified
institutional buyers, as contemplated by Rule 144A under
the 1933 Act. Rule 144A provides an exemption from the
registration requirements of the 1933 Act for the resale of
certain restricted securities to qualified institutional buyers.
One effect of Rule 144A is that certain restricted
securities may now have liquidity, though there is no assurance
that a liquid market for Rule 144A securities will develop
or be maintained. To the extent that the number of qualified
institutional buyers is reduced, a previously liquid
Rule 144A security may be determined to be illiquid, thus
increasing the percentage of illiquid assets in the Funds
portfolio. The Board of Directors has adopted policies and
procedures for the purpose of determining whether securities
that are eligible for resale under Rule 144A are liquid or
illiquid securities. Pursuant to those policies and procedures,
the Board of Directors has delegated to the Investment Manager
the determination as to whether a particular security is liquid
or illiquid.
Convertible securities. A convertible security
is a bond, debenture, note, preferred stock or other security
that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have
several unique investment characteristics such as:
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higher yields than common stocks but lower yields than
comparable nonconvertible securities;
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a lesser degree of fluctuation in value than the underlying
stock since they have fixed income characteristics; and
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the potential for capital appreciation if the market price of
the underlying common stock increases.
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A convertible security might be subject to redemption at the
option of the issuer at a price established in the convertible
securitys governing instrument. If a convertible security
held by the Fund is called for redemption, the Fund may be
required to permit the issuer to redeem the security, convert it
into the underlying common stock or sell it to a third party.
In selecting convertible debt securities for the Fund, the
following factors, among others, may be considered by the
Investment Manager:
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the creditworthiness of the issuers of the securities;
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the interest income generated by the securities;
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the potential for capital appreciation of the securities and the
underlying stock;
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the conversion prices of the securities relative to the
underlying stocks; and
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the conversion prices of the securities relative to other
comparable securities.
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Warrants. The Fund may invest in warrants,
which are securities permitting but not obligating their holder
to subscribe for other securities. Warrants do not carry with
them the right to dividends or voting rights with respect to the
securities that they entitle their holder to purchase, and they
do not represent any rights in the assets of an issuer. As a
result, an investment in warrants may be considered more
speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change
with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its
expiration date.
Equity-linked debt securities. The Fund may
invest in equity-linked debt securities. The amount of interest
and/or
principal payments that an issuer of equity-linked debt
securities is obligated to make is linked to the performance of
a specified index of equity securities and may be significantly
greater or less than payment obligations in respect of other
types of debt securities. As a result, an investment in
equity-linked debt securities may be considered more speculative
than other types of debt securities. In selecting equity-linked
debt securities for
30
the Fund, the Investment Manager may consider, among other
factors, the creditworthiness of the issuers of the securities
and the volatility of the index of equity securities.
ADDITIONAL
INVESTMENT ACTIVITIES
In addition to the investment policies discussed above, the Fund
may engage in certain additional investment activities. These
activities may be limited by Indian law or regulations.
Hedging
The Fund is authorized to use various hedging and investment
strategies. From time to time and as permitted by the 1940 Act,
the Fund may engage in certain hedging activities described
below to hedge various market risks (such as broad or specific
market movements and interest rates and currency exchange rates).
In addition, techniques and instruments may change over time as
new instruments and strategies are developed or regulatory
changes occur. Limitations on the portion of the Funds
assets that may be used in connection with the investment
strategies described below are set out in Appendix A:
General Characteristics and Risks of Hedging.
Subject to the constraints described above, the Fund may
purchase and sell interest rate, currency or stock index futures
contracts and enter into currency forward contracts and currency
swaps. It may purchase and sell (or write) exchange listed and
over-the-counter put and call options on debt and equity
securities, currencies, futures contracts, fixed income and
stock indices and other financial instruments. And it may enter
into interest rate transactions, equity swaps and related
transactions and other similar transactions that may be
developed to the extent the Investment Manager determines are
consistent with the Funds investment objective and
policies and applicable regulatory requirements. The Funds
futures transactions will be entered into for hedging purposes.
There is, however, no limit on the Funds assets that can
be put at risk through the use of futures contracts and options
thereon, and the value of the Funds futures contracts and
options thereon may equal or exceed 100% of the Funds
total assets. The Funds interest rate transactions may
take the form of swaps, caps, floors and collars, currency
forward contracts, currency futures contracts, currency swaps
and options on currency or currency futures contracts.
Hedging may be used to attempt to protect against possible
changes in the market value of securities held in or to be
purchased for the Funds portfolio resulting from
securities markets or currency exchange rate fluctuations, to
protect the Funds unrealized gains in the value of its
portfolio securities, to facilitate the sale of those securities
for investment purposes, to manage the effective maturity or
duration of the Funds portfolio or to establish a position
in the derivatives markets as a temporary substitute for
purchasing or selling particular debt or equity securities. The
ability of the Fund to utilize hedging successfully will depend
on the Investment Managers ability to predict pertinent
market movements, and this ability cannot be assured. These
skills are different from those needed to select portfolio
securities. The use of hedging in certain circumstances will
require that the Fund segregate cash, U.S. government
securities or other liquid debt obligations to the extent the
Funds obligations are not otherwise covered
through ownership of the underlying security, financial
instrument or currency.
A detailed discussion of hedging, including applicable
requirements of the U.S. Commodity Futures Trading
Commission, the requirement to segregate assets with respect to
these transactions and special risks associated with such
strategies, appears in this prospectus as Appendix A:
General Characteristics and Risks of Hedging. See also
Risk Factors Risks Related to the Funds
Operations The Funds ability to successfully
hedge against financial risks may adversely affect the
Funds net asset value.
When-Issued
and Delayed Delivery Securities
The Fund may purchase securities on a when-issued or delayed
delivery basis. Securities purchased on a when-issued or delayed
delivery basis are purchased for delivery beyond the normal
settlement date at a stated price. No income accrues to the
purchaser of a security on a when-issued or delayed delivery
basis prior to delivery. Such securities are recorded as an
asset and are subject to changes in value based upon changes in
market prices. Purchasing a security on a when-issued or delayed
delivery basis can involve a risk that the market price at the
time of delivery may be lower than the
agreed-upon
purchase price, in which case there could be an unrealized loss
at the
31
time of delivery. The Fund will only make commitments to
purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but it
may sell them before the settlement date if it is deemed
advisable. The Fund generally will establish a segregated
account in which it will maintain liquid assets in an amount at
least equal in value to the Funds commitments to purchase
securities on a when-issued or delayed delivery basis. If the
value of these assets declines, the Fund will place additional
liquid assets in the account on a daily basis so that the value
of the assets in the account is equal to the amount of such
commitments. As an alternative, the Fund may elect to treat
when-issued or delayed delivery securities as senior securities
representing indebtedness, which are subject to asset coverage
requirements under the 1940 Act. See Investment
Restrictions.
Loans of
Portfolio Securities
The Fund may lend portfolio securities. By doing so, the Fund
attempts to earn income through the receipt of interest on the
loan. In the event of the bankruptcy of the other party to a
securities loan, the Fund could experience delays in recovering
the securities that it lent. To the extent that, in the
meantime, the value of the securities that the Fund has lent has
increased, the Fund could experience a loss.
The Fund may lend securities from its portfolio if liquid assets
in an amount at least equal to the current market value of the
securities lent (including accrued interest thereon) plus the
interest payable to the Fund with respect to the loan is
maintained by the Fund in a segregated account. Any securities
that the Fund may receive as collateral will not become a part
of its portfolio at the time of the loan and, in the event of a
default by the borrower, the Fund will, if permitted by law,
dispose of such collateral except for such part thereof that is
a security in which the Fund is permitted to invest. During the
time that securities are on loan, the borrower will pay the Fund
any accrued income on those securities, and the Fund may invest
the cash collateral and earn additional income or receive an
agreed-upon
fee from a borrower that has delivered cash equivalent
collateral. Cash collateral received by the Fund will be
invested in securities in which the Fund is permitted to invest.
The value of securities lent will be marked to market daily.
Portfolio securities purchased with cash collateral are subject
to possible depreciation. Loans of securities by the Fund will
be subject to termination at the Funds or the
borrowers option. The Fund may pay reasonable negotiated
fees in connection with loaned securities, so long as such fees
are set forth in a written contract and approved by the
Funds Board of Directors.
SEBI has, in a press release dated October 20, 2008 in
respect of offshore stock lending activities by an FII, stated
that it disapproves of the overseas lending and borrowing
activities of FIIs and the consequent selling pressure in the
cash market in India. SEBI has communicated this disapproval to
the FIls. Consequently, the lending and borrowing activities of
FIls are being monitored and if necessary stronger measures may
be taken by SEBI as considered appropriate, which may include
the imposition of further restrictions or reporting requirements
on an FII
Investment
Funds
The Fund may invest in investment funds, including unregistered
funds, other than those for which the Investment Manager or
Country Adviser serve as investment adviser or sponsor and which
invest principally in securities in which the Fund is authorized
to invest. Under the 1940 Act, the Fund may invest a maximum of
10% of its total assets in the securities of other investment
companies. In addition, the Fund may not invest more than 5% of
its total assets in the securities of any one investment
company, and it may not invest in any investment company if it
would own more than 3% of the outstanding voting stock of that
company. To the extent that the Fund invests in other investment
funds, including unregistered funds, the Funds
stockholders will incur certain duplicative fees and expenses,
including investment advisory fees. As a stockholder in an
investment fund, the Fund will bear its ratable share of the
investment funds expenses and will remain subject to
payment of the Funds advisory and other fees and expenses
with respect to assets so invested. See Risk
Factors The operating expenses of the Fund may be
higher than investment companies that invest primarily in the
securities of U.S. companies.
Short
Sales
Although the Fund does not presently do so or intend to do so to
any significant extent, the Fund may from time to time sell
securities short. A short sale is a transaction in which the
Fund would sell securities it does not own but has borrowed. In
the event the Fund elects to sell securities short, the
Funds intention would be to seek to take
32
advantage of decreases in the market prices of securities in
order to increase the Funds return on its investments.
When the Fund makes a short sale, the proceeds it receives from
the sale will be held on behalf of a broker until the Fund
replaces the borrowed securities. To deliver the securities to
the buyer, the Fund will need to arrange through a broker to
borrow the securities, and, in so doing, the Fund will become
obligated to replace the securities borrowed at their market
price at the time of replacement, whatever that price may be.
The Fund may have to pay a premium to borrow the securities and
must pay any dividends or interest payable on the securities
until they are replaced.
The Funds obligation to replace the securities borrowed in
connection with a short sale will be secured by collateral
deposited with the broker that consists of cash,
U.S. government securities or other liquid debt
obligations. In addition, the Fund will place in a segregated
account with its custodian, or designated sub-custodian, an
amount of cash, U.S. government securities or other liquid
debt obligations equal to the difference, if any, between the
market value of the securities sold at the time they were sold
short and any cash, U.S. government securities or other
liquid obligations deposited as collateral with the broker in
connection with the short sale (not including the proceeds of
the short sale). Until it replaces the borrowed securities, the
Fund will maintain the segregated account daily at a level so
that the amount deposited in the account plus the amount
deposited with the broker (not including the proceeds from the
short sale) will equal the current market value of the
securities sold short and the amount deposited in the account
plus the amount deposited with the broker (not including the
proceeds from the short sale) will not be less than the market
value of the securities at the time they were sold short.
Short sales by the Fund involve certain risks and special
considerations. Possible losses from short sales differ from
losses that could be incurred from a purchase of a security
because losses from short sales may be unlimited whereas losses
from purchases can equal only the total amount invested.
Further, SEBI issued a circular on December 20, 2007, which
permits all classes of investors to engage in short selling of
securities subject to the broad framework specified by SEBI.
SEBI set April 21, 2008 as the date of implementation of
the short selling of securities and securities lending and
borrowing scheme. In addition, the stock exchanges have also
stipulated certain procedural requirements, including entering
into appropriate agreements for this purpose. Further, the RBI
has by its circular dated December 31, 2007 permitted FIIs/
sub-accounts to short sell, lend and borrow equity shares of
Indian companies subject to certain condition prescribed in the
said circular.
The custodian of the Fund in India would be required to
separately report all transactions pertaining to short selling
of equity shares and lending and borrowing in India of equity
shares by the Fund in its daily reporting with a suitable remark
(short sold / lent / borrowed equity shares)
for the purpose of monitoring by the RBI.
Leverage
Although the Fund does not presently do so or intend to do so in
the upcoming year, the Fund may utilize leverage by borrowing or
by issuing preferred stock or short-term debt securities in an
amount up to 25% of the Funds total assets. Borrowings may
be secured by the Funds assets. Temporary borrowings in an
additional amount of up to 5% of the Funds total assets
may be made without regard to the foregoing limitation for
temporary or emergency purposes such as clearance of portfolio
transactions, share repurchases and payment of dividends.
Leverage by the Fund creates an opportunity for increased return
but, at the same time, creates special risks. For example,
leverage may exaggerate changes in the net asset value of the
common stock and in the return on the Funds portfolio.
Although the principal of any leverage will be fixed, the
Funds assets may change in value during the time the
leverage is outstanding. Leverage will create expenses for the
Fund that can exceed the income from the assets acquired with
the proceeds of the leverage. All expenses associated with
leverage would be borne by common stockholders. Furthermore, an
increase in interest rates could reduce or eliminate the
benefits of leverage and could reduce the value of the
Funds common stock.
The Fund also may enter into reverse repurchase agreements with
any member bank of the U.S. Federal Reserve System and any
broker-dealer or any foreign bank that has been determined by
the Investment Manager to be creditworthy. Under a reverse
repurchase agreement, the Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. At
the time the Fund enters into a reverse repurchase agreement, it
may establish and maintain a segregated account with its
custodian or a designated sub- custodian that contains cash,
U.S. government securities or other liquid debt obligations
that have a value not less than the repurchase price
33
(including accrued interest). Reverse repurchase agreements
involve the risk that the market value of the securities
purchased with the proceeds of the sale of securities received
by the Fund may decline below the price of the securities that
the Fund is obligated to repurchase. In the event that the buyer
of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the buyer or its trustee or
receiver may receive an extension of time to determine whether
to enforce the Funds obligations to repurchase the
securities, and the Funds use of proceeds of the reverse
repurchase agreement may effectively be restricted pending the
decision. Reverse repurchase agreements will be treated as
borrowings for purposes of calculating the Funds borrowing
limitation to the extent the Fund does not establish and
maintain a segregated account.
Asset
Coverage Requirements
The 1940 Act requires the Fund to satisfy an asset coverage
requirement of 300% of its indebtedness, including amounts
borrowed, measured at the time that the Fund incurs the
indebtedness. This requirement, which we refer to as the
asset coverage requirement, means that the value of
the Funds total indebtedness may not exceed one-third of
the value of its total assets (including such indebtedness),
measured at the time the Fund incurs the indebtedness. The staff
at the SECs Division of Investment Management has taken
the position that short sales of securities, reverse repurchase
agreements, use of margin, sales of put and call options on
specific securities or indices, investments in certain other
types of instruments (including certain derivatives, such as
swap agreements) and the purchase and sale of securities on a
when-issued or forward commitment basis may be deemed to
constitute indebtedness subject to the asset coverage
requirement.
The SECs staff has stated, however, that it will not deem
a portfolio position involving these instruments to be subject
to the asset coverage requirement if an investment company
covers its position by segregating liquid securities
on its books or in an account with its custodian in an amount
sufficient to offset the liability associated with the position.
Generally, in conjunction with portfolio positions that are
deemed to constitute senior securities, the Fund must:
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observe the asset coverage requirement;
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maintain daily a segregated account in cash or liquid securities
at such a level that the amount segregated plus any amounts
pledged to a broker as collateral will equal the current value
of the position; or
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otherwise cover the portfolio position with offsetting portfolio
securities.
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Segregation of assets or covering portfolio positions with
offsetting portfolio positions may limit the Funds ability
to otherwise invest those assets or dispose of those securities.
If the Fund were to issue preferred stock, the asset coverage
requirement with respect to such preferred stock would be 200%.
INVESTMENT
RESTRICTIONS
The following restrictions, along with the Funds
investment objective, its policy to invest at least 80% of the
Funds total assets in the equity securities of Indian
companies under normal market conditions and its interval fund
structure, are, subject to the next sentence, the Funds
only fundamental policies, that is, policies that cannot be
changed without the approval of the holders of a majority of the
Funds outstanding voting securities. In addition, as a
matter of fundamental policy and notwithstanding any other
fundamental investment policy or limitation, the Fund may invest
all or a portion of its assets invested in India through a
subsidiary, trust or other similar arrangement (including a
branch) established by the Fund at any such time that the Board
of Directors of the Fund determines that it is in the best
interests of the Funds stockholders. As used in here and
otherwise in this prospectus, a majority of the
Funds outstanding voting securities means the lesser
of (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares. The other
policies and investment restrictions referred to in this
prospectus are not fundamental policies of the Fund and may be
changed by the Funds Board of Directors without
stockholder approval. If a percentage restriction set forth
below is adhered to at the time a transaction is effected, later
changes in any percentage resulting from any cause other than
actions by the Fund will not be considered a violation.
34
Under its fundamental restrictions, the Fund may not:
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purchase any securities that would cause 25% or more of the
value of its total assets at the time of such purchase to be
invested in securities of one or more issuers conducting their
principal business activities in the same industry, except that
there is no limitation with respect to investment in obligations
issued or guaranteed by the U.S. government, its agencies
or instrumentalities;
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issue senior securities or borrow money, except for
(a) senior securities (including borrowing money, margin
transactions if the margin securities are owned and entering
into reverse repurchase agreements, or any similar transactions)
not in excess of 25% of its total assets (including the amount
borrowed) and (b) borrowings of up to 5% of its total
assets (including the amount borrowed) for temporary or
emergency purposes (including for the clearance of transactions,
repurchase of its shares or payment of dividends), without
regard to the amount of senior securities outstanding under
clause (a) above. However, with respect to the above, the
Funds obligations under when-issued and delayed delivery
and similar transactions and reverse repurchase agreements are
not treated as senior securities if covering assets are
appropriately segregated, and the use of hedging shall not be
treated as involving the issuance of a senior
security or a borrowing. Also, for purposes of
clauses (a) and (b) above, the term total
assets shall be calculated after giving effect to the net
proceeds of senior securities issued by the Fund reduced by any
liabilities and indebtedness not constituting senior securities,
except for such liabilities and indebtedness as are excluded
from treatment as senior securities by this second bullet. The
Funds obligations under interest rate, currency and equity
swaps are not treated as senior securities;
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purchase or sell commodities or commodity contracts, including
futures contracts and options thereon, except that the Fund may
engage in hedging, as described in the section titled
Additional Investment Activities Hedging;
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make loans, except that: (1) the Fund may (a) purchase
and hold debt instruments (including bonds, debentures or other
obligations and certificates of deposit, bankers
acceptances and fixed time deposits) in accordance with its
investment objective and policies, (b) enter into
repurchase agreements with respect to portfolio securities and
(c) make loans of portfolio securities, as described under
Additional Investment Activities Loans of
Portfolio Securities in this prospectus; and
(2) delays in the settlement of securities transactions
will not be considered loans;
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underwrite the securities of other issuers, except to the extent
that, in connection with the disposition of portfolio
securities, it may be deemed to be an underwriter;
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purchase real estate, real estate mortgage loans or real estate
limited partnership interests (other than securities secured by
real estate or interests therein or securities issued by
companies that invest in real estate or interests therein);
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purchase securities on margin, except (1) as provided in
the second bullet above and (2) (a) for delayed delivery or
when-issued transactions, (b) such short-term credits as
are necessary for the clearance of transactions and
(c) margin deposits in connection with transactions in
futures contracts, options on futures contracts, options on
securities and securities indices and currency
transactions); or
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invest for the purpose of exercising control over the management
of any company.
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For purposes of the above restrictions on senior securities and
as further described above under Additional Investment
Activities Asset Coverage Requirements, the
1940 Act requires the Fund to satisfy an asset coverage
requirement of 300% of its indebtedness, including amounts
borrowed, measured at the time the Fund incurs the indebtedness.
Short sales of securities, reverse repurchase agreements, use of
margin, sales of put and call options on specific securities or
indices, investments in certain other types of instruments
(including certain derivatives, such as swap agreements) and the
purchase and sale of securities on a when-issued or forward
commitment basis may be deemed to constitute indebtedness
subject to this requirement.
For purposes of the above restrictions on loans of portfolio
securities and as further described under Additional
Investment Activities Loans of Portfolio
Securities, the Fund may make loans of portfolio
securities if liquid assets in an amount at least equal to the
current market value of the securities lent (including
35
accrued interest thereon) plus the interest payable to the Fund
with respect to the loan is maintained by the Fund in a
segregated account.
RISK
FACTORS
You should carefully consider the following risks and the
other information in this prospectus before you decide to
participate in this offer. The risks and uncertainties described
below are not the only ones facing the Fund. Additional risks
and uncertainties may also adversely affect and impair the Fund.
If any of the following risks actually occur, the Funds
operations, results of operations and financial condition would
likely suffer, which in turn could materially adversely affect
your investment in the Fund.
Risks
Relating to the Offer
As a
result of this offer, you will incur immediate economic
dilution, and, if you do not exercise all of your rights, you
may incur dilution of ownership, voting rights and your share of
any distributions made by the Fund.
You should expect that you will, at the completion of this
offer, experience immediate dilution of net asset value per
share because the subscription price will be less than the net
asset value per share, and the number of shares outstanding
after the offer will have increased proportionately more than
the increase in the size of the Funds net assets. This
dilution of net asset value will disproportionately affect
stockholders who do not exercise their rights. In addition,
whether or not you exercise your rights, you will experience a
dilution of net asset value because you will indirectly bear the
expenses of this offer, which include, among other items, SEC
registration fees, state blue sky qualification
fees, printing expenses and the fees assessed by service
providers (including the cost of the Funds counsel and
accountants). We cannot state precisely the amount of any
decrease because we do not know at this time how many shares
will be subscribed for or what the net asset value per share
will be at the pricing date. The following example, assuming
(i) a net asset value of $1.0 billion (the Funds
approximate net asset value on July 2, 2009), (ii) a
subscription price of $25.05 (which is 95% of the Funds
approximate net asset value per share on July 2,
2009) and (iii) that all rights are exercised at the
estimated subscription price, including the additional shares
that may be issued under the over-subscription privilege,
demonstrates the dilution of net asset value.
Example:
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NAV per share
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Assumed
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following offering
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NAV as of
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subscription
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NAV per share as
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(after payment of
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Reduction in NAV
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July 2, 2009
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price
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of July 2, 2009
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expenses)
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per share
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$
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1.0 billion
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$
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25.05
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$
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26.37
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$
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25.96
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$
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0.41
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In addition to the economic dilution described above, if you do
not exercise all of your rights, you may incur dilution of
ownership and voting rights, as well as dilution of your share
of any distributions made by the Fund, as a result of this
offer. This dilution may occur because you could own a smaller
interest in the Fund after the offer than you owned prior to the
offer. If you do not submit a subscription request pursuant to
the over-subscription privilege, you will also experience
dilution in your Fund ownership if the Fund offers additional
shares for subscription. In addition, regardless of whether you
participate in the current offering, to the extent the Fund
engages in subsequent rights offerings, your investment may be
diluted by any such offering.
You
may lose money by investing in the Fund, including the
possibility that you may lose all of your
investment.
An investment in the Fund is not a deposit in a bank and is not
insured or guaranteed by the U.S. Federal Deposit Insurance
Corporation or any other governmental agency.
Among the principal risks of investing in the Fund is market
risk, which is the risk that the value of your investment may
fluctuate as stock markets fluctuate.
36
As an investment company that holds primarily common stocks, the
Funds portfolio is subject to the possibility that common
stock prices will decline over short or even extended periods.
The Fund may remain substantially fully invested during periods
when stock prices generally rise and also during periods when
they generally decline. Moreover, as a holder of common stock,
the Funds rights to the assets of the companies in which
it invests will be subordinated to such companies holders
of preferred stock and debt in the event of a bankruptcy,
liquidation or similar proceeding. Accordingly, if such an event
were to occur to such a company in which the Fund invests, the
Fund would be entitled to such a companys assets only
after such companys preferred stockholders and debt
holders have been paid. Risks are inherent in investments in
equities, and Fund stockholders should be able to tolerate
significant fluctuations in the value of their investment in the
Fund.
In addition, the Fund may invest up to 20% of its assets in debt
securities whose value will tend to decrease as interest rates
rise.
The Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating on
short-term stock market movements. Investors should not consider
the Fund a complete investment program.
Risks
Related to the Funds Operations
Political,
economic, social and other factors in India may adversely affect
the Funds performance.
An emerging market such as India has undergone and may continue
to undergo rapid change and lack the social, political and
economic stability of more developed countries. The value of the
Funds assets may be adversely affected by political,
economic, social and religious factors, changes in Indian law or
regulations and the status of Indias relations with other
countries. In addition, the economy of India may differ
favorably or unfavorably from the U.S. economy in such
respects as the rate of growth of gross domestic product, the
rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Agriculture
occupies a more prominent position in the Indian economy than in
the United States, and the Indian economy therefore is more
susceptible to adverse changes in weather. The Indian government
has exercised and continues to exercise significant influence
over many aspects of the economy, and the number of public
sector enterprises in India is substantial. Accordingly, Indian
government actions in the future could have a significant effect
on the Indian economy, which could affect private sector
companies and the Fund, market conditions, and prices and yields
of securities in the Funds portfolio.
Since mid-1991, the Indian government has committed itself to
implementing an economic structural reform program with the
objective of liberalizing Indias exchange and trade
policies, reducing the fiscal deficit, controlling inflation,
promoting a sound monetary policy, reforming the financial
sector, and placing greater reliance on market mechanisms to
direct economic activity. A significant component of the program
is the promotion of foreign investment in key areas of the
economy and the further development of, and the relaxation of
restrictions in, the private sector. These policies have been
coupled with the expressed intention to redirect the
governments central planning function away from the
allocation of resources and toward the issuance of indicative
guidelines. While the governments policies have resulted
in improved economic performance there can be no assurance that
the economic recovery will be sustained. Moreover, there can be
no assurance that these economic reforms will persist. There can
be no assurance that the government will continue the program of
economic liberalization of the last government which may
adversely affect Indian laws and policies affecting foreign
investment and currency exchange. In addition, economic growth
in India is constrained by inadequate infrastructure, a
cumbersome bureaucracy, corruption, labor market rigidities,
regulatory and foreign investment controls, the
reservation of key products for small-scale
industries and high fiscal deficits. Such changes in economic
policies, or lack of movement toward economic liberalization,
could negatively affect the general business and economic
conditions in India, which could in turn affect the Funds
investments.
Further, the economies of developing countries such as India
generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected
by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade.
The Indian economy also has been and may continue to be
adversely affected by economic conditions in the countries with
which it trades.
37
There is also the possibility of nationalization, expropriation
or confiscatory taxation, political changes, government
regulation, social instability or diplomatic developments
(including war or terrorist attacks). All of these factors could
adversely affect the economy of India, make the prices of Indian
securities generally more volatile than the prices of securities
of companies in developed markets and increase the risk of loss
to the Fund.
The Indian population is comprised of diverse religious,
linguistic and ethnic groups. Religious and border disputes
persist in India. The longstanding grievances between the Hindu
and Muslim populations resulted in communal violence during 1993
in the aftermath of the destruction of a mosque in Ayodhya by
radical elements of the Hindu population. As recently as 2002,
there has been communal violence between Hindus and Muslims in
the western Indian state of Gujarat. Moreover, India has from
time to time experienced civil unrest and hostilities with
neighboring countries such as Pakistan. The Indian government
has confronted separatist movements in several Indian states.
The longstanding dispute with Pakistan over the border Indian
state of Jammu and Kashmir, a majority of whose population is
Muslim, remains unresolved. Moreover, in late November 2008,
terrorists killed at least 164 people in a series of
coordinated attacks around Mumbai. If the Indian government is
unable to control the violence and disruption associated with
these tensions, the results could destabilize the economy and,
consequently, adversely affect the Funds investments.
Since early 2003, there have also been military hostilities and
civil unrest in Afghanistan, Iraq and other Asian countries.
These events could adversely influence the Indian economy and,
as a result, negatively affect the Funds investments. See
Appendix B: Republic of India.
Recent
Developments in Financial Markets and Impact on the
Fund.
Worldwide economic conditions have recently deteriorated
significantly affecting the global financial markets and have
caused significant reductions in available capital and liquidity
from banks and other providers of credit, substantial reductions
in equity and currency values in financial markets and extreme
volatility in credit, equity and fixed income markets and
general economic uncertainty. Conditions in the debt and equity
capital markets in the United States and abroad have caused
firms in the financial services sector to take significant
losses relating to, among other things, subprime mortgages and
the re-pricing of credit risk in the broadly syndicated loan
market. While the economic crisis has not, at present, affected
the Indian economy to the same extent as in the U.S. or
European economies, the Indian economy and the Fund may be
impacted in the future. The timing and nature of any recovery in
the credit and financial markets remains uncertain, and there
can be no assurance that market conditions will improve in the
near future or that our results will not be materially and
adversely affected.
Indian
securities markets are substantially smaller, less liquid and
more volatile than securities markets in the United
States.
There are over 20 recognized stock exchanges in India, including
The Over the Counter Exchange of India. Most stock exchanges are
governed by regulatory boards. The Stock Exchange, Mumbai, which
we refer to as the BSE, and the National Stock
Exchange of India Limited, which we refer to as the
NSE, have nationwide trading terminals and, taken
together, are the principal Indian stock exchanges in terms of
the number of listed companies, market capitalization and
trading volume. The regional exchanges have seen a steady drop
in volumes since the introduction of screen based trading and
the phase out of lending/borrowing (badla) system. The
securities market in India is substantially smaller, less liquid
and significantly more volatile than the securities market in
the United States. At March 31, 2009, there were
approximately 6,349 companies listed on the BSE and the NSE
and the aggregate market capitalization of listed equity
securities of these companies was approximately
$610 billion. By comparison, on March 31, 2009, the
global market capitalization of the New York Stock Exchange was
approximately $10.0 trillion. The relatively small market
capitalizations of, and trading values on, the BSE and NSE may
cause the Funds investments in securities listed on these
exchanges to be comparatively less liquid and subject to greater
price volatility than comparable U.S. investments.
Under current Indian law, only companies organized under the
laws of India may list their securities on the Indian securities
exchanges or over-the-counter markets, except for Indian
depositary receipts. If we invest in Indian depositary receipts
or if Indian law changes in this regard, the Fund would be able
to invest in companies that are principally traded in India but
which may be organized outside of India, which could subject the
Fund to different
38
risks of the country where they are organized. Similarly, Indian
companies may have operations outside of India and, accordingly,
may be subject to risks in the various countries where they have
operations.
A high proportion of the shares of many Indian issuers are held
by a limited number of persons, which may limit the number of
shares available for investment by the Fund. In addition,
further issuances, or the perception that such issuances may
occur, of securities by Indian issuers in which the Fund has
invested could dilute the earnings per share of the Funds
investment and could adversely affect the market price of such
securities. Sales of securities by such issuers major
stockholders, or the perception that such sales may occur, may
also significantly and adversely affect the market price of such
securities and, in turn, the Funds investment. A limited
number of issuers represent a disproportionately large
percentage of market capitalization and trading value. At
March 31, 2009, the 10 largest companies by market
capitalization accounted for approximately 37% of the aggregate
market capitalization of the NSE. The limited liquidity of the
Indian securities markets may also affect the Funds
ability to acquire or dispose of securities at the price and
time that it desires.
Anticipation of this offering in the Indian securities markets
may adversely influence the prices paid by the Fund in
purchasing certain securities for its portfolio and may affect
the speed with which the Fund can initially invest in Indian
securities. In addition, the small trading volume concentrated
in a limited number of the largest companies, combined with
certain investment diversification requirements and other
restrictions applicable to the Fund, also may affect the rate at
which the Fund can initially invest. Accordingly, to the extent
the Fund purchases securities at present levels, there may be
greater risk that the value of such securities may decline.
Indian stock exchanges, including the BSE and the NSE, have in
the past experienced substantial fluctuations in the prices of
their listed securities. They have also experienced problems
such as temporary exchange closures, broker defaults, settlement
delays and broker strikes that, if they occur again in the
future, could affect the market price and liquidity of the
Indian securities in which the Fund invests. In addition, the
governing bodies of the various Indian stock exchanges have from
time to time imposed restrictions on trading in certain
securities, limitations on price movements and margin
requirements. Disputes have also occurred from time to time
among listed companies, the stock exchanges and other regulatory
bodies, and in some cases those disputes have had a negative
effect on overall market sentiment.
The foregoing factors could impede the ability of the Fund to
effect portfolio transactions on a timely basis and could have
an adverse effect on the net asset value of the Funds
shares of common stock and the price at which those shares trade.
Volatility
of the Indian stock market may affect the value of the
Funds shares.
The stock market in India is volatile. Indian stocks, like those
in other emerging markets, have a history of extreme volatility
with sharp advances and rapid declines, which can be sudden and
unpredictable. For example, Indian share prices declined by
65.1% in 2008, but increased by 54.6% in 2009 up to May 27 (as
measured by MSCI India Index in U.S. dollars). As of
May 27, 2009, Indian shares traded on a 14.7 times
12-month
forward price-earnings ratio (consensus estimates provided by
the Institutional Brokers Estimate System). Since November
1992, the historical valuation range is 7.1 times to 29.2 times.
Since the value of the Funds shares is sensitive to stock
market volatility, if there is a decline in the value of
exchange-listed stocks in India, the value of our common shares
would also likely decline.
India
has different corporate disclosure, governance and regulatory
requirements than you may be familiar with in the United
States.
In addition to their smaller size, lesser liquidity and greater
volatility, Indian securities markets are less developed than
U.S. securities markets. Disclosure and regulatory
standards are in many respects less stringent than
U.S. standards. Issuers in India are subject to accounting,
auditing and financial standards and requirements that differ,
in some cases significantly, from those applicable to
U.S. issuers. In particular, the assets and profits
appearing on the financial statements of an Indian issuer may
not reflect its financial position or results of operations in
the way they would be reflected had such financial statements
been prepared in accordance with U.S. generally accepted
accounting principles. There is substantially less publicly
available information about Indian issuers than there is about
U.S. issuers.
39
There is less regulation and monitoring of Indian securities
markets and the activities of investors, brokers and other
participants than in the United States. Moreover, issuers of
securities in India are not subject to the same degree of
regulation as are U.S. issuers with respect to such matters
as insider trading rules, tender offer regulation, stockholder
proxy requirements and the timely disclosure of information.
There is also less publicly available information about Indian
companies than U.S. companies. See Appendix C:
The Indian Securities Market.
Legal principles relating to corporate affairs and the validity
of corporate procedures, directors fiduciary duties and
liabilities and stockholders rights may differ from those
that may apply in other jurisdictions. Stockholders rights
under Indian law may not be as extensive as those that exist
under the laws of the United States. The Fund may therefore have
more difficulty asserting its rights as a stockholder of an
Indian company in which it invests than it would as a
stockholder of a comparable American company.
The
Fund may have difficulty enforcing foreign judgments against
Indian companies or their management.
The Indian companies in which the Fund invests are primarily
limited liability companies incorporated under the laws of
India. Generally, the directors, executive officers and a
substantial portion of the assets of such companies are located
in India. It may be difficult for the Fund to obtain a judgment
in a court outside the United States to the extent that there is
a default with respect to the security of an Indian issuer or
with respect to any other claim that the Fund may have against
any such issuer or its directors and officers. As a result, even
if the Fund initiates a suit against the issuer in a
U.S. court, it may not be possible for the Fund to effect
service of process in India. Moreover, if the Fund obtains a
judgment in a U.S. court, it may be difficult to enforce
such judgment in India since the United States been not declared
by the Government of India to be a reciprocating territory. A
judgment of a court in a jurisdiction that is not a
reciprocating territory may be enforced only by a fresh suit
upon the judgment and not by proceedings in execution. The suit
must be brought in India within three years from the date of the
judgment in the same manner as any other suit filed to enforce a
civil liability in India. It is unlikely that a court in India
would award damages on the same basis as a foreign court if an
action were brought in India. Furthermore, it is unlikely that
an Indian court would enforce foreign judgments if it viewed the
amount of damages awarded as excessive or inconsistent with
public policy. A party seeking to enforce a foreign judgment in
India is also required to obtain approval from the RBI to
execute such a judgment or to repatriate outside India any
amount recovered and any such amount may be subject to income
tax in accordance with applicable laws.
Indian
investment restrictions may hinder the Funds investment
program.
The Fund will invest in India as a sub-account of the Investment
Manager, which is registered as a foreign institutional investor
with SEBI. Generally, under SEBI regulations applicable to
foreign institutional investors and subject to certain
exceptions, total investments by foreign institutional investors
and their sub-accounts, taken together, in the primary and
secondary Indian markets may not exceed 24% of the equity
capital or the value of each series of convertible debentures of
any Indian company in which they invest. The ceiling would apply
to the total holdings in any Indian Company of all foreign
institutional investors and their sub-accounts collectively in a
given Indian company. In addition, to this 24% overall
investment limitation, no individual foreign institutional
investor, together with its sub- accounts, may generally invest
more than 10% of the equity capital of any Indian company. The
ceiling would apply to the total holdings of foreign
institutional investors collectively in an Indian company. The
FII Regulations prescribe that each broad based foreign
institutional investor investing on its own behalf or on the
behalf of its sub-account (broad based) can invest up to 10% of
the equity capital of an Indian company. A foreign corporate or
individual sub-account can invest only up to 5% of the equity
capital of an Indian company. Investments by the foreign
institutional investor made in its own behalf would be
registered in the name of the foreign institutional investor
while investments by the sub-accounts in Indian securities may
be registered in the name of either the foreign institutional
investor or the sub-account.
In addition, a foreign institutional investor and its
sub-accounts, may not, with certain exceptions, hold more than
30% of their total investments in the debt securities of Indian
companies. However, SEBI may permit registration as a 100% debt
FII / sub-account, in which the case the said 70%
condition would not be applicable. However, pursuant to SEBI
circular dated October 16, 2008, in order to provide
flexibility to FIIs to allocate investments across equity and
debt, SEBI has decided to do away with the abovementioned
restrictions on the ratio
40
of equity and debt investments. Please note that no formal
amendments to the FII Regulations have been made in this regard.
It may be noted that there are certain industry-wide ceilings
for FII investments in debt and accordingly, investment in debt
would be subject to available headroom (discussed below). It may
be noted that debt securities under the FII
Regulations are defined to include government securities,
commercial papers and treasury bills. As per SEBI circular dated
March 13, 2009, the cumulative debt investment limits for
FIIs in corporate debt is $15 billion, out of which
$8 billion will be allocated on an open bidding platform
and the remaining limit will be allocated on a first come first
serve basis, subject to a ceiling of Rs. 2.49 billion
per registered entity. Pursuant to SEBI circular dated
January 31, 2008, investments by FIIs in units of debt
oriented mutual funds are considered as investments in corporate
debt and are reckoned within the stipulated limit earmarked for
FII investments in corporate debt. The applicable investment
limit for FIIs and sub-accounts is up to $5 billion in
government securities and treasury bills and $500 million
for investment in innovative perpetual debt instruments issued
by banks. These limits are monitored by SEBI across all FIIs.
Currently, the following types of derivatives contracts are
traded on the NSE and BSE: (a) index futures;
(b) index options; (c) single stock futures;
(d) single stock options; (e) interest rate
derivatives and (f) exchange traded currency derivatives.
The position limits for FII/sub-accounts are prescribed by SEBI
on the basis of the type of derivative contract, the type of
underlying i.e. index, single stock, interest rate/fixed income)
and entity (i.e. FII or sub-account). The position limits are
computed on a gross basis at the FII level and on a net basis at
the level of sub-accounts and proprietary positions. The open
position for all derivative contracts is the open interest
multiplied with the closing price of the respective underlying
in the cash market. For a detailed description of the position
limits applicable to sub-account investments in derivative
contracts, see Investments in India
Investments by Foreign Institutional Investors. Such
position limits may restrict the ability of the Fund to invest
in derivatives in India.
Foreign institutional investors are also limited in their
ability to invest in certain industries, such as the banking
sector, insurance sector, telecom sector etc. In such
industries, there is often a ceiling on total foreign holdings,
against which holdings of foreign institutional investors are
counted. To the extent that the ceiling has been reached in that
industry, further investment by foreign institutional investors
may not be permitted. Further, pursuant to Press Note 2 of
2009 issued by the Department of Industrial Policy and Promotion
(Ministry of Commerce and Industry), investments by foreign
institutional investors is also included in the computation of
indirect foreign investment in Indian companies. This may
further restrict the ability of the Fund to invest in companies
incorporated in India which operate in sectors that are subject
to foreign investment caps.
Indian takeover regulations contain certain provisions that may
delay, deter, or prevent a future takeover or change in control
of Indian companies. For example, an acquirer who, along with
persons acting in concert, acquires 15% or more of the shares or
voting rights in a company is required to make a public
announcement offering to acquire a further 20% of the shares of
a company. In addition, regardless of whether there has been any
acquisition of shares or voting rights in a company, an acquirer
cannot directly or indirectly acquire control over a company
(for example, by way of acquiring the right to appoint a
majority of the directors or to control the management or the
policy decisions of the company) unless such acquirer makes a
public announcement offering to acquire a minimum of 20% of the
shares of the company. However, the public announcement
requirement will not apply to any change in control which takes
place pursuant to a special resolution passed by way of a postal
ballot by the shareholders of the company. These provisions may
discourage or prevent a third party from acquiring control of an
Indian company, even if a change in control would result in the
purchase of equity shares of such company at a premium to the
market price or would otherwise be beneficial to the Fund.
Further, certain reportings are required to be made upon
crossing the prescribed thresholds under the Indian takeover
regulations.
The due diligence that the Fund can conduct be limited by Indian
regulations that restrict the ability to conduct inside due
diligence on listed companies. Indian insider trading
regulations prohibit any dealings in securities on the basis of
unpublished price sensitive information. The Fund and others
involved in the investments may violate the insider trading
regulations if an investment decision is made based on
unpublished price sensitive information obtained during the due
diligence of a listed company and as result may not be able to
make the investment. This restriction will impact the ability of
the Fund to receive and analyze such information, which could
adversely affect the quality and effectiveness of the due
diligence. In addition, any dealings on the basis of unpublished
price sensitive information may expose the recipient to insider
trading charges.
41
Accordingly, the ability of the Fund to invest in certain
companies may be restricted, and there can be no assurance that
additional restrictions on investments permissible for foreign
institutional investors will not be imposed in the future. There
can be no assurance that the foreign institutional investor
guidelines will not be applied or administered by Indian
regulatory bodies or authorities or amended, clarified,
interpreted by judicial or administrative ruling or superseded
in the future in such a way that may adversely affect the Fund.
For example, if Indian regulatory authorities determined that
limitations on ownership by Restricted Persons are not being
followed or the Fund ceasing to be a broad based fund as defined
under the FII Regulations, they could take various actions,
including among other things prohibiting the Fund from investing
in Indian securities through the foreign institutional investor
route, which could have a material adverse effect on the Fund.
At present, foreign institutional investor and sub-account
registrations are granted on a permanent basis subject to the
payment of the prescribed fees every three years.
Validity
of registration with SEBI.
The registration of the Fund as a sub-account is co-terminus
with the Investment Managers registration as a FII. Any
cancellation of such FII registration will result in the
cancellation of the sub-account registration. If the sub-account
registration of the Fund is cancelled, the Fund will not be
permitted to trade in the Indian securities markets any further,
and will be required to sell its holdings in the Indian
securities markets within a specified time. Such unintended sale
of holdings of Indian securities by the Fund may adversely
impact the value of the Funds assets and thereby the
Funds shareholders. If the FIIs status is lost, the
Fund may, subject to the compliances, register itself as a
sub-account of another FII.
Under certain circumstances such as a change in law or
regulation or loss of FII authorization, governmental regulation
or approval for the repatriation of investment income, capital
or the proceeds of sales of securities by foreign investors may
be required.
Foreign
currency fluctuations could adversely affect the Funds
performance.
The Funds assets will be invested principally in
securities of Indian issuers and substantially all of the income
received by the Fund will be in Indian rupees. However, the Fund
will compute and distribute its income in U.S. dollars, and
the computation of income will be made on the date that the
income is earned by the Fund at the foreign exchange rate on
that date. Therefore, if the value of the Indian rupee falls
relative to the U.S. dollar between the earning of the
income and the time at which the Fund converts the Indian rupees
to U.S. dollars, the Fund may be required to liquidate
securities in order to make distributions if the Fund has
insufficient cash in U.S. dollars to meet distribution
requirements. The liquidation of investments, if required, may
have an adverse impact on the Funds performance. See
Taxation and Dividends and Distributions;
Dividend Reinvestment and Cash Purchase Plan.
Since the Fund will invest primarily in securities denominated
or quoted in Indian rupees, changes in the
U.S. dollar-Indian rupee exchange rate will affect the
dollar value of securities in the Funds portfolio and the
unrealized appreciation or depreciation of investments. The
exchange rate between the Indian rupee and the U.S. dollar
has changed substantially in the last two decades and may
fluctuate substantially in the future. On an annual average
basis, the Indian rupee declined against the U.S. dollar
from 1980 until 2002. From April 1, 1999 until
March 31, 2002, the rupee lost approximately 15% of value
relative to the U.S. dollar. From April 1, 2002 until
March 31, 2004, the value of the Indian rupee appreciated
12.5% in value relative to the U.S. dollar. Since 2004, the
value of the rupee has fluctuated, depreciating approximately 6%
against the U.S. dollar between March 31, 2004 and
August 31, 2004, appreciating approximately 7% between
August 31, 2004 and December 31, 2004, depreciating
approximately 6% between December 31, 2004 and
November 30, 2005, appreciating approximately 4% between
November 30, 2005 and January 31, 2006. From
February 1, 2006 until March 31, 2009, the value of
the rupee has depreciated by approximately 15%.
Furthermore, the Fund may incur costs in connection with
conversions between U.S. dollars and Indian rupees. Foreign
exchange dealers realize a profit based on the difference
between the prices at which they are buying and selling various
currencies. Thus, a dealer normally will offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate
of exchange should the Fund desire immediately to resell that
currency to the dealer. The Fund will conduct its foreign
currency exchange transactions either at the spot rate
prevailing in the foreign currency exchange market or through
entering into forward, futures or options contracts to purchase
or sell foreign currencies, if available.
42
Exchange
controls in India may restrict the Funds ability to
repatriate investment.
The ability of the Fund to invest in Indian securities, exchange
Indian rupees into U.S. dollars and repatriate investment
income, capital and proceeds of sales realized from its
investments in Indian securities is subject to the Indian
Foreign Exchange Management Act, 1999 and the rules, regulations
and notifications issued thereunder. See Investment in
India.
Under certain circumstances, such as a change in law or
regulation or loss of foreign institutional investor
authorization, governmental regulation or approval for the
repatriation of investment income, capital or the proceeds of
sales of securities by foreign investors may be required. In
addition, there can be no assurance that the Indian government
in the future, whether for purposes of managing its balance of
payments or for other reasons, will not impose restrictions on
foreign capital remittances abroad or otherwise modify the
exchange control regime applicable to foreign institutional
investors in such a way that may adversely affect the ability of
the Fund to repatriate its income and capital. If for any reason
the Fund is unable, through borrowing or otherwise, to
distribute an amount equal to substantially all of its
investment company taxable income (as defined for U.S. tax
purposes, without regard to the deduction for dividends paid)
within the applicable time periods, the Fund would cease to
qualify for the favorable tax treatment afforded to regulated
investment companies under the Internal Revenue Code.
In addition, indirect foreign investment in the securities of
companies listed and traded on the stock exchanges in India may
be permitted through investment funds that have been specially
authorized. The Fund may invest in these investment funds
subject to the provisions of the U.S. Investment Company
Act of 1940, as amended, as discussed above under
Investment Objective and Policies-Portfolio
Structure and Additional Investment
Activities Investment Funds. If the Fund
invests in investment funds, the Funds stockholders will
bear not only their proportionate share of the expenses of the
Fund (including operating expenses and the fees of the
Investment Manager), but also will indirectly bear similar
expenses of the underlying investment funds.
Investments
in unseasoned and small and mid-capitalization Indian companies
may expose the Fund to greater investment risk.
While the Fund invests a substantial portion of its assets in
the securities of established Indian companies, it also may
invest in the securities of less seasoned and smaller and
mid-capitalization Indian companies. Investments in the
securities of these companies may present greater opportunities
for growth but also involve greater risks than are customarily
associated with investments in securities of more established
and larger capitalized companies. The securities of less
seasoned and smaller capitalized companies are often traded in
the over-the-counter market and have fewer market makers and
wider price spreads, which may in turn result in more abrupt and
erratic market price movements and make the Funds
investments more vulnerable to adverse general market or
economic developments than would investments only in large, more
established Indian companies.
The Fund has not established any minimum capitalization or
length of operating history for the smaller, less seasoned
issuers in whose securities it may invest.
The
Funds investments in illiquid securities may restrict its
ability to dispose of its investments in a timely fashion and at
a price approximating the value at which the Fund carries the
securities on its books.
The Fund may invest up to 20% of its total assets in illiquid
securities. Illiquid securities are securities that are not
readily marketable. The prices of such securities may change
abruptly and erratically, and investment of the Funds
assets in illiquid securities may restrict the ability of the
Fund to dispose of its investments in a timely fashion and at a
price approximating the value at which the Fund carries the
securities on its books, as well as restrict its ability to take
advantage of market opportunities. The risks associated with
illiquidity will be particularly acute in situations in which
the Funds operations require cash, such as when the Fund
repurchases shares or pays dividends or distributions, and could
result in the Fund borrowing to meet short-term cash
requirements or incurring capital losses on the sale of illiquid
investments. Further, companies whose securities are not
publicly traded are not subject to the disclosure and other
investor protection requirements that would be applicable if
their securities were publicly traded.
43
The
concentration of the Funds investments in specific
economic sectors and related industries may expose it to greater
risk of loss with respect to its portfolio
securities.
From time to time, the Fund may invest a greater proportion of
its assets in the securities of companies that are part of
specific sectors and related industries of the Indian economy.
For example, at March 31, 2009, the Fund maintained 19.72%
of its total assets in the securities of Indian companies in the
petroleum sector and related industries. The Fund is therefore
subject to greater risk of loss with respect to its portfolio
securities as a result of its concentration in such sectors and
related industries.
A
change in the Funds tax status could adversely affect the
Funds return on its investments.
The Fund currently operates through a branch in the Republic of
Mauritius to take advantage of favorable tax treatment by the
Indian government pursuant to a taxation treaty between India
and Mauritius. Recently, the Supreme Court of India upheld the
validity of this tax treaty in response to a lower court
challenge contesting the treatys applicability to entities
such as the Fund. Any change in the provision of this treaty or
in its applicability to the Fund could result in the imposition
of withholding and other taxes on the Fund by India, which would
reduce the return to the Fund on its investments.
The Fund intends to elect to pass-through to the
Funds stockholders as a deduction or credit the amount of
foreign taxes paid by the Fund. The taxes passed through to
stockholders are included in each stockholders income.
Certain stockholders, including some
non-U.S. stockholders,
are not entitled to the benefit of a deduction or credit with
respect to foreign taxes paid by the Fund. Other foreign taxes,
such as transfer taxes, may be imposed on the Fund, but would
not give rise to a credit, or be eligible to be passed through
to stockholders. See Taxation-U.S. Stockholders
and Taxation-Mauritian Tax Status.
In addition, prior to Blackstone Advisors assuming management,
the Fund may have failed to qualify to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue
Code for the taxable year ended December 31, 2004. For the
year ended December 31, 2005, a provision of $25,507,350
was made for U.S. federal income tax purposes as, at that
time, it was unclear whether the Fund qualified to be taxed as a
RIC under Subchapter M of the Code for the taxable year ended
December 31, 2004. In order to preserve the Funds tax
status as a RIC under Subchapter M of the Code for the taxable
year ended December 31, 2004, on April 20, 2006 the
Fund distributed a deficiency dividend (within the meaning of
Section 860 of the Internal Revenue Code) to shareholders
in the amount of $1.07 per share, of which $0.95 per share was
designated as a capital gain dividend. Under the deficiency
dividend procedure, the maximum amount that the Fund will be
obligated to pay to the Internal Revenue Service in interest and
penalties is approximately $4,956,314. Accordingly, a reversal
of $20,551,036 was made in 2006 to the prior years tax
provision to reflect the decrease in the amount of the tax
liability due to the deficiency dividend distributed to
shareholders. There can be no assurance that the Fund will be
able to further reduce the liability. See
Taxation The Fund.
The
Funds shares have traded and may trade in the future at a
discount to net asset value.
Although the Funds shares of common stock have recently
traded on the NYSE at a premium to their net asset value, the
Funds shares have traded at a discount to their net asset
value in the past. There can also be no assurance that the
Funds shares will trade at a premium in the future or that
the present premium is sustainable. The Funds shares have
traded at discounts of as much as 40%.
Shares of closed-end investment companies frequently trade at a
discount from their net asset values. This characteristic of
shares of a closed-end fund is a risk separate and distinct from
the risk that a funds net asset value will decrease. The
Fund cannot predict whether its own shares will trade at, below
or above net asset value. The Fund also cannot predict the
effect of this offer on the market price of its shares because
the market price of the Funds shares is, among other
things, determined by the supply and demand for the Funds
shares, the Funds investment performance and investor
perception of the Funds overall attractiveness as an
investment as compared with alternative investments.
44
The
Funds interval fund structure involves certain
risks and special considerations not typically associated with
other closed-end funds.
The Fund has adopted an interval fund structure whereby the Fund
conducts semi-annual repurchase offers for between 5% and 25% of
the Funds outstanding common stock. The Funds
required semi-annual repurchases are likely to continually
decrease the overall size of the Fund, which could over time:
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harm investment performance in part by limiting the extent to
which the Fund may pursue its investment strategies;
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increase the Funds expense ratio as the Funds assets
decrease; and
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jeopardize the Funds viability, investment opportunities
and continued existence.
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Moreover, there are additional risks associated with the
Funds repurchase offers, including that:
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if the repurchase offer is over-subscribed, stockholders may be
unable to liquidate all or a given percentage of their
investment at net asset value during the repurchase offer;
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because the Fund expects to liquidate portfolio securities in
order to fund repurchase offers, the need to sell such
securities may in turn affect the market for such securities and
accordingly diminish the value of the Funds investments;
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share values may decrease as a result of fluctuations between
the date of tender and the repurchase pricing date;
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the repurchase offer may not eliminate any discount, if any, at
which the Funds shares trade; and
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due to the potential for proration if the repurchase offer is
over-subscribed, some investors may tender more shares than they
wish to have repurchased in order to ensure the repurchase of a
specific number of shares.
|
The decrease in the Funds assets resulting from the
semi-annual repurchase offers will likely offset in whole or in
part the potential benefits to the Fund associated with having
increased assets as a result of this offer.
See Semi-Annual Repurchases of Securities and
Semi-Annual Repurchases of Securities-Fundamental Policy
Regarding Semi-Annual Repurchase Offers.
The
Funds status as a non-diversified investment
company may expose it to greater risk of loss with respect to
its portfolio securities.
The Fund is classified as a non-diversified investment company
under the 1940 Act, which means that the Fund is not limited in
the proportion of its assets that may be invested in the
obligations of a single issuer. The Fund, however, intends to
comply with the diversification requirements imposed by the
Internal Revenue Code for qualification as a regulated
investment company. Because the Fund is not limited by the 1940
Act for diversification purposes, the Fund may invest a greater
proportion of its assets in the securities of a smaller number
of issuers and, as a result, will be subject to greater risk of
loss with respect to its portfolio securities. See
Taxation-The Fund and Investment
Restrictions.
There
are no fixed limitations regarding portfolio
turnover.
Frequency of portfolio turnover is not a limiting factor if the
Fund considers it advantageous to purchase or sell securities.
The Fund anticipates that its annual portfolio turnover rate
will not exceed 150%. For the year ended December 31, 2008,
the Funds portfolio turnover rate was 49.41%. A high rate
of portfolio turnover involves correspondingly greater aggregate
payments for brokerage commissions than a lower rate, which
expenses must be borne by the Fund and its stockholders, while a
lower rate of portfolio turnover involves correspondingly lower
aggregate payments and stockholder expenses.
45
The
extent to which the Fund invests in high yield/high risk and
unrated debt may adversely affect the Funds
performance.
The Fund has not established any rating criteria for the debt
securities in which it may invest and such securities may not be
rated at all for creditworthiness. Securities rated in medium to
low rating categories by nationally recognized statistical
rating organizations and unrated securities of comparable
quality, or high yield/high risk securities, are
speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and
generally involve a greater volatility of price than securities
in higher rated categories. These securities are commonly
referred to as junk bonds, and credit ratings issued
with respect to such securities evaluate only the safety of
principal and interest in respect of such securities and not the
risk of change in market value. In purchasing such securities,
the Fund will rely on the Investment Managers analysis,
judgment and experience in evaluating the creditworthiness of an
issuer of such securities. The Investment Manager will take into
consideration, among other things, the issuers financial
resources, its operating history, its sensitivity to economic
conditions and trends, the quality of the issuers
management and regulatory matters.
The market values of high yield/high risk securities tend to
reflect individual issuer developments to a greater extent than
do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Issuers of
high yield/high risk securities may be highly leveraged and may
not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the
securities of such issuers generally are greater than is the
case with higher rated securities. For example, during a
sustained period of rising interest rates or an economic
downturn, issuers of high yield/high risk securities may be more
likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, service of
debt obligations also may be adversely affected by the
issuers inability to meet specific projected business
forecasts, specific issuer developments or the unavailability of
additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high
yield/high risk securities because such securities may be
unsecured and may be subordinated to other creditors of the
issuer.
High yield/high risk securities may have redemption or call
features that would permit an issuer to repurchase the
securities from the Fund. If a call were exercised by the issuer
during a period of declining interest rates, the Fund in all
likelihood would have to replace the called securities with
lower yielding securities, thus decreasing the net investment
income to the Fund and dividends to stockholders.
The Fund may have difficulty disposing of certain high
yield/high risk securities, as there may be a thin trading
market for such securities. To the extent that a secondary
trading market for high yield/high risk securities does exist,
it is generally not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an
adverse impact on market price and the Funds ability to
dispose of particular issues when necessary to meet the
Funds liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness
of the issuer. Reduced secondary market liquidity for certain
high yield/high risk securities may also make it more difficult
for the Fund to obtain accurate market quotations for purposes
of valuing the Funds portfolio. Market quotations are
generally available on many high yield/high risk securities only
from a limited number of dealers and may not necessarily
represent firm bids of such dealers of prices for actual sales.
The Funds Board of Directors or the Investment Manager
will carefully consider the factors affecting the market for
high yield/high risk securities in determining whether any
particular security is liquid or illiquid and whether current
market quotations are readily available. Adverse publicity and
investor perceptions, which may not be based on fundamental
analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded
market. Factors adversely affecting the market value of high
yield/high risk securities are likely to adversely affect the
Funds net asset value. In addition, the Fund may incur
additional expenses to the extent it is required to seek
recovery upon a default on a portfolio holding or to participate
in the restructuring of the obligations.
The
Funds ability to successfully hedge against financial
risks may adversely affect the Funds net asset
value.
The risks and special considerations of certain of the
investment practices in which the Fund may engage are described
under Investment Objective and Policies and
Additional Investment Activities. Hedging involves
special risks, including possible default by the other party to
the transaction, illiquidity and, to the extent the
46
Investment Managers view as to certain market movements is
incorrect, the risk that the use of hedging could result in
losses greater than if they had not been used. Use of put and
call options could result in losses to the Fund, force the sale
or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than
(in the case of call options) current market values, or cause
the Fund to hold a security that it might otherwise sell. The
use of currency transactions could result in the Funds
incurring losses as a result of the imposition of exchange
controls, suspension of settlements or the inability to deliver
or receive a specified currency. The use of options and futures
transactions entails certain special risks. In particular, the
variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio
position of the Fund could create the possibility that losses on
the hedging instrument will be greater than gains in the value
of the Funds position. In addition, futures and options
markets could be illiquid in some circumstances, and certain
over-the-counter options could have no markets. As a result, in
certain markets, the Fund might not be able to close out a
position without incurring substantial losses. To the extent
that the Fund utilizes futures and options transactions for
hedging, such transactions should tend to minimize the risk of
loss due to a decline in the value of the hedged position and,
at the same time, limit any potential gain to the Fund that
might result from an increase in value of the position. There
is, however, no limit on the amount of the Funds assets
that can be put at risk through the use of futures contracts and
options thereon, and the value of the Funds futures
contracts and options thereon may equal or exceed 100% of the
Funds total assets. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing
potential financial risk than would purchases of options, in
which case the exposure is limited to the cost of the initial
premium and transaction costs. Losses resulting from the use of
hedging will reduce the Funds net asset value, and
possibly income, and the losses can be greater than if hedging
had not been used. See Appendix A: General
Characteristics and Risks of Hedging.
The
extent to which the Fund utilizes leverage to hedge against
financial risks may increase its expenses and adversely affect
the Funds performance.
Although the Fund has no present intention to do so to any
significant extent, the Fund may utilize leverage by borrowing
or by issuing preferred stock or short-term debt securities in
an amount up to 25% of the Funds total assets. Leverage by
the Fund creates an opportunity for increased return but, at the
same time, creates special risks. For example, leverage may
exaggerate changes in the net asset value of the common stock
and in the return on the Funds portfolio. Although the
principal of any leverage will be fixed, the Funds assets
may change in value during the time the leverage is outstanding.
Leverage will create expenses for the Fund that can, during any
period, exceed the income from the assets acquired with the
proceeds of the leverage. All expenses associated with leverage
would be borne by common stockholders. Furthermore, an increase
in interest rates could reduce or eliminate the benefits of
leverage and could reduce the value of the Funds
securities. The Fund may also borrow by entering into reverse
repurchase agreements, which will subject the Fund to additional
market risk as well as credit risks with respect to the buyer of
the securities under the agreement.
The
anti-takeover provisions in the Funds charter and amended
and restated by-laws and certain provisions of Maryland law may
limit your ability to sell your shares at a
premium.
The Funds charter and amended and restated by-laws and
Maryland law contain certain anti-takeover provisions that,
among other things, may have the effect of inhibiting the
Funds possible conversion to open-end status and delaying
or limiting the ability of other persons to acquire control of
the Fund. In certain circumstances, these provisions might also
inhibit the ability of holders of common stock to sell their
shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the
Fund. The Funds Board of Directors has determined that
these provisions are in the best interests of the Fund and its
stockholders.
The
operating expenses of the Fund may be higher than investment
companies that invest primarily in the securities of U.S.
companies.
The Funds estimated annual operating expenses may be
higher than those of most other investment companies that invest
predominately in the securities of U.S. companies,
primarily because of the additional time and expense required of
the Investment Manager and the Country Adviser in pursuing the
Funds objective of long-term capital appreciation through
investing in equity securities of Indian companies. Investments
in Indian equity securities
47
require additional time and expense because the available public
information regarding such securities is more limited in
comparison to, and not as comprehensive as, the information
available for U.S. equity securities. In addition,
brokerage commissions, custodial fees and other fees are
generally higher for investments in foreign securities markets.
As a result of these higher expected operating expenses, the
Fund needs to generate higher relative returns to provide
investors with an equivalent economic return.
Future
market disruptions resulting from terrorist attacks in the
United States and elsewhere or U.S. military action abroad could
negatively and adversely affect the market for the Funds
common stock.
The aftermath of the war with Iraq, instability in the Middle
East and terrorist attacks in the United States and around the
world may have a substantial impact on the U.S. and world
economies and securities markets. The nature, scope and duration
of the occupation of Iraq cannot be predicted with any
certainty. Terrorist attacks closed some of the
U.S. securities markets in 2001, and similar events cannot
be ruled out in the future. The war and occupation, terrorism
and related geopolitical risks have led, and may in the future
lead to, increased short-term market volatility and may have
adverse long-term effects on U.S. and world economies and
markets generally. These risks may adversely affect individual
issuers and securities markets, interest rates, secondary
trading, ratings, investor psychology, credit risk, inflation
and other factors relating to Funds common shares.
High-yield securities tend to be more volatile than higher rated
securities so that these events and any actions resulting from
them may have a greater impact on the prices and volatility of
high yield securities than on higher rated securities.
MANAGEMENT
OF THE FUND
The names of the Directors and principal officers of the Fund
are set forth below, together with their positions with the Fund
and their principal occupations during the past five years. None
of the Funds nonresident Directors has authorized an agent
in the United States to receive notice.
Directors considered by the Fund to be interested
persons (as defined in the 1940 Act) of the Fund or of the
Investment Manager:
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Number
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of Funds
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in Fund
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Complex
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Length of
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Overseen
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Time
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by
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Position(s)
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Served;
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Director
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Held with
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Term of
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Principal Occupation(s)
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(including
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Other Directorships
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Name, Address and Age
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Fund
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Office
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During Past 5 Years
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the Fund)
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Held by Nominee
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Interested Directors
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Robert L. Friedman*
The Blackstone Group
345 Park Avenue
New York, N.Y. 10154
Birth Year: 1943
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Director
Chief Legal Officer
and Vice President
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Since 2009
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Chief Legal Officer, The Blackstone Group L.P. (2003-Present);
Senior Managing Director, The Blackstone Group L.P.
(1999Present)
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2
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TRW Automotive Holdings Corp., Axis Capital Holdings Ltd. and
FGIC Corporation.
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Prakash A. Melwani**
The Blackstone Group
345 Park Avenue
New York, NY 10154
Birth Year: 1958
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Director and
President
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Since 2005
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Senior Managing Director, Private Equity Group, The Blackstone
Group L.P. (May 2003Present); Founder and Chief Executive
Officer, Vestar Capital Partners (19882003)
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2
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Pinnacle Foods Group L.L.C., Performance Foods Group LLC, RGIS
Holdings L.L.C., Kosmos Energy L.L.C. and Ariel Holdings.
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* |
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Mr. Friedman is an interested person, as
defined in the 1940 Act, because he serves as Chief Legal
Officer of The Blackstone Group L.P., the parent of Blackstone
Advisors. |
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** |
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Mr. Melwani is an interested person, as defined
in the 1940 Act, because he serves as President of the Fund. |
48
Directors considered by the Fund not to be interested
persons (as defined in the 1940 Act) of the Fund or the
Investment Manager:
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Number of
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Funds in
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Fund
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Length of
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Complex
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Time
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Overseen
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Position(s)
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Served;
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By Director
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Held with
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Term of
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Principal Occupation(s)
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(including
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Other Directorships
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Name, Address and Age
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Fund
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Office
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During Past 5 Years
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the Fund)
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Held by Nominee
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Non-Interested Directors
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Lawrence K. Becker
c/o Blackstone
Asia Advisors L.L.C.
345 Park Avenue
New York, NY 10154
Birth Year: 1955
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Director and Member of the Audit Committee and Nominating
Committee
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Since 2003
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Private Investor, Real Estate Investment Management (July
2003Present); Treasurer, France Growth Fund
(20042008); Vice President, Controller/Treasurer ,
National Financial Partners (20002003); Managing Director,
Controller/Treasurer, Oppenheimer Capital-PIMCO (19812000)
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2
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Member of Board of Trustees or Board of Managers of four
registered investment companies advised by Advantage Advisers
L.L.C. or its affiliates.
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Leslie H. Gelb
c/o
Blackstone Asia
Advisors L.L.C.
345 Park Avenue New York, NY 10154
Birth Year: 1937
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Director and Member of the Audit Committee and Nominating
Committee
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Since 1994
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President Emeritus, The Council on Foreign Relations
(2003Present); President, The Council on Foreign Relations
(19932003); formerly Columnist, Deputy Editorial Page
Editor and Editor, Op-Ed Page, The New York Times
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2
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Director of 22 registered investment companies advised by Legg
Mason Partners Fund Advisor, LLC and its affiliates.
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J. Marc Hardy
c/o Multiconsult
Limited
Rogers House
5, President John Kennedy Street P.O. Box 60
Port Louis, Mauritius
Birth Year: 1954
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Director and Member of the Audit Committee and Nominating
Committee
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Since 2002
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Independent Financial Adviser, ACMS Fund Management Ltd.
(November 2003-Present)
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1
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Director of Mauritius Development Investment Trust Co. Ltd and
Hanover Reinsurance Ltd. Mauritius Ltd.
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Stephane R. F. Henry
c/o Investment
Professionals Limited 6th Floor Harbour Front John F.
Kennedy Street Port Louis, Mauritius
Birth Year: 1967
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Director and Member of the Audit Committee and Nominating
Committee
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Since 2004
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Managing Director, Investment Professionals Ltd.,
(1998Present)
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1
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Director of Boyer Allan Asia Pacific Fund, Arisaig (Partners)
Ltd. and Foreign Colonial India Ltd.
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Luis F. Rubio
c/o
Blackstone Asia Advisors L.L.C.
345 Park Avenue
New York, New York 10154
Birth Year: 1955
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Director and Member of the Audit Committee and Nominating
Committee
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Since 1999
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President, Centro de Investigacion para el Desarrollo, A.C.
(Center of Research for Development) (2002Present);
frequent contributor of op-ed pieces to The Wall Street
Journal
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2
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Member of Board of Trustees or Board of Managers of four
registered investment companies advised by Advantage Advisers
L.L.C. or its affiliates.
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Jeswald W. Salacuse
c/o Blackstone
Asia Advisors L.L.C.
345 Park Avenue New York, N.Y. 10154
Birth Year: 1938
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Director and Member of the Audit and Nominating Committees
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Since 1993
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Henry J. Braker Professor of Commercial Law, The Fletcher School
of Law & Diplomacy, Tufts University (1986Present);
President, Arbitration Tribunal, ICSID, World Bank
(2003-Present).
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2
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Director of 22 registered investment companies advised by Legg
Mason Partners Fund Advisor, LLC and its affiliates.
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49
The following table provides information concerning the number
and dollar range of equity securities owned beneficially by each
Director as of December 31, 2008:
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Aggregate Dollar Range of
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Equity Securities in All Funds
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Dollar Range of
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Overseen by Director and
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Equity Securities in
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Advised by Blackstone
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Name of Director
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the Fund
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Advisors
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Non-Interested Directors
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Lawrence K. Becker
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None
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None
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Leslie H. Gelb
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None
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None
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J. Marc Hardy
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None
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None
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Stephane R.F. Henry
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None
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None
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Luis F. Rubio
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None
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None
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Jeswald W. Salacuse
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$10,001 - $50,000
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$10,001 - $50,000
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Interested Directors
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Robert L. Friedman*
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None
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None
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Prakash A. Melwani**
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None
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None
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|
|
|
* |
|
Mr. Friedman is an interested person, as
defined in the 1940 Act, because he serves as Chief Legal
Officer of The Blackstone Group L.P., the parent of Blackstone
Advisors. |
|
** |
|
Mr. Melwani is an interested person, as defined
in the 1940 Act, because he serves as President of the Fund. |
As of December 31, 2008, the holdings of no Director or
executive officer, nor the Directors and executive officers of
the Fund as a group, represented more than 1% of the outstanding
shares of the Funds common stock. During calendar years
2007 and 2008, no Director who is not an interested
person of the Fund (as defined in the 1940 Act) nor any
immediate family member of such persons, had any interest in
Blackstone Advisors, Blackstone India or person or entity (other
than the Fund) directly or indirectly controlling, controlled by
or under common control with Blackstone Advisors or Blackstone
India.
Responsibilities
of the Board of Directors
The Board of Directors is responsible for directing the
management of the business and affairs of the Fund. In
performing his duties, each Director is required to act in good
faith, in a manner he reasonably believes to be in the best
interests of the Fund and its stockholders and with the care of
an ordinarily prudent person in a like position under similar
circumstances. The Directors oversee the Funds business
by, among other things, meeting with the Funds management
and evaluating the performance of the Funds service
providers including Blackstone Advisors, Blackstone India, the
custodian, the transfer agent and the sub-administrator. As part
of this process, the Directors consult with the Funds
independent registered public accounting firm and with their own
separate independent counsel.
The Board of Directors has four regularly scheduled meetings
each year and additional meetings are scheduled as needed. In
addition, the Board has an audit committee and a nominating
committee that meet periodically during the year and whose
responsibilities are described below.
The Directors regularly review the Funds financial
statements, performance and market price as well as the quality
of the services being provided to the Fund. As part of this
process, the Directors review the Funds fees and expenses
to determine if they are reasonable and competitive in light of
the services being received, while also ensuring that the Fund
continues to have access to high quality services in the future.
Based on these reviews, the Directors periodically make
suggestions to the Funds management and monitor to ensure
that responsive action is taken. The Directors also monitor
potential conflicts of interest among the Fund, Blackstone
Advisors, Blackstone India and their affiliates and other funds
and clients managed by Blackstone Advisors to ensure that the
Fund is managed in a manner which is in the best interest of the
Funds stockholders.
50
Officers
The executive officers of the Fund are chosen each year at the
first meeting of the Board of Directors of the Fund following
the Annual Meeting of Stockholders, to hold office until the
meeting of the Board following the next Annual Meeting of
Stockholders and until their successors are chosen and
qualified. The current executive officers of the Fund are:
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Term of Office and
|
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Position(s) Held
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Length of Time
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|
Principal Occupation During
|
Name, Address and Age
|
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with Fund
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Served
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Past 5 Years
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|
Prakash A. Melwani
The Blackstone Group
345 Park Avenue
New York, N.Y. 10154
Birth Year: 1958
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|
President
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Since 2005
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|
Senior Managing Director, Private Equity Group, The Blackstone
Group L.P. (May 2003Present); Founder and Chief Executive
Officer, Vestar Capital Partners (19882003).
|
Robert L. Friedman
The Blackstone Group
345 Park Avenue
New York, N.Y. 10154
Birth Year: 1943
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|
Chief Legal Officer and Vice President
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Since 2005
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|
Chief Legal Officer, The Blackstone Group L.P.
(2003Present); Senior Managing Director, The Blackstone
Group L.P. (1999Present).
|
Joshua B. Rovine
The Blackstone Group
345 Park Avenue
New York, N.Y. 10154
Birth Year: 1965
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Secretary
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Since 2005
|
|
Managing Director, Legal and Compliance Group, The Blackstone
Group L.P. (2003Present); Partner, Sidley Austin Brown
& Wood LLP (19942003).
|
Joseph M. Malangoni
Blackstone Asia Advisors, L.L.C.
345 Park Avenue
New York, N.Y. 10154
Birth Year: 1976
|
|
Treasurer and Vice President
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|
Since 2007
|
|
Chief Financial Officer and Vice President, Blackstone Asia
Advisors L.L.C. (2007Present); Controller and Chief
Compliance Officer, Steadfast Financial L.L.C. (20022007).
|
Barbara F. Pires
Blackstone Asia Advisors L.L.C.
345 Park Avenue
New York, N.Y. 10154
Birth Year: 1952
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Chief Compliance Officer and Vice President
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Since 2005
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|
Chief Compliance Officer and Principal, Blackstone Asia Advisors
L.L.C. (2006Present); Managing Member, BFP Consulting,
L.L.C. (20052006); Chief Compliance Officer, The Asia
Tigers Fund, Inc. (2005Present); Chief Compliance Officer,
Oppenheimer Asset Management, Inc. (formerly CIBC World Markets)
(19962005).
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51
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Term of Office and
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|
Position(s) Held
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Length of Time
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|
Principal Occupation During
|
Name, Address and Age
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with Fund
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Served
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Past 5 Years
|
|
Punita Kumar-Sinha
Blackstone Asia Advisors L.L.C.
345 Park Avenue
New York, N.Y. 10154
Birth Year: 1962
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Chief Investment Officer and Portfolio Manager
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Since 1997
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|
Senior Managing Director, The Blackstone Group L.P.
(2006Present); Chief Investment Officer, Blackstone Asia
Advisors L.L.C. (2005present); Managing Director and
Senior Portfolio Manager, Advantage Advisers, Inc., an affiliate
of Oppenheimer & Co., Inc. (19972005); Portfolio
Manager, The Asia Tigers Fund, Inc. (1999Present); Senior
Portfolio Manager and Chief Investment Officer to an
unregistered pooled investment vehicle (2007Present).
|
Audit
Committee
The Funds Audit Committee is composed entirely of
Directors who are not interested persons of the
Fund, Blackstone Advisors or its affiliates within the meaning
of the 1940 Act, and who are independent as defined
in the New York Stock Exchange listing standards. Currently,
Messrs. Becker, Gelb, Hardy, Henry, Rubio and Salacuse are
members of the Audit Committee. The Audit Committee convened two
times during the fiscal year ended December 31, 2008. The
principal functions of the Audit Committee are to appoint and
retain the Funds independent registered public accounting
firm, to review with the independent registered public
accounting firm the scope, performance and anticipated cost of
their audit and to receive and consider a report from the
independent registered public accounting firm concerning their
conduct of the audit, including the form of the opinion proposed
to be rendered and any comments or recommendations the
independent registered public accounting firm might want to make
in that connection. The Board has determined that
Mr. Becker is an audit committee financial
expert, as defined in Section 401(h) of
Regulation S-K.
The Fund adopted an Audit Committee Charter in February 2000,
which was most recently amended and restated in November 2005.
The Funds amended and restated Audit Committee Charter was
filed as an exhibit to the Proxy Statement filed by the Fund on
March 25, 2009. The Audit Committee Charter states that no
member of the Committee may serve on the audit committees of
more than three public companies, including the Fund, unless the
Board of Directors determines that such simultaneous service
would not impair the ability of such member to serve on the
Committee effectively. The Board of Directors has determined
that the service by Messrs. Becker, Gelb and Salacuse on
the audit committees of more than two other public companies
does not impair each of their ability to serve effectively on
the Funds Audit Committee.
The members of the Audit Committee are not professionally
engaged in the practice of auditing or accounting and are not
employed by the Fund for accounting, financial management or
internal control. Moreover, the Audit Committee relies on and
makes no independent verification of the facts presented to it
or representations made by management or the independent
registered public accounting firm. Accordingly, the Audit
Committees oversight does not provide an independent basis
to determine that management has maintained appropriate
accounting and financial reporting principles and policies, or
internal controls and procedures, designed to assure compliance
with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committees considerations and
discussions referred to above do not provide assurance that the
audit of the Funds financial statements has been
52
carried out in accordance with generally accepted auditing
standards or that the financial statements are presented in
accordance with generally accepted accounting principles.
Nominating
Committee
The Nominating Committee is composed entirely of Directors who
are not interested persons of the Fund, Blackstone
Advisors or its affiliates within the meaning of the 1940 Act,
and who are independent as defined in the NYSE
listing standards. Currently Messrs. Becker, Gelb, Hardy,
Henry, Rubio and Salacuse are members of the Nominating
Committee. This Committee met once during the fiscal year ended
December 31, 2008. The principal function of the Nominating
Committee is to select and nominate persons for election as
Directors of the Fund. The Fund adopted a Nominating Committee
Charter on December 18, 2003, which was filed as
Exhibit A to the Proxy Statement filed by the Fund on
March 20, 2007.
The Nominating Committee identifies potential nominees through
its network of contacts. While the Nominating Committee meets to
discuss and consider such candidates qualifications and
then chooses a candidate by majority vote, the Nominating
Committee does not have specific, minimum qualifications for
nominees and has not established specific qualities or skills
that it regards as necessary for one or more of the Funds
Directors to possess (other than any qualities or skills that
may be required by applicable law, regulation or listing
standard).
In identifying and evaluating nominees, the Nominating Committee
considers factors it deems relevant which include: whether or
not the person is an interested person as defined in
the 1940 Act and whether the person is otherwise qualified under
applicable laws and regulations to serve on the Board of
Directors of the Fund; whether or not the person has any
relationship that might impair his or her independence, such as
any business, financial or family relationships with Fund
management, the investment manager of the Fund, Fund service
providers or their affiliates; whether or not the person serves
on boards of, or is otherwise affiliated with, competing
organizations or funds; and the character and integrity of the
person and the contribution which the person can make to the
Board. The Nominating Committee will accept nominations for the
office of Director made by Fund Stockholders. Stockholders
who wish to recommend a nominee should send nominations to the
Secretary of the Fund which include biographical information and
set forth the qualifications of the proposed nominee. There are
no differences in the manner in which the Nominating Committee
evaluates nominees based on whether such nominees are
recommended by a Stockholder.
Stockholders who wish to recommend a nominee should send
nominations to the Secretary of the Fund which include
biographical information and set forth the qualifications of the
proposed nominee. There are no differences in the manner in
which the Nominating Committee evaluates nominees based on
whether such nominees are recommended by a Stockholder.
The Fund does not pay a fee to any third party or parties to
identify or evaluate or assist in identifying or evaluating
potential nominees. The Nominating Committee did not receive a
recommended nominee from a Stockholder who beneficially owned,
or a group of Stockholders who beneficially owned, more than 5%
of the Funds shares for at least one year as of the date
the recommendation was made.
Board
Meetings
During the fiscal year ended December 31, 2008, the Board
of Directors held four regular meetings and two special
meetings. Each Director attended at least 75% of the meetings of
the Board or the committee(s) of the Board on which he served.
Director
Compensation
Under the federal securities laws, the Fund is required to
provide to Stockholders in connection with the Meeting
information regarding compensation paid to Directors by the Fund
as well as by the various other U.S. registered investment
companies advised by the investment manager or an affiliate of
the investment manager during the Funds prior fiscal year.
The following table provides information concerning the
approximate compensation paid during the fiscal year ended
December 31, 2008 to the Directors of the Fund and the
aggregate compensation paid to them from all registered funds in
the Fund Complex for the fiscal year ended
December 31,
53
2008. The Fund does not provide any pension or retirement
benefits to Directors. Robert L. Friedman is not included in the
table because he was appointed by the Funds Board of
Directors to serve as a Class I director of the Fund
effective January 7, 2009 to fill the vacancy created by
Peter G. Petersons resignation. Mr. Peterson retired
from The Blackstone Group L.P. and resigned from the Board of
Directors of the Fund effective December 31, 2008.
Mr. Friedman will not receive compensation for his service
on the Funds Board of Directors.
A Fund Complex means two or more registered investment
companies that hold themselves out to investors as related
companies for purposes of investment and investor services, or
that have a common investment manager or that have an investment
manager that is an affiliated person of the investment manager
of any of the other registered investment companies. Investment
companies are considered to be in the same family if they share
the same investment manager or principal underwriter and hold
themselves out to investors as related companies for purposes of
investment and investor services
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Total
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Compensation
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Aggregate
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|
from Other Funds
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|
Compensation
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|
Compensation
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|
Advised by
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|
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from Fund and
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Name of Director
|
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from Fund
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Adviser
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|
Fund Complex
|
|
|
Lawrence K. Becker
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|
$
|
45,000
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|
|
$
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11,500
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|
|
$
|
56,500
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|
Leslie H. Gelb
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|
|
30,000
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|
|
9,750
|
|
|
|
39,750
|
|
J. Marc Hardy
|
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|
29,000
|
|
|
|
0
|
|
|
|
29,000
|
|
Stephane R. F. Henry
|
|
|
30,000
|
|
|
|
0
|
|
|
|
30,000
|
|
Prakash A. Melwani
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Luis F. Rubio
|
|
|
34,000
|
|
|
|
9,750
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|
|
|
43,750
|
|
Jeswald W. Salacuse
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|
|
55,000
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|
|
|
14,000
|
|
|
|
69,000
|
|
Code of
Ethics
The Funds Board of Directors approved a code of ethics
under
Rule 17j-1
under the 1940 Act. Subject to certain conditions and
restrictions, the code of ethics permits Directors, officers and
other personnel subject to its provisions to invest in
securities, including securities that may be purchased or held
by the Fund.
The code of ethics can be reviewed and copied at the SECs
Public Reference Room in Washington, D.C. Information about
the operation of the Public Reference Room may be obtained by
calling the SEC
at 202-551-8090.
The code of ethics is available on the EDGAR database on the
SECs website at
http://www.sec.gov.
Copies may also be obtained, after paying a duplicating fee, by
electronic request to publicinfo@sec.gov or by
writing to the SECs Public Reference Section,
Washington, D.C. 20549.
Proxy
Voting Policies and Procedures
The Fund has adopted the Investment Managers policies and
procedures with respect to the voting of proxies related to
portfolio securities. These proxy voting policies and procedures
delegate to the Investment Manager the responsibility for voting
proxy securities, subject to the Board of Directors
continuing oversight. A copy of the Funds proxy voting
policies and procedures is included in the Statement of
Additional Information which is available without charge by
calling the Fund at 1-866-800-8933.
Information regarding how the Fund voted proxies relating to
portfolio securities for the
12-month
period ended June 30, 2008 is available, without charge, by
calling 1-866-800-8933 or on the SECs website at
http://www.sec.gov.
54
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth the beneficial ownership of
shares of the Fund, as of July 2, 2009, by each person
(including any group) known to the Fund to be deemed to be the
beneficial owner of more than 5% of the outstanding shares of
the Fund:
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|
Name of
|
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|
Number of Shares
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|
|
|
|
|
|
Beneficial Owner
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|
Beneficially Owned
|
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|
Percent Ownership
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None
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At July 2, 2009, to the knowledge of the Fund, no person
owned of record or owned beneficially more than 5% of the
outstanding shares of the Fund, except that Cede &
Co., a nominee for participants in The Depository
Trust Company, held of record 38,292,558 shares, equal
to approximately 99.5% of the outstanding shares of the Fund.
PORTFOLIO
TRANSACTIONS
The Fund has no obligation to deal with any brokers or dealers
in the execution of transactions in portfolio securities.
Subject to policy established by the Funds Board of
Directors, the Investment Manager is primarily responsible for
the Funds portfolio decisions and the initiation of the
Funds portfolio transactions.
In placing orders, it is the policy of the Fund to obtain the
best results taking into account the general execution and
operational facilities of the broker or dealer, the type of
transaction involved and other factors such as the risk of the
broker or dealer in positioning the securities involved. While
generally the best price is sought in placing orders, the Fund
may not necessarily be paying the lowest price available.
Securities firms that provide supplemental research to the
Investment Manager or the Country Adviser may receive orders for
transactions by the Fund. In these circumstances, as
contemplated by Section 28(e) of the U.S. Securities
Exchange Act of 1934, as amended (the
1934 Act), the Fund may pay commissions that
are higher than those that the Fund might otherwise have paid to
another broker if those services had not been provided.
Information so received will be in addition to and not in lieu
of the services that the Investment Manager and the Country
Adviser must perform under their respective agreements, and the
expenses of the Investment Manager or the Country Adviser will
not necessarily be reduced as a result of the receipt of such
supplemental information. The Investment Manager and the Country
Adviser may use the research services furnished to them by
brokers who effect securities transactions for the Fund in
servicing other investment companies and accounts that they
manage. Similarly, the Investment Manager and the Country
Adviser may use the research services furnished to them by those
brokers in servicing the Fund. The Investment Manager and the
Country Adviser do not use all of these research services in
managing any particular account, including the Fund. To the
extent that any services are provided by other NYSE members, the
Fund will consider whether the commissions and fees with respect
to those transactions are fair and reasonable.
In connection with the execution of portfolio transactions on
its behalf, affiliated persons (as such term is defined in the
1940 Act) of the Fund, or affiliated persons of such persons,
may from time to time be selected to perform brokerage services
for the Fund, subject to the considerations discussed above. The
1940 Act prohibits such affiliated persons from dealing with the
Fund as principal in the purchase or sale of securities. In
order for such an affiliated person to be permitted to effect
any portfolio transactions for the Fund, the commissions, fees
or other remuneration received by such affiliated person must be
reasonable and fair compared to the commissions, fees or other
remuneration received by other brokers in connection with
comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable
period of time. This standard would allow such an affiliated
person to receive no more than the remuneration that an
unaffiliated broker would expect to receive in a commensurate
arms-length transaction.
The Investment Manager makes investment decisions or
recommendations for the Fund independently from those rendered
for other funds that it manages, which may also invest in the
same securities as the Fund. If another fund is prepared to
invest in, or desires to dispose of, the same security at the
same time as the Fund, however, transactions in such securities
will be made, insofar as feasible, for the respective funds in a
manner deemed equitable to all. In some cases, this procedure
may adversely affect the size of the position obtained for or
disposed of by the Fund or the price paid or received by the
Fund. In addition, because of different investment objectives, a
55
particular security may be purchased for one fund when another
fund is selling the same security. In the future, the Investment
Manager may advise or manage other funds or accounts, in which
case similar issues may arise. See Portfolio
Manager-Potential Conflicts of Interest.
Although the management agreement does not contain any
restrictions on portfolio turnover, the Funds policy is
not to engage in transactions with the objective of seeking
profits from short-term trading. It is expected that the annual
portfolio turnover rate of the Fund will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of
sales or purchases of portfolio securities by the average
monthly value of the Funds portfolio securities. For
purposes of this calculation, portfolio securities exclude all
securities having a maturity when purchased of one year or less.
Higher portfolio turnover involves correspondingly higher
transaction costs and may result in greater amounts of
short-term capital gains, which are taxed to stockholders as
ordinary income when distributed. See Taxation
U.S. Stockholders.
For the fiscal years ended December 31, 2006, 2007 and
2008, the Fund paid commissions for the execution of its
portfolio transactions amounting in the aggregate to $4,580,359,
$6,197,781 and $5,609,104, respectively.
SEMI-ANNUAL
REPURCHASES OF SECURITIES
General
Under the 1940 Act, the Fund may repurchase its securities:
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on a securities exchange or such other open market designated by
the SEC (so long as the Fund has, in the case of purchases of
its stock, informed holders of the class of stock involved
within the preceding six months of its intention to repurchase
such stock);
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by a tender offer open to all holders of the class of securities
involved; or
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as otherwise permitted by the SEC, including, for example, by
electing for an interval fund structure.
|
The Fund has adopted an interval fund structure,
pursuant to which the Fund conducts semi-annual repurchase
offers for between 5% and 25% of the Funds outstanding
common stock. The Fund currently intends to fund repurchase
offers by using cash on hand and liquidating portfolio
securities and does not intend to make additional discretionary
repurchase offers. In accordance with the Funds
fundamental periodic repurchase policy, the Funds next
repurchase offer is expected to occur immediately following the
expiration of the Offer.
If the Fund repurchases its shares of common stock for a price
below their net asset value, the net asset value of those shares
of common stock that remain outstanding would be enhanced, but
this does not necessarily mean that the market price of those
outstanding shares would be affected, either positively or
negatively. Repurchases of shares of common stock by the Fund
would also decrease its total assets and accordingly may
increase its expenses as a percentage of average net assets.
Further, interest on any borrowings to finance any such share
repurchase transactions would reduce the Funds net income.
Fundamental
Policy Regarding Semi-Annual Repurchase Offers
The Funds fundamental policy with respect to repurchase
offers is as follows:
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The Fund will make offers to repurchase its shares at
semi-annual intervals pursuant to
Rule 23c-3
under the 1940 Act, and the Funds Board of Directors may
place such conditions and limitations on the repurchase offers
as may be permitted under
Rule 23c-3;
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14 days prior to the last Friday of each of the Funds
first and third fiscal quarters (or the next business day if
such Friday is not a business day) will be the deadline, which
we refer to as the repurchase request deadline, by
which the Fund must receive repurchase requests submitted by
stockholders in response to the repurchase offer;
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The date on which the repurchase price for shares is to be
determined shall occur no later than the last Friday of each of
the Funds first and third fiscal quarters, or the next
business day if such Friday is not a business day; and
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56
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Repurchase offers may be suspended or postponed only under
certain circumstances as provided for in
Rule 23c-3
under the 1940 Act.
|
The foregoing policy cannot be changed without stockholder
approval.
From the date that notice is sent to stockholders announcing the
repurchase offer until the repurchase pricing date, the Fund
maintains a percentage of its portfolio assets in liquid
securities at least equal to the value of the percentage of the
Funds shares that the Fund has offered to purchase.
Procedures
Relating to Semi-Annual Repurchase Offers
Prior to each repurchase offer, the Board of Directors, in the
exercise of its fiduciary duties, will determine the number of
shares subject to the repurchase offer based upon such
considerations as market demand and the Funds net asset
value per share. If a repurchase offer is oversubscribed, the
Fund may, but is not obligated to, either:
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repurchase all additional shares tendered if the additional
shares do not exceed 2% of the Funds outstanding common
stock; or
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|
purchase all shares tendered on a pro rata basis.
|
All shares tendered may be withdrawn at any time prior to the
repurchase request deadline in accordance with certain
procedures.
Repurchase prices are set at a price equal to the net asset
value of the Fund as of a specified date that occurs after the
repurchase request deadline. The Fund charges a repurchase fee
of up to 2% of the value of the shares that are repurchased.
Payment for tendered shares is distributed within one week
thereafter. All repurchase offer materials are mailed to
stockholders of record before commencement of the repurchase
offer. Stockholders whose shares are held in the name of a
broker, dealer, commercial bank, trust company or other nominee
should contact such firm if they desire to tender their shares
in the repurchase offer.
During repurchase offers, net asset value per share is
calculated as of the close of regular trading on the NYSE each
Friday and each of the five business days preceding the
repurchase request deadline. Stockholders who wish to obtain the
net asset value during this period should contact the
Funds information agent for the repurchase offer.
See Taxation
U.S. Stockholders Dispositions and
repurchases.
DIVIDENDS
AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Fund intends to distribute annually to stockholders
substantially all of its net investment income and to distribute
any net realized capital gains at least annually. Net investment
income for this purpose is income other than net realized
long-and short-term capital gains net of expenses.
Pursuant to the Funds dividend reinvestment and cash
purchase plan, which we refer to as the plan,
stockholders whose shares of common stock are registered in
their own names will be deemed to have elected to have all
distributions automatically reinvested by PNC Global Investment
Servicing (U.S.) Inc., which serves as the plan agent, in Fund
shares pursuant to the plan, unless such stockholders elect to
receive distributions in cash. Stockholders who elect to receive
distributions in cash will receive all distributions in cash
paid by check in dollars mailed directly to the stockholders by
the dividend paying agent. In the case of stockholders, such as
banks, brokers or nominees, that hold shares for others who are
beneficial owners, the plan agent will administer the plan on
the basis of the number of shares certified from time to time by
the stockholders as representing the total amount registered in
such stockholders names and held for the account of
beneficial owners that have not elected to receive distributions
in cash. Investors that own shares registered in the name of a
bank, broker or other nominee should consult with such nominee
as to participation in the plan through such nominee, and may be
required to have their shares registered in their own names in
order to participate in the plan.
The plan agent serves as agent for the stockholders in
administering the plan. If the Directors of the Fund declare an
income dividend or a capital gains distribution payable either
in the Funds common stock or in cash,
57
nonparticipants in the plan will receive cash and participants
in the plan will receive common stock, to be issued by the Fund
or purchased by the plan agent in the open market. If the market
price per share on the valuation date equals or exceeds net
asset value per share on that date, the Fund will issue new
shares to participants at net asset value, except if the net
asset value is less than 95% of the market price on the
valuation date, in which case such shares will then be issued at
95% of the market price. The valuation date will be the dividend
or distribution payment date or, if that date is not a NYSE
trading day, the next preceding trading day. If the net asset
value exceeds the market price of Fund shares at such time, or
if the Fund should declare an income dividend or capital gains
distribution payable only in cash, the plan agent will, as agent
for the participants, buy Fund shares in the open market, on the
NYSE or elsewhere, for the participants accounts on, or
shortly after, the payment date. If, before the plan agent has
completed its purchases, the market price exceeds the net asset
value of a Fund share, the average per-share purchase price paid
by the plan agent may exceed the net asset value of the
Funds shares, resulting in the acquisition of fewer shares
than if the distribution had been paid in shares issued by the
Fund on the dividend payment date. Because of the foregoing
difficulty with respect to open-market purchases, the plan
provides that if the plan agent is unable to invest the full
dividend amount in open- market purchases during the purchase
period or if the market discount shifts to a market premium
during the purchase period, the plan agent will cease making
open-market purchases and will receive the uninvested portion of
the dividend amount in newly issued shares at the close of
business on the last purchase date.
Participants have the option of making additional cash payments
to the plan agent annually in any amount from $100 to $3,000 for
investment in the Funds common stock. The plan agent will
use all such funds received from participants to purchase Fund
shares in the open market on or about February 15 of each year.
Any voluntary cash payment received more than 30 days prior
to this date will be returned by the plan agent, and interest
will not be paid on any uninvested cash payment. To avoid
unnecessary cash accumulations and also to allow ample time for
receipt and processing by the plan agent, it is suggested that
participants send in voluntary cash payments to be received by
the plan agent approximately 10 days before an applicable
purchase date specified above. A participant may withdraw a
voluntary cash payment by written notice if the notice is
received by the plan agent not less than 48 hours before
such payment is to be invested.
The plan agent maintains all stockholder accounts in the plan
and furnishes written confirmations of all transactions in an
account, including information needed by stockholders for
personal and tax records. Shares in the account of each plan
participant will be held by the plan agent in the name of the
participant, and each stockholders proxy will include
those shares purchased pursuant to the plan.
There is no charge to participants for reinvesting dividends or
capital gains distributions or voluntary cash payments. The Fund
will pay the plan agents fees for the reinvestment of
dividends and capital gains distributions and voluntary cash
payments. There will be no brokerage charges with respect to
shares issued directly by the Fund as a result of dividends or
capital gains distributions payable either in stock or in cash.
However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the plan agents open
market purchases in connection with the reinvestment of
dividends and capital gains distributions and voluntary cash
payments made by the participant. Brokerage charges for
purchasing small amounts of stock for individual accounts
through the plan are expected to be less than the usual
brokerage charges for such transactions, because the plan agent
will be purchasing stock for all participants in blocks and
prorating the lower commission thus attainable.
The receipt of dividends and distributions under the plan will
not relieve participants of any income tax which may be payable
on such dividends or distributions. See Taxation.
Experience under the plan may later indicate that changes in the
plan are desirable. Accordingly, the Fund and the plan agent
reserve the right to terminate the plan as applied to any
voluntary cash payments made and any dividend or distribution
paid subsequent to notice of the termination sent to members of
the plan at least 30 days before the record date for such
dividend or distribution. The plan also may be amended by the
Fund or the plan agent, but (except when necessary or
appropriate to comply with applicable law, rules or policies of
a regulatory authority) only by at least 30 days
written notice to participants in the plan. All correspondence
concerning the plan should be directed to the plan agent at
P.O. Box 43027, Westborough, Massachusetts 01581
(telephone: 1-508-871-8500).
58
TAXATION
The following is a general summary of certain United States
federal income tax considerations affecting the Fund and its
stockholders. It is not expected that stockholders will be
subject to the alternative minimum tax as a result of their
investment in the Fund. No attempt is made to present a detailed
explanation of all federal, state, local and foreign income tax
considerations, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential
investors are urged to consult their own tax advisors regarding
an investment in the Fund. This summary reflects applicable tax
laws as of the date of this prospectus, which tax laws may be
changed or subject to new interpretations by the courts of the
U.S. Internal Revenue Service (the IRS),
retroactively or prospectively.
The
Fund
The Fund has qualified and intends to continue to qualify as a
regulated investment company for federal income tax
purposes under the Internal Revenue Code, except as noted below.
In order to so qualify, the Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross
income from (i) dividends, interest, payments with respect
to loans of securities, gains from the sale or other disposition
of stock or securities or foreign currencies, or other income
derived with respect to its business of investing in such stock,
securities or currencies (including, but not limited to, gains
from options, futures or forward contracts) and (ii) net
income derived from interests in certain publicly traded
partnerships that are treated as partnerships for
U.S. federal income tax purposes and that derive less than
90% of their gross income from the items described in
(i) above (each, a Qualified Publicly Traded
Partnership) and (b) diversify its holdings so that,
at the end of each quarter of each taxable year, (i) at
least 50% of the value of the Funds assets is represented
by cash, cash items, U.S. government securities, securities
of other regulated investment companies, and other securities
which, with respect to any one issuer, do not represent more
than 5% of the value of the Funds assets nor more than 10%
of the voting securities of such issuer, and (ii) not more
than 25% of the value of the Funds assets is invested in
the securities (other than U.S. government securities or
the securities of other regulated investment companies) of any
one issuer, any two or more issuers that the Fund controls and
that are engaged in the same, similar or related trades or
businesses or any one or more Qualified Publicly Traded
Partnerships.
The Fund may not have qualified to be taxed as a regulated
investment company for the taxable year ended December 31,
2004. Section 855(a) of the Internal Revenue Code provides
that, in order to eliminate taxable income for a taxable year, a
regulated investment company may elect to treat dividends
distributed during the twelve months following the taxable year
as having been paid during such taxable year. In order to make
this election, a fund must (1) declare such dividend prior
to the due date of filing its tax return for the taxable year
(including any extensions granted), and (2) distribute the
dividend during the twelve months following the taxable year.
For the taxable year ended December 31, 2004, the Fund
distributed the appropriate dividend within the twelve month
timeframe; however, the declaration was made on
December 19, 2005, which was subsequent to the filing
deadline for the 2004 tax return (i.e., September 15,
2005). As such, the Fund may have failed to qualify to be taxed
as a regulated investment company under Subchapter M of the
Internal Revenue Code for the taxable year ended
December 31, 2004. A provision of $25,507,350 was made for
U.S. federal income tax purposes in the Funds 2005
financial statements. However, on April 6, 2006, the Fund
declared a deficiency dividend (within the meaning of
Section 860 of the Internal Revenue Code) of $1.07 per
share with respect to its income for the taxable year ending
December 31, 2004. As a result of this deficiency dividend,
the Fund has reduced its recorded tax liability to approximately
$4,956,314. There can be no assurance that the Fund will be able
to further reduce the liability.
If the Fund qualifies as a regulated investment company and
distributes to its stockholders at least 90% of its investment
company taxable income (as that term is defined in the Internal
Revenue Code, without regard to the deduction for dividends
paid), then the Fund will not be subject to federal income tax
on the income so distributed. However, the Fund would be subject
to corporate income tax at a rate of 35% on any undistributed
income. Investment company taxable income includes dividends,
interest, and net short-term capital gains in excess of net
long-term capital losses, but does not include net capital
gain, which is net long-term capital gains in excess of
net short-term capital losses. If in any year the Fund should
fail to qualify as a regulated investment company, the Fund
would be subject to federal income tax in the same manner as an
ordinary corporation, and distributions to stockholders would be
taxable to such holders as ordinary dividend income to the
extent of the earnings and profits
59
of the Fund. Such distributions generally would be eligible
(i) to be treated as qualified dividend income
(as discussed below) in the case of individual stockholders and
(ii) for the dividends-received deduction in the case of
corporate stockholders. Distributions in excess of earnings and
profits will be treated as a tax-free return of capital, to the
extent of a holders basis in its shares, and any excess,
as a long- or short-term capital gain. In addition, the Fund
will be subject to a nondeductible 4% excise tax on the amount
by which the aggregate income it distributes in any calendar
year is less than the sum of: (a) 98% of the Funds
ordinary income for such calendar year, (b) 98% of the
excess of capital gains over capital losses for the one-year
period ending on October 31 of such year, and (c) 100% of
the undistributed ordinary income and gains from prior years.
For these purposes, the Fund will be deemed to have distributed
any income or gains on which it paid corporate income tax.
The Fund intends to distribute sufficient income so as to avoid
both corporate income tax and the excise tax.
The Fund may engage in hedging involving foreign currencies,
forward contracts, options and futures contracts (including
options and futures contracts of foreign currencies). See
Additional Investment Activities
Hedging. Such transactions will be subject to special
provisions of the Internal Revenue Code that, among other
things, may affect the character of gains and losses realized by
the Fund (that is, may affect whether gains or losses are
ordinary or capital), accelerate recognition of income to the
Fund and defer recognition of certain of the Funds losses.
These rules could therefore affect the character, amount and
timing of distributions to stockholders. In addition, these
provisions (1) will require the Fund to
mark-to-market certain types of positions in its
portfolio (that is, treat them as if they were closed out) and
(2) may cause the Fund to recognize income without
receiving cash with which to pay dividends or make distributions
in amounts necessary to satisfy the distribution requirements
for avoiding income and excise taxes. In addition, certain Fund
investments may produce income that will not qualify as good
income for purposes of the 90% annual gross income requirement
discussed above. The Fund intends to monitor its transactions,
will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires
any forward contract, option, futures contract, or hedged
investment in order to mitigate the effect of these rules and
prevent disqualification of the Fund as a regulated investment
company.
The Fund will maintain accounts and calculate income by
reference to the U.S. dollar for U.S. federal income
tax purposes. Investments generally will be maintained and
income therefrom calculated by reference to certain foreign
currencies and such calculations will not necessarily correspond
to the Funds distributable income and capital gains for
U.S. federal income tax purposes as a result of
fluctuations in currency exchange rates. Under Section 988
of the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates between the time the Fund accrues
income or receivables or expenses or other liabilities
denominated in a foreign currency and the time the Fund actually
collects such income or receivables or pays such liabilities are
generally treated as ordinary income or loss. Similarly, gains
or losses on foreign currency forward contracts and the
disposition of debt securities denominated in foreign currency,
to the extent attributable to fluctuations in exchange rates
between the acquisition and disposition dates, are also treated
as ordinary income or loss.
Furthermore, exchange control regulations may restrict the
ability of the Fund to repatriate investment income or the
proceeds of sales of securities. These restrictions and
limitations may limit the Funds ability to make sufficient
distributions to satisfy the 90% distribution requirement and
avoid the 4% excise tax.
The tax treatment of certain investments of the Fund is not free
from doubt and it is possible that an IRS examination of the
issuers of such securities or of the Fund could result in
adjustments to the income of the Fund. An upward adjustment by
the IRS to the income of the Fund may result in the failure of
the Fund to satisfy the 90% distribution requirement necessary
for the Fund to maintain its status as a regulated investment
company under the Internal Revenue Code. In such event, the Fund
may be able to make a deficiency dividend
distribution to its stockholders with respect to the year under
examination to satisfy this requirement. Such distribution will
be taxable as a dividend to the stockholders receiving the
distribution (whether or not the Fund has sufficient current or
accumulated earnings and profits for the year in which such
distribution is made) in the taxable year in which such
dividends are received. A downward adjustment by the IRS to the
income of the Fund may cause a portion of the previously made
distribution with respect to the year under examination not to
be treated as a dividend. In such event, the portion of
distributions to each stockholder not treated as a dividend
would be recharacterized as a return of capital and reduce the
stockholders basis in the shares held at the time of the
previously made distributions.
60
Accordingly, this reduction in basis could cause a stockholder
to recognize additional gain upon the sale of such
stockholders shares.
The Fund intends to make investments which may, for federal
income tax purposes, constitute investments in shares of foreign
corporations. If the Fund purchases shares in certain foreign
investment entities, called passive foreign investment
companies (PFICs), the Fund may be subject to
U.S. federal income tax on a portion of any excess
distribution or gain from the disposition of the shares
even if the income is distributed as a taxable dividend by the
Fund to its stockholders. The Fund will generally not be able to
pass through to its stockholders any credit or deduction for
this tax. Additional charges in the nature of interest may be
imposed with respect to deferred taxes arising from the
distributions or gains. If the Fund were to invest in a PFIC and
(if the Fund received the necessary information available from
the PFIC, which may be difficult to obtain) elected to treat the
PFIC as a qualified electing fund under the Internal
Revenue Code, in lieu of the foregoing requirements, the Fund
would generally be required to include in income each year a
portion of the ordinary earnings and net capital gains of the
PFIC, even if not distributed to the Fund, and the amounts would
be subject to the 90% and calendar year distribution
requirements described above.
Alternatively, the Fund may elect to mark-to-market
any stock in a PFIC it owns at the end of its taxable year.
Marking-to-market, in this context, means including
in ordinary income for each taxable year the excess, if any, of
the fair market value of the stock over the Funds adjusted
basis therein as of the end of that year. Pursuant to the
election, the Fund also may deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock
over the fair market value thereof as of the taxable year-end,
but only to the extent of any net mark-to-market gains with
respect to that stock the Fund included in income for prior
taxable years under the election. The Funds adjusted basis
in each PFICs stock subject to the election would be
adjusted to reflect the amounts of income included and
deductions taken thereunder. Any income recognized by the Fund
pursuant to the mark-to-market election would be
subject to the 90% and calendar year distribution requirements
described above.
U.S.
Stockholders
Distributions. Distributions to stockholders
of investment company taxable income will, except in the case of
distributions attributable to qualified dividend
income described below, be taxable as ordinary income to
the extent of the Funds earnings and profits, whether such
distributions are paid in cash or reinvested in additional
shares. It is not anticipated that a significant portion of such
dividends, if any, will qualify for the dividends-received
deduction generally available for corporate stockholders under
the Internal Revenue Code. Stockholders receiving distributions
from the Fund in the form of additional shares pursuant to the
dividend reinvestment plan (i) will be treated as receiving
a distribution in the amount of cash that they would have
received if they had elected to receive the distribution in
cash, unless the Fund issues new shares that are trading at or
above net asset value, and (ii) will be treated for federal
income tax purposes as receiving a distribution in an amount
equal to the fair market value of the additional shares on the
date of such a distribution if the Fund issues new shares that
are trading at or above net asset value. Consequently, if the
number of shares distributed reflects a market premium, the
amount distributed to stockholders participating in the plan
would exceed the amount of the cash distributed to
nonparticipating stockholders.
For taxable years beginning on or before December 31, 2010,
distributions of investment company taxable income that are
designated by the Fund as derived from qualified dividend
income are taxed to individual stockholders at the rates
applicable to long-term capital gain, which reach a maximum of
15%. Qualified dividend income includes dividends received from
foreign corporations only if such corporations are
qualified foreign corporations and the Fund meets
holding period and other requirements with respect to its
investment in such corporations. The Fund will not be able to
pass through to any stockholder the tax treatment of qualified
dividend income (namely, that such income will be taxed at
long-term capital gain rates) unless that stockholder also meets
the same holding period and other requirements with respect to
its investment in stock of the Fund. A foreign corporation is a
qualified foreign corporation if it is
(i) eligible for benefits of a comprehensive income tax
treaty with the United States that the United States Treasury
Department determines is satisfactory for this purpose and that
includes an exchange of information program or (ii) any
other foreign corporation with respect to any dividend paid by
such corporation if the stock with respect to which such
dividend is paid is readily tradable on an established
securities market in the United States. The United States
Treasury Department has issued a notice indicating that the
61
income tax convention between the United States and India
currently in effect (the Convention) satisfies the
requirements described in clause (i) of the preceding
sentence. Accordingly, dividends paid by Indian corporations
that are eligible for the benefits of the Convention will
generally be eligible to be passed through to Fund stockholders
as qualified dividend income. Dividends paid by PFICs, however,
will not be treated as qualified dividend income. The provisions
of the Internal Revenue Code applicable to qualified dividend
income and the 15% maximum individual tax rate on long-term
capital gains are currently effective through 2010. Thereafter,
qualified dividend income will no longer be taxed at the rates
applicable to long-term capital gains, and the maximum
individual tax rate on long-term capital gains will increase to
20%, unless Congress enacts legislation providing otherwise.
Distributions to stockholders of net capital gain that are
designated by the Fund as capital gain dividends
will be taxable as long-term capital gains, whether paid in cash
or additional shares, regardless of how long the shares have
been held by such stockholders. Capital gain dividends will not
be eligible for the dividends-received deduction. The current
maximum federal income tax rate imposed on individuals with
respect to long-term capital gains is limited to 15%, whereas
the current maximum federal income tax rate imposed on
individuals with respect to ordinary income (and short-term
capital gains, which are taxed at the same rates as ordinary
income) is 35%. With respect to corporate taxpayers, long-term
capital gains are currently taxed at the same federal income tax
rates as ordinary income and short-term capital gains.
A distribution to a stockholder of an amount in excess of the
Funds current and accumulated earnings and profits will be
treated by the stockholder as a return of capital which is
applied against and reduces the stockholders basis in his
shares. To the extent that the amount of any such distribution
exceeds the stockholders basis in its shares, the excess
will be treated by the stockholder as gain from a sale or
exchange of the shares.
The Fund may elect to retain its net capital gain or a portion
thereof for investment and be taxed at corporate rates on the
amount retained. In such case, it may designate the retained
amount as undistributed capital gains in a notice to its
stockholders, who will be treated as if each received a
distribution of its pro rata share of such gain, with the result
that each stockholder will (i) be required to report his
pro rata share of such gain on his tax return as long-term
capital gain, (ii) receive a refundable tax credit for his
pro rata share of tax paid by the Fund on the gain and
(iii) increase the tax basis for his shares by an amount
equal to the deemed distribution less the tax credit.
Dividends and distributions by the Fund are generally taxable to
the stockholders at the time the dividend or distribution is
made (even if paid or reinvested in additional shares). Any
dividend declared by the Fund in October, November or December
of any calendar year, however, which is payable to stockholders
of record on a specified date in such a month and which is not
paid on or before December 31 of such year will be treated as
paid by the Fund and received by the stockholders as of December
31 of such year, provided that the dividend is paid during
January of the following year.
A notice detailing the tax status of dividends and distributions
paid by the Fund will be mailed annually to the stockholders of
the Fund.
Dispositions and repurchases. Gain or loss, if
any, recognized on the sale or other disposition of shares of
the Fund will be taxed as capital gain or loss if the shares are
capital assets in the stockholders hands. Generally, a
stockholders gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. If a
stockholder sells or otherwise disposes of a share of the Fund
before holding it for more than six months, any loss on the sale
or other disposition of such share shall be treated as a
long-term capital loss to the extent of any capital gain
dividends received or deemed received by the stockholder with
respect to such share. A loss realized on a sale or exchange of
shares may be disallowed if other substantially identical shares
are acquired (whether under the plan or otherwise) within a
61-day
period beginning 30 days before and ending 30 days
after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
A repurchase by the Fund of shares generally will be treated as
a sale of the shares by a stockholder provided that after the
repurchase the stockholder does not own, either directly or by
attribution under Section 318 of the Internal Revenue Code,
any shares. If, after a repurchase a stockholder continues to
own, directly or by attribution, any shares, it is possible that
any amounts received in the repurchase by such stockholder will
be taxable as a dividend to such stockholder, and there is a
risk that stockholders who do not have any of their shares
repurchased
62
would be treated as having received a dividend distribution as a
result of their proportionate increase in the ownership of the
Fund. Use of the Funds cash to repurchase shares may
adversely affect the Funds ability to satisfy the 90%
distribution requirement described above. The Fund may also
recognize income in connection with the liquidation of portfolio
securities to fund share purchases. Any such income would be
taken into account in determining whether the 90% distribution
requirement has been satisfied.
Foreign taxes. The Fund will be subject to
withholding and other taxes imposed by India and may be subject
to certain taxes imposed by other foreign countries with respect
to dividends, interest, capital gains and other income. If the
Fund qualifies as a regulated investment company, the 90%
distribution requirement discussed above is satisfied and more
than 50% in value of the Funds total assets at the close
of any taxable year consists of stocks or securities of foreign
corporations, which for this purpose should include obligations
issued by foreign governmental issuers, then the Fund may elect
to treat any foreign income taxes paid by it (if such taxes are
treated as income taxes under U.S. income tax principles)
as paid by its stockholders. The Fund has historically made and
intends to continue to qualify for and to make this election.
For any year that the Fund makes such an election, an amount
equal to the foreign income taxes paid by the Fund that can be
treated as income taxes under U.S. income tax principles
will be included in the income of its stockholders. Each
stockholder will be required to include in its gross income,
even though not actually received, his pro rata share of the
foreign income taxes paid by the Fund, and will be entitled
(subject to certain limitations) to credit the amount included
in his income against his U.S. tax liabilities, if any, or
to deduct such amount from his U.S. taxable income, if any.
Shortly after any year for which it makes such an election, the
Fund will report to its stockholders, in writing, the amount per
share of such foreign income taxes that must be included in each
stockholders gross income and the amount that will be
available for deductions or credit. In general, a stockholder
may elect each year whether to claim deductions or credits for
foreign taxes. No deductions for foreign taxes may be claimed,
however, by non-corporate stockholders (including certain
foreign stockholders as described below) who do not itemize
deductions. If a stockholder elects to credit foreign taxes, the
amount of credit that may be claimed in any year may not exceed
the same proportion of the U.S. tax against which such
credit is taken that the stockholders taxable income from
foreign sources (but not in excess of the stockholders
entire taxable income) bears to his entire taxable income. This
limitation must be applied separately to certain categories of
income and the related foreign taxes. In certain circumstances,
a stockholder that (i) has held shares of the Fund for less
than a specified minimum period during which it is not protected
from risk of loss or (ii) is obligated to make payments
related to the dividends, will not be allowed a foreign tax
credit for foreign taxes deemed imposed on dividends paid on
such shares. Additionally, the Fund must meet this holding
period requirement with respect to its foreign stock and
securities in order for creditable foreign taxes to
be passed through to its stockholders. Generally, under
U.S. law, capital gains realized by U.S. residents are
treated as U.S. source income. Under the Convention,
however, capital gains realized by U.S. residents which may
be taxed in India will be treated as foreign source income,
unless inconsistent with U.S. law. Section 865(h) of
the Internal Revenue Code provides that if a taxpayer elects,
gain from the sale of stock of a foreign corporation by a
U.S. resident (as defined in Section 865(g) of the
Internal Revenue Code) will be treated as foreign source if,
pursuant to a U.S. tax treaty (without regard to the
general U.S. sourcing rule for capital gains), such income
is treated as foreign source. Accordingly, capital gains
realized by the Fund which may be subject to Indian capital
gains tax should be treated as foreign source if the election is
made. Stockholders should consult their own tax advisors with
respect to making this election and the general application of
foreign tax credits.
Backup withholding. The Fund may be required
to withhold federal income tax (backup withholding)
from dividends and redemption proceeds paid to non-corporate
stockholders. This tax may be withheld from dividends if
(i) the stockholder fails to furnish the Fund with the
stockholders correct taxpayer identification number,
(ii) the IRS notifies the Fund that the stockholder has
failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or
(iii) when required to do so, the stockholder fails to
certify that he or she is not subject to backup withholding.
Redemption proceeds may be subject to withholding under the
circumstances described in (i) above. Corporate
stockholders and other stockholders specified in the Internal
Revenue Code or the Treasury regulations promulgated thereunder
are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld under the backup
withholding rules from payments made to a stockholder may be
credited against such stockholders federal income tax
liability, provided the required information is furnished to the
IRS.
63
Disclosure regulations. Treasury regulations
provide that, if a stockholder recognizes a loss with respect to
shares of $2 million or more for an individual stockholder
or $10 million or more for a corporate stockholder (or a
greater loss over a combination of years), the stockholder must
file with the IRS a disclosure statement on IRS Form 8886.
Direct stockholders of portfolio securities are in many cases
excepted from this reporting requirement, but under current
guidance, stockholders of a regulated investment company are not
excepted. Future guidance may extend the current exception from
this reporting requirement to stockholders of most or all
regulated investment companies. The fact that a loss is
reportable under these regulations does not affect the legal
determination of whether the taxpayers treatment of the
loss is proper. Stockholders should consult their own tax
advisors to determine the applicability of these regulations in
light of their individual circumstances.
Foreign
Stockholders
U.S. taxation of a stockholder who, as to the United
States, is a non-resident alien individual, a foreign trust or
estate, a foreign corporation, or a foreign partnership
(foreign stockholder), depends on whether the income
from the Fund is effectively connected with a
U.S. trade or business carried on by such stockholder.
Ordinarily, income from the Fund will not be treated as so
effectively connected.
Income not effectively connected. If the
income from the Fund is not effectively connected
with a U.S. trade or business carried on by the foreign
stockholder, then, except as described below with respect to
interest-related dividends and short-term capital gain
dividends, distributions of investment company taxable income
(including dividends designated as qualified dividend income)
will generally be subject to a U.S. tax of 30% (or lower
treaty rate), which tax is generally withheld from such
distributions. Furthermore, foreign stockholders may be subject
to U.S. tax at the rate of 30% (or lower treaty rate) of
the income resulting from the Funds election to treat any
foreign taxes paid by it as paid by its stockholders, but will
not be able to claim a credit or deduction for the foreign taxes
as having been paid by them unless they file U.S. tax
returns.
The 30% U.S. withholding tax is not imposed on dividends
paid by regulated investment companies to the extent the
dividends are designated as interest-related
dividends or short-term capital gain
dividends. Under this exemption, interest-related
dividends and short-term capital gain dividends generally
represent distributions of interest or short-term capital gains
that would not have been subject to U.S. withholding tax at
the source if they had been received directly by a foreign
person, and that satisfy certain other requirements. The
exemption applies to dividends with respect to taxable years of
regulated investment companies beginning before January 1,
2010.
Distributions of capital gain dividends to a non-resident alien
who is present in the United States for fewer than one hundred
eighty-three days during the taxable year will not be subject to
the 30% U.S. tax. An alien individual who is physically
present in the United States for more than one hundred
eighty-two days during the taxable year generally is treated as
a resident for U.S. federal income tax purposes, in which
case he or she will be subject to U.S. federal income tax
on his or her worldwide income, including ordinary income and
capital gain dividends, at the graduated rates applicable to
U.S. citizens, rather than the 30% U.S. tax. In the
case of a foreign stockholder who is a non-resident alien
individual, the Fund may be required to withhold
U.S. federal income tax from distributions of capital gain
dividends under the backup withholding system unless the foreign
stockholder makes required certifications to the Fund on a
properly completed IRS
Form W-8BEN
(or other applicable form), or otherwise establishes an
exemption. The amount so withheld could be applied as a credit
against any U.S. tax due from the stockholder or, if no tax
is due, refunded pursuant to a claim therefor properly filed on
an income tax return.
Any gain that a foreign stockholder realizes upon the sale or
other disposition of shares of the Fund will ordinarily be
exempt from U.S. tax unless the stockholder is an alien
individual who is physically present in the United States for
more than one hundred eighty-two days during the taxable year
(as discussed above), the gain is U.S. source income and
certain other requirements are met.
Income effectively connected. If the income
from the Fund is effectively connected with a
U.S. trade or business carried on by a foreign stockholder,
then distributions of investment company taxable income and net
capital gain, and any gains realized upon the sale of shares or
the Fund, will be subject to U.S. federal income tax at the
graduated rates applicable to U.S. citizens, residents and
domestic corporations. Corporate stockholders may also be
subject to the 30% branch profits tax.
64
The tax consequences to a foreign stockholder entitled to claim
the benefits of an applicable tax treaty may be different from
those described herein. Foreign stockholders are advised to
consult their own tax advisers with respect to the particular
tax consequences to them of an investment in the Fund.
Indian
Taxes
The discussion of Indian tax matters contained herein is based
on existing law, including the provisions of the Indian Income
Tax Act, 1961 (Income Tax Act) and the provisions of
the tax treaty between Mauritius and India. The Income Tax Act
is amended every year by the Indian Finance Act of the relevant
year, and this summary reflects changes through the date hereof.
No assurance can be given that future legislation,
administrative rulings or court decisions will not significantly
modify the conclusions set forth in this summary, possibly with
retroactive effect.
Additionally, the discussion of Indian tax matters contained
herein does not address the tax consequences to investors
arising from the acquisition, holding or disposition of
interests in their respective local jurisdictions.
The Fund will be subject to taxation in India if (i) it is
treated as a resident of India because its control and
management is wholly in India or (ii) as a
non-resident any income accrues to it, whether directly or
indirectly, through a business connection in India or through
any asset or source of income in India or through the transfer
of a capital asset in India or (iii) it receives income in
India.
The Fund conducts its investment activities in India as a tax
resident of Mauritius and as such expects to obtain benefits
under the tax treaty between Mauritius and India. In light of
Circular 789 of April 13, 2000 issued by the Central Board
of Direct Taxes in India, the Fund should be eligible for the
benefits under the treaty if it holds a valid tax residence
certificate issued by the Mauritius income tax authorities. The
validity of the circular was also upheld by the Supreme Court of
India in a judgment delivered on October 7, 2003. However,
investments in India through Mauritius are continuously under
the review of the Indian revenue authorities. The Fund has
obtained a certificate from the Mauritius tax authorities to the
effect that it is a resident of Mauritius under the treaty.
The Fund continues to (i) comply with the requirements of
the tax treaty, (ii) be a tax resident of Mauritius and
(iii) maintain that its central management and control
resides in Mauritius, and therefore the Funds management
believes that the Fund will be able to obtain the benefits of
the tax treaty, subject to the continuance of the current terms
of the treaty.
In case income of the Fund is characterized as capital gain, the
Fund will not be subject to Indian tax solely by reason of
investing in the portfolio companies in India unless it is
treated as a resident of India as well as Mauritius and unless
it is considered to have the place of effective management in
India.
In case income of the Fund is characterized as business income,
it will not be taxable in India, unless it has a permanent
establishment in India. Certain factors that may result in the
Fund being considered as conducting business through a permanent
establishment in India include the maintenance by the Fund of a
branch or an office or a place of management in India, the
physical presence of the Funds employees or directors in
India (beyond a prescribed time period) and the existence of
dependent agents in India with authority to conclude contracts
in India on behalf of the Fund. Although the Fund is expected to
operate in a manner that will not cause it to be treated as
having a permanent establishment in India, there can be no
assurances made in this regard.
If the Fund does not have a permanent establishment in India,
capital gains earned by the Fund should not be taxed in India by
virtue of Article 13 of the treaty.
Dividends paid by Indian companies to the Fund should be exempt
from tax in India. Any interest income earned on Indian
securities is subject to withholding tax in India at the rate of
21.115%.
Where the benefits under the India-Mauritius tax treaty are
denied for any reason, the domestic income tax laws in India
would apply in such case. The Indian income tax laws provide
that the income of foreign institutional investors and their
sub-accounts, including the Fund, from the transfer of
securities or from capital gains arising
65
from the transfer of securities is taxable as per the provisions
of Section 115AD of the Indian Income Tax Act, 1961.
Selected provisions as they apply to the Fund are as follows:
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Income received in respect of securities (other than
(1) income from dividends on which a dividend distribution
tax has been paid or (2) income from units of the Unit
Trust of India or specified mutual funds covered by
Section 115AB of the Indian Income Tax Act) are taxed at a
rate of 21.115%.
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With respect to long-term capital gains:
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Income received in respect of long-term capital gains from
(A) the transfer of (i) equity shares of an Indian
company listed on an Indian securities exchange or
(ii) units of an equity-oriented mutual fund listed on an
Indian securities exchange or (B) the repurchase of units
by an equity-oriented mutual fund is not subject to any
long-term capital gains tax if that income is otherwise subject
to the securities transaction tax described under
Securities transaction tax below.
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Income received in respect of long-term capital gains from the
transfer of securities other than as set forth above are taxed
at a rate of 10.558%.
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With respect to short-term capital gains:
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Income received in respect of short-term capital gains from
(A) the transfer of (i) equity shares of an Indian
company listed on an Indian securities exchange or
(ii) units of an equity-oriented mutual fund listed on an
Indian securities exchange or (B) the repurchase of units
by an equity oriented mutual fund are taxed at a rate of 15.836%
if that income is otherwise subject to the securities
transaction tax described under Securities
transaction tax below.
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Income received in respect of short-term capital gains from the
transfer of securities other than as set forth above are taxed
at a rate of 31.673%.
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If the Fund only has income from securities (other than
(1) income from dividends on which a dividend distribution
tax has been paid or (2) income from units of the Unit
Trust of India or specified mutual funds registered with SEBI
and covered by Section 115AB of the Indian Income Tax Act),
then the Fund may not claim a deduction on the gross amount of
such income under Sections 28 through 44C, Section 57
and Chapter VIA of the Indian Income Tax Act.
|
As used above, the term securities has the meaning
assigned to it Section 2(h) of the Indian Securities
Contract (Regulations) Act, 1956 and includes:
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shares, scrips, stocks, bonds, debentures, derivatives,
debenture stock or other marketable securities of a like nature
in or of any incorporated company or other body corporate;
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derivatives;
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units or any other instrument issued by any collective
investment scheme to the investor in such schemes;
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security receipts as defined in clause (zg) of section 2 of
the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002;
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units or any other instrument issued to the investors under any
mutual fund scheme;
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Indian government securities; and
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such other instruments as may be declared by the Central
Government to be securities; and rights or interests in
securities.
|
As used above, equity-oriented mutual fund means a
mutual fund registered with SEBI or such other mutual fund set
up by a public sector bank or a public financial institution or
authorized by the Reserve Bank of India, that has invested more
than 65% of its total proceeds in the equity shares of Indian
companies.
Provisions that would otherwise apply to non-residents to
protect them from currency fluctuations in computing the capital
gains arising from the transfer of shares or debentures of an
Indian company do not apply to the capital gains of foreign
institutional investors and their sub-accounts. In addition, the
benefit of cost inflation
66
indexation is also not available to foreign institutional
investors and their sub-accounts when computing long-term
capital gains from the transfer of securities.
Shares in a company, or any other securities listed in a
recognized stock exchange in India or units of a mutual fund or
a zero coupon bond must be held for more than twelve months in
order to qualify as a long-term capital asset. All other
securities must be held for more than thirty-six months in order
to qualify as a long-term capital asset.
The income of foreign institutional investors and their
sub-accounts from securities is subject to a tax deduction at
source. However, no deduction may be made on any capital gains
income from the transfer of securities.
Dividends paid by an Indian company to a foreign institutional
investor or sub-account will not be subject to tax. However, the
Indian company must pay a dividend distribution tax,
which is currently 16.995%, on the total amount distributed as a
dividend. A distribution to non-residents of bonus shares or
rights to subscribe for shares is not subject to Indian tax.
Securities transaction tax. All transactions
of purchase and sale of an equity share in a company or a unit
of an equity-oriented fund entered into on a recognized stock
exchange in India will be subject to a securities transaction
tax (STT), levied on the taxable securities
transaction value. There is no treaty exemption for STT. With
respect to the purchases and sales of equity shares and units of
an equity-oriented mutual fund, which are settled by actual
delivery or transfer of the equity share or unit, STT will be
levied at the rate of 0.125% on both the buyer and seller of the
equity share or unit. For sales of equity shares and units of an
equity-oriented mutual fund (where the transaction of such sale
is entered into in a recognized stock exchange), the contract of
which is settled other than by actual delivery or transfer of
the equity share or unit, STT will be levied at the rate of
0.025% on the seller of the equity share or unit. Furthermore,
sellers of option/futures in securities would be subject to an
STT of 0.017% while a purchaser of an option in securities would
be subject to a STT of 0.125% where the option is exercised. A
seller of a unit of an equity-oriented fund would be subject to
STT at the rate of 0.25% where the sale of such unit is made to
the Fund. STT paid can be claimed as an expense while computing
the income chargeable under the head Profits and Gains of
Business or Profession where the gains on the transactions
are, in fact, treated as business income, and not capital gains.
Value of Taxable Securities Transaction. The
value of a taxable securities transaction, in the case of the
sale of an option in securities, shall be the option premium,
where the option is not exercised and the settlement price where
the option is exercised. In the case of a taxable securities
transaction relating to futures, the value of the taxable
securities transaction shall be the price at which such futures
are traded. In the case of any other taxable securities
transaction, the value shall be the price at which such
securities are purchased or sold.
Capital losses. Section 115AD of the
Indian Income Tax Act does not contain provisions for the tax
treatment of capital losses arising on a transfer of shares in
India. In general, losses arising from a transfer of a capital
asset in India can only be set off against capital gains and not
against any other income. To the extent that the losses are not
absorbed in the year of transfer, they may be carried forward
for a period of eight assessment years immediately succeeding
the assessment year for which the loss was first computed and
may be set off against the capital gains assessable for such
subsequent assessment years. However, a long-term capital loss
can be set off only against a long-term capital gain. In order
to make use of capital losses in this manner, the foreign
institutional investor or sub-account must file appropriate and
timely tax returns in India and undergo certain assessment
procedures. After October 1, 2004, long-term capital losses
with respect to (i) a sale transaction of equity shares or
units of an equity-oriented mutual fund on an Indian securities
exchange or (ii) a repurchase of units of an
equity-oriented mutual fund may not be set off against long-term
capital gains and may not be carried forward to subsequent years.
Tax treaties. Currently, dividend income
distributed by an Indian company is not subject to tax in India
in the hands of the holder of the shares. The provisions of the
Double Taxation Avoidance Agreement entered into by the
Government of India with the country of residence of a foreign
institutional investor or sub-account will be applicable in the
matter of taxation of income, gains or dividends (if
applicable). Where the Government of India has entered into a
Double Taxation Avoidance Agreement, the provisions of the
Indian Income Tax Act will apply to the foreign institutional
investor or the sub-account to the extent that they are more
beneficial.
67
Stamp duty. Purchasers of shares who seek to
register such shares on the share register of an Indian company
are required to pay an Indian stamp duty at the rate of 0.25% of
the market value of such shares. In order to register a transfer
of shares in certificated form with an Indian company, it is
necessary to present a stamped deed of transfer. Upon issuing
shares, an Indian company will be required to pay a stamp duty
at the applicable rate on the share certificate. However, if the
shares are delivered in uncertificated or
dematerialized form, which occurs with most listed
companies, no stamp duty is payable upon transfer. The equity
shares of Indian companies listed on a recognized stock exchange
are required to be traded in dematerialized form.
Service tax. Brokerage or commission fees paid
to stockbrokers in connection with the sale or purchase of
securities are subject to an Indian service tax of 10.3%. A
stockbroker is responsible for collecting this tax and for
paying it to the relevant authority.
Mauritius
Tax Status
The Fund shall hold a Category 1 Global Business License for the
purpose of the Securities Act 2005 and the Financial Services
Act 2007 and is subject to tax in Mauritius at the rate of 15%
on its chargeable income. However, it is entitled to a tax
credit equal to the higher of the actual foreign tax suffered
and a presumed foreign tax equivalent to 80% of Mauritius tax
chargeable on its foreign sourced income, so that the effective
tax rate should not exceed 3%. Further, the Fund is not subject
to capital gains tax in Mauritius nor is it liable to income tax
on any gains from sale of units or securities. There is no
withholding tax payable in Mauritius in respect of payments of
dividends to shareholders or in respect of redemptions or
exchanges of shares. Interest, if any, paid to a non-resident by
the Fund will also be exempt from Mauritius tax.
NET ASSET
VALUE
The net asset value of the Funds shares of common stock is
calculated no less frequently than weekly, on the last business
day of each week and at such other times as the Board of
Directors may determine. In addition, during a repurchase offer,
the Fund makes this information available by telephone toll-free
at 1-866-800-8933 and on the Internet at www.blackstone.com.
Currently, The Wall Street Journal, The New York Times
and Barrons publish net asset values for
closed-end investment companies weekly.
The net asset value per share of the common stock is determined
by dividing the value of the net assets of the Fund (the value
of its assets less its liabilities including borrowings,
exclusive of capital stock and surplus) by the total number of
shares of common stock outstanding. In valuing the Funds
assets, all securities for which market quotations are readily
available are valued:
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at the last sale price prior to the time of determination if
there was a sale on the date of determination;
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at the mean between the last current bid and asked prices if
there was no sales price on such date and bid and asked
quotations are available; and
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at the bid price if there was no sales price on such date and
only bid quotations are available. In instances where a price
determined above is deemed not to represent fair market value,
the price is determined in such manner as the Board of Directors
may prescribe.
|
Securities may be valued by independent pricing services that
use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term investments
having a maturity of 60 days or less are valued at
amortized cost, unless the Board of Directors determines that
that valuation does not constitute fair value. In valuing
assets, prices denominated in foreign currencies are converted
to U.S. dollar equivalents at the current exchange rate.
Securities for which reliable quotations or pricing services are
not readily available and all other securities and assets are
valued at fair value as determined in good faith by, or under
procedures established by, the Board of Directors.
68
DESCRIPTION
OF CAPITAL STOCK
General
The authorized capital stock of the Fund is
100,000,000 shares of common stock, par value $.001 per
share. The outstanding shares of common stock are, and the
shares of common stock offered hereby will be, duly authorized,
fully paid and nonassessable. All shares of common stock are
equal as to dividends, distributions and voting privileges.
There are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of common stock
is entitled to its proportion of the Funds assets after
debts and expenses. There are no cumulative voting rights for
the election of Directors. As a NYSE-listed company and as a
Maryland corporation, the Fund is required to hold annual
meetings of its stockholders. Under Maryland law, stockholders
of the Fund are not liable for the Funds debts or
obligations solely by reason of their status as stockholders.
Under Maryland law, a corporation generally cannot dissolve,
amend its charter, merge, sell all or substantially all of its
assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business, unless
approved by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter.
However, a Maryland corporation may provide in its charter for
approval of these matters by a lesser percentage, but not less
than a majority of all of the votes entitled to be cast on the
matter. The charter of the Fund provides for approval of these
matters by a majority of all of the votes entitled to be cast on
the matter, except in the circumstances described below under
Special Voting Provisions.
The Fund has no present intention of offering additional shares
of its common stock other than by this offering. Other offerings
of its common stock, if made, will require approval of the
Funds Board of Directors. Any additional offering will be
subject to the requirements of the 1940 Act that shares of
common stock may not be sold at a price below the then-current
net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing
stockholders or with the consent of a majority of the
Funds outstanding common stock.
The following table shows the number of shares of
(i) capital stock authorized and (ii) capital stock
outstanding for each class of authorized securities of the Fund
as of July 2, 2009 and as adjusted for this offer:
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Amount
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Outstanding,
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Amount Outstanding
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As Adjusted for
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Title of Class
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Amount Authorized
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as of March 31 2009
|
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the Offer(2)
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Common Stock
|
|
|
100,000,000
|
|
|
|
38,478,622
|
(1)
|
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51,304,829
|
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* |
|
All figures have been rounded to the nearest whole share. |
|
(1) |
|
The Fund held 3,372,800 treasury shares. These shares were not
counted for purposes of determining the amount of shares
outstanding. |
|
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(2) |
|
This amount assumes that all rights are exercised. If the Fund
increases the number of shares subject to this offer by 25% in
order to satisfy over-subscription requests, the amount of
shares of common stock outstanding, as adjusted, would be
increased by 3,206,551 shares, to an aggregate of
54,511,380 shares outstanding, as adjusted. |
Common
Stock
The Funds shares of common stock are publicly held and are
listed and traded on the NYSE under the symbol IFN.
The following table sets forth, for the periods indicated, the
high and low intraday sale prices per share of the
69
Funds common stock on the NYSE and the high and low net
asset values per share of the Funds common stock on the
previous Friday or month end on or immediately prior to the
dates of those market highs and lows:
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Market Price per Share and Related
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Net Asset Value per Share on Date of Market
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Discount (−)/Premium (+)(1)(2)
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High and Low(3)
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Period
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High
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Low
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High
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Low
|
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|
April 1, 2006 to June 30, 2006
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$
|
65.25
|
|
|
|
36.78
|
%
|
|
$
|
36.78
|
|
|
|
25.79
|
%
|
|
$
|
45.22
|
|
|
$
|
33.39
|
|
July 1, 2006 to September 30, 2006
|
|
$
|
47.21
|
|
|
|
28.95
|
%
|
|
$
|
37.00
|
|
|
|
4.66
|
%
|
|
$
|
35.82
|
|
|
$
|
36.30
|
|
October 1, 2006 to December 31, 2006
|
|
$
|
51.17
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|
|
|
8.37
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%
|
|
$
|
42.31
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|
|
10.13
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%
|
|
$
|
44.06
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|
|
$
|
40.09
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|
January 1, 2007 to March 31, 2007
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|
$
|
47.17
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|
|
7.62
|
%
|
|
$
|
35.51
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|
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|
(3.62
|
)%
|
|
$
|
42.65
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|
|
$
|
39.53
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|
April 1, 2007 to June 30, 2007
|
|
$
|
44.10
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|
|
|
(11.96
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)%
|
|
$
|
37.25
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|
|
|
(6.59
|
)%
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|
$
|
49.17
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|
|
$
|
40.83
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|
July 1, 2007 to September 30, 2007
|
|
$
|
55.09
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|
|
|
(11.67
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)%
|
|
$
|
39.12
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|
|
|
(11.11
|
)%
|
|
$
|
57.58
|
|
|
$
|
50.84
|
|
October 1, 2007 to December 31, 2007
|
|
$
|
71.54
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|
|
|
(7.78
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)%
|
|
$
|
50.75
|
|
|
|
(13.17
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)%
|
|
$
|
70.97
|
|
|
$
|
59.54
|
|
January 1, 2008 to March 31, 2008
|
|
$
|
63.37
|
|
|
|
(4.91
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)%
|
|
$
|
38.87
|
|
|
|
(6.14
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)%
|
|
$
|
65.41
|
|
|
$
|
48.19
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|
April 1, 2008 to June 30, 2008
|
|
$
|
52.30
|
|
|
|
(0.21
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)%
|
|
$
|
35.30
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|
|
|
(7.67
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)%
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|
$
|
52.11
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|
|
$
|
38.32
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|
July 1, 2008 to September 30, 2008
|
|
$
|
42.42
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|
|
|
(6.06
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)%
|
|
$
|
29.92
|
|
|
|
(1.35
|
)%
|
|
$
|
41.56
|
|
|
$
|
36.98
|
|
October 1, 2008 to December 31, 2008
|
|
$
|
34.10
|
|
|
|
(1.35
|
)%
|
|
$
|
14.01
|
|
|
|
5.31
|
%
|
|
$
|
33.27
|
|
|
$
|
17.52
|
|
January 1, 2009 to March 31, 2009
|
|
$
|
19.90
|
|
|
|
7.13
|
%
|
|
$
|
12.88
|
|
|
|
(2.76
|
)%
|
|
$
|
17.96
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|
|
$
|
14.15
|
|
April 1, 2009 to June 30, 2009
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|
$
|
33.00
|
|
|
|
13.58
|
%
|
|
$
|
16.79
|
|
|
|
2.30
|
%
|
|
$
|
27.76
|
|
|
$
|
16.55
|
|
|
|
|
(1) |
|
Highest and lowest intraday market price per share reported on
the NYSE. |
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(2) |
|
Related Discount (−) / Premium (+) represents
the discount or premium from net asset value of the shares on
the Friday or month end on or immediately prior to the dates of
the market highs and lows. |
|
|
|
(3) |
|
Based on the Funds computations. |
On July 2, 2009, the net asset value per share of the Fund
was $26.37 and the closing price per share on the NYSE was
$30.90, meaning the Funds shares were trading at a 17.18%
premium to the Funds net asset value per share. Although
the Funds shares of common stock have recently traded at a
premium to their net asset value, the Funds shares have in
the past traded at a discount to their net asset value. In an
attempt to reduce this discount, the Fund converted to an
interval fund structure in April 2003 pursuant to which it
conducts semi-annual repurchase offers for between 5% and 25% of
the Funds outstanding common stock. The Fund may also,
with the approval of stockholders, amend its articles of
amendment and restatement so that it may convert to an open-end
investment company.
There is no assurance that conducting repurchase offers or
converting to an open-end fund will cause the shares to trade at
or above net asset value because the market price of the
Funds shares is, among other things, determined by the
supply and demand for the Funds shares, the Funds
investment performance and investor perception of the
Funds overall attractiveness as an investment as compared
with alternative investments.
Preferred
Stock
The Funds charter provides that the Board of Directors may
classify or reclassify any unissued shares of capital stock into
one or more additional or other classes or series, with rights
as determined by the Board of Directors, by action by the Board
of Directors without the approval of the holders of common
stock. Holders of common stock have no preemptive right to
purchase any shares of preferred stock that might be issued. The
terms of any preferred stock, including its dividend rate,
liquidation preference and redemption provisions, will be
determined by the Board of Directors, subject to applicable law
and the Funds charter. Thus, the Board of Directors could
authorize the issuance of shares of preferred stock with terms
and conditions which could have the effect of delaying,
deferring or preventing a transaction or a change in control
that might involve a premium price for holders of the
Funds common stock or otherwise be in their best interest.
Presently, the Fund has no outstanding preferred stock and has
no intention of offering shares of preferred stock.
70
Special
Voting Provisions
The Fund presently has provisions in its charter and its amended
and restated by-laws that are commonly referred to as
anti-takeover provisions and may have the effect of
limiting the ability of other entities or persons to acquire
control of the Fund, to cause it to engage in certain
transactions or to modify its structure.
First, a Director may be removed from office only for cause by
vote of at least 75% of the shares entitled to be cast for the
election of Directors.
Second, the affirmative vote of 75% of the entire Board of
Directors is required to authorize the conversion of the Fund
from a closed-end to an open-end investment company. The
conversion also requires the affirmative vote of holders of at
least 75% of the common stock unless it is approved by a vote of
75% of the Continuing Directors (as defined below), in which
event such conversion requires the approval of the holders of a
majority of the common stock. A Continuing Director
for purposes of this section is any member of the Board of
Directors of the Fund who:
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is not a person or affiliate of a person who enters or proposed
to enter into a business combination (as defined below) with the
Fund (an interested party), and
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who has been a member of the Board of Directors for a period of
at least 12 months, or has been a member of the Board of
Directors since February 1, 1994, or is a successor of a
Continuing Director who is unaffiliated with an interested party
and is recommended to succeed a Continuing Director by a
majority of the Continuing Directors then on the Board of
Directors of the Fund.
|
Third, the Board of Directors is classified into three classes,
each with a term of three years with only one class of Directors
standing for election in any year. Such classification may
prevent replacement of a majority of the Directors for up to a
two-year period. The affirmative vote of at least 75% of the
shares will also be required to amend the charter or by-laws to
change any of the provisions in this paragraph and the preceding
two paragraphs.
Additionally, the affirmative vote of 75% of the entire Board of
Directors and the holders of at least (i) 80% of the common
stock and (ii) in the case of a business combination (as
defined below), 66% of the common stock other than common stock
held by an interested party who is (or whose affiliate is) a
party to a business combination or an affiliate or associate of
the interested party, are required to authorize any of the
following transactions:
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merger, consolidation or statutory share exchange of the Fund
with or into any other person;
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issuance or transfer by the Fund (in one or a series of
transactions in any
12-month
period) of any securities of the Fund to any person or entity
for cash, securities or other property (or combination thereof)
having an aggregate fair market value of $1,000,000 or more,
excluding issuances or transfers of debt securities of the Fund,
sales of securities of the Fund in connection with a public
offering, issuances of securities of the Fund pursuant to a
dividend reinvestment plan adopted by the Fund, issuances of
securities of the Fund upon the exercise of any stock
subscription rights distributed by the Fund, transfers by the
Fund of securities or other property to a corporation, trust,
partnership or other entity which is wholly owned by the Fund
and portfolio transactions effected by the Fund in the ordinary
course of its business;
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sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Fund (in one or a series of transactions in
any 12-month
period) to or with any person or entity of any assets of the
Fund having an aggregate fair market value of $1,000,000 or
more, excluding sales, exchanges, transfers or other
dispositions by the Fund to any person or entity which is wholly
owned by the Fund, and except for portfolio transactions
(including pledges of portfolio securities in connection with
borrowings) effected by the Fund in the ordinary course of its
business (we refer to the transactions described in these first
three bullets as business combinations);
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the voluntary liquidation or dissolution of the Fund, or an
amendment to the Funds charter to terminate the
Funds existence; or
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unless the 1940 Act or other federal law requires a lesser vote,
any stockholder proposal as to specific investment decisions
made or to be made with respect to the Funds assets as to
which stockholder approval is required under federal or Maryland
law.
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71
However, the stockholder vote described above will not be
required with respect to the foregoing transactions (other than
those set forth in the fifth bullet above) if they are approved
by a vote of 75% of the Continuing Directors. In that case, if
Maryland law requires, the affirmative vote of a majority of the
votes entitled to be cast thereon shall be required.
Additionally, any amendment to the Funds charter to amend,
alter or repeal (or adopt any provision inconsistent with) the
provisions of the charter relating to the purpose and powers of
the Fund, the classification of the Board of Directors, removal
of directors, the maximum number of directors, the special
voting requirements discussed above, the perpetual existence of
the Fund and amendment of the charter must be approved by at
least 75% of the entire Board of Directors and the holders of at
least 75% of the votes entitled to be cast on the matter.
The Funds by-laws contain provisions the effect of which
is to prevent matters, including nominations of Directors, from
being considered at a stockholders meeting where the Fund
has not received notice of the matters at least 90 days but
not more than 120 days prior to the first anniversary of
the prior years annual meeting, in the case of an annual
meeting, or 10 days following the date notice of such
meeting is given by the Fund, in the case of a special meeting.
Reference is made to the charter and amended and restated
by-laws of the Fund, each on file with the SEC, for the full
text of these provisions. The percentage of votes required under
these provisions, which is greater than the minimum requirements
under Maryland law absent the elections described above or in
the 1940 Act, will make more difficult a change in the
Funds business or management and may have the effect of
depriving stockholders of an opportunity to sell shares at a
premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund in a tender
offer or similar transaction.
The Funds Board of Directors, however, has considered
these anti-takeover provisions and believes they are in the best
interests of the Fund and its stockholders.
In addition, in the opinion of the Investment Manager, these
provisions offer several advantages. They may require persons
seeking control of the Fund to negotiate with its management
regarding the price to be paid for the shares required to obtain
such control; they promote continuity and stability; and they
enhance the Funds ability to pursue long-term strategies
that are consistent with its investment objective.
Certain
Provisions of Maryland Law
In addition to the provisions of the Funds charter and
amended and restated by-laws that may have an anti-takeover
effect, certain provisions of Maryland law may also have the
effect of delaying, deferring or preventing a transaction or a
change in control that might involve a premium price for holders
of the Funds common stock or otherwise be in their best
interest.
Maryland Business Combination Act. Under
Maryland law, business combinations between a
Maryland corporation and an interested stockholder or an
affiliate of an interested stockholder are prohibited for five
years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange,
or, in circumstances specified in the statute, an asset transfer
or issuance or reclassification of equity securities. An
interested stockholder is defined as:
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any person who beneficially owns ten percent or more of the
voting power of the corporations shares; or
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an affiliate or associate of the corporation who, at any time
within the two-year period prior to the date in question, was
the beneficial owner of ten percent or more of the voting power
of the then outstanding voting stock of the corporation.
|
A person is not an interested stockholder under the statute if
the board of directors approved in advance the transaction by
which he otherwise would have become an interested stockholder.
However, in approving a transaction, the board of directors may
provide that its approval is subject to compliance, at or after
the time of approval, with any terms and conditions determined
by the board.
72
After the five-year prohibition, any business combination
between the Maryland corporation and an interested stockholder
generally must be recommended by the board of directors of the
corporation and approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and
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two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation other than shares held by the
interested stockholder with whom or with whose affiliate the
business combination is to be effected or held by an affiliate
or associate of the interested stockholder.
|
These super-majority vote requirements do not apply if the
corporations common stockholders receive a minimum price,
as defined under Maryland law, for their shares in the form of
cash or other consideration in the same form as previously paid
by the interested stockholder for its shares.
The statute permits various exemptions from its provisions,
including business combinations that are exempted by the board
of directors before the time that the interested stockholder
becomes an interested stockholder.
The statute does not automatically apply to closed-end
investment companies such as the Fund. At this time, the Fund
has not elected to be subject to any of these provisions.
However, the Funds Board of Directors may make such an
election at any time.
Maryland Control Share Acquisition
Act. Subtitle 7 of Title 3 of the Maryland
General Corporation Law provides that control shares of a
Maryland corporation acquired in a control share acquisition
have no voting rights except to the extent approved by a vote of
two- thirds of the votes entitled to be cast on the matter.
Shares owned by the acquiror, by officers or by directors who
are employees of the corporation are excluded from shares
entitled to vote on the matter. Control shares are voting shares
of stock which, if aggregated with all other shares of stock
owned by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within
one of the following ranges of voting power:
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one-tenth or more but less than one-third;
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one-third or more but less than a majority;
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or a majority or more of all voting power.
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Control shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition may compel the board of directors of the corporation
to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is
subject to the satisfaction of certain conditions, including an
undertaking to pay the expenses of the meeting. If no request
for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by the statute, then the corporation may redeem for
fair value any or all of the control shares, except those for
which voting rights have previously been approved. The right of
the corporation to redeem control shares is subject to certain
conditions and limitations. Fair value is determined, without
regard to the absence of voting rights for the control shares,
as of the date of the last control share acquisition by the
acquiror or of any meeting of stockholders at which the voting
rights of the shares are considered and not approved. If voting
rights for control shares are approved at a stockholders meeting
and the acquiror becomes entitled to vote a majority of the
shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for
purposes of appraisal rights may not be less than the highest
price per share paid by the acquiror in the control share
acquisition.
Subtitle 7 does not apply (a) to shares acquired in a
merger, consolidation or share exchange if the corporation is a
party to the transaction, or (b) to acquisitions approved
or exempted by the charter or by-laws of the corporation.
73
Subtitle 7 does not automatically apply to closed-end investment
companies such as the Fund. At this time, the Fund has not
elected to be subject to any of these provisions. However, the
Funds Board of Directors may make such an election at any
time.
Section 18(i) of the 1940 Act provides that every
share of stock . . . issued by a registered management company .
. . shall be a voting stock and have equal voting rights with
every other outstanding voting stock . . . . Thus, the
1940 Act prohibits the Fund from issuing a class of shares with
voting rights that vary within the class. Subtitle 7 could be
viewed as limiting the voting rights of stockholders within the
specified percentages and not the voting rights of the shares
themselves. Moreover, each stockholder would be equally subject
to Subtitle 7. The Fund is not aware of any judicial decision or
SEC interpretation that addresses the issue of whether Subtitle
7 conflicts with Section 18(i) of the 1940 Act. It is
possible, however, that the SEC or a court could find that
Subtitle 7 conflicts with the 1940 Act and, therefore, that its
provisions are unenforceable as to a registered investment
company such as the Fund. If the Fund were to elect to be
subject to Subtitle 7, its provisions would apply to the Fund to
the extent not in conflict with Section 18(i) of the 1940
Act.
Maryland Unsolicited Takeovers Act. Subtitle 8
of Title 3 of the Maryland General Corporation Law permits
a Maryland corporation with a class of equity securities
registered under the 1934 Act and at least three
independent directors to elect to be subject, by provision in
its charter or by-laws or a resolution of its board of directors
and notwithstanding any contrary provision in the charter of
by-laws, to any or all of five provisions:
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a classified board;
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a two-thirds vote requirement for removing a director;
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a requirement that the number of directors be fixed only by vote
of directors;
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a requirement that a vacancy on the board be filled only by the
remaining directors and for the remainder of the full term of
the class of directors in which the vacancy occurred; and
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a majority requirement for the calling of a special meeting of
stockholders.
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A corporation may also adopt a charter provision or resolution
of the Board of Directors that prohibits the corporation from
electing to be subject to any or all of the provisions of the
subtitle. At this time, the Fund has not elected to be subject
to any of these provisions. However, because the Funds
charter does not include a provision prohibiting it from
electing to be subject to any of these provisions, the Board of
Directors may make such an election at any time. Through
provisions in its charter and by-laws unrelated to Subtitle 8,
the Fund already has a classified board, requires more than a
two-thirds vote for the removal of directors and requires a
majority vote for the calling of a special meeting of
stockholders. The Fund would only elect to be subject to the
provisions of Subtitle 8 requiring that any vacancy on the board
be filled only by the remaining directors and for the remainder
of the full term of the class of directors in which the vacancy
occurred if it were consistent with any applicable requirements
of the 1940 Act, including Section 16 thereof.
INVESTMENT
MANAGEMENT AND OTHER SERVICES
Investment
Manager
The Fund is party to a management agreement dated March 16,
2006 between the Fund and Blackstone Asia Advisors L.L.C., a
Delaware limited liability company. Blackstone Advisors, which
is a registered investment adviser under the
U.S. Investment Advisers Act of 1940, as amended (the
Advisers Act), has served as the Investment Manager
of the Fund since December 4, 2005. Blackstone Advisors,
which also serves as the Funds Administrator, is an
affiliate of Blackstone. Blackstone is a leading global
alternative asset manager and provider of financial advisory
services. Blackstone is one of the largest independent
alternative asset managers in the world, with assets under
management of $92.5 billion as of March 31, 2009.
Blackstones alternative asset management businesses
include the management of corporate private equity funds, real
estate funds, funds of hedge funds, credit-oriented funds,
collateralized loan obligation (CLO) vehicles and
publicly-traded closed-end mutual funds. Blackstone also
provides a wide range of financial advisory services, including
corporate and mergers and
74
acquisitions advisory, restructuring and reorganization advisory
and fund placement services. The address of Blackstone Advisors
is 345 Park Avenue, New York, NY 10154.
Blackstone Advisors acts as an investment adviser of the Fund
and is responsible on a day-to-day basis for investing the
Funds portfolio in accordance with its investment
objective and policies. Blackstone Advisors has discretion over
investment decisions for the Fund and, in that connection,
initiates purchase and sale orders for the Funds portfolio
securities. In addition, Blackstone Advisors will make available
research and statistical data to the Fund.
Blackstone Advisors serves as investment manager or investment
adviser for two registered investment companies including the
Fund. The other fund managed by Blackstone Advisors was
established in 1993 and had approximately $55 million in
assets as of April 30, 2009.
Under the Funds articles of amendment and restatement and
Maryland law, the Funds business and affairs are managed
under the direction of its Board of Directors. Investment
decisions for the Fund are made by Blackstone Advisors, subject
to any direction it may receive from the Funds Board of
Directors, which periodically reviews the Funds investment
performance.
Prior to December 4, 2005, Advantage Advisers, a subsidiary
of Oppenheimer Asset Management Inc. and an affiliate of
Oppenheimer & Co. Inc., served as the Funds
Investment Manager.
Compensation. Under the existing management
agreement, the Fund pays Blackstone Advisors monthly fees at an
annual rate of: (i) 1.10% of the Funds average weekly
net assets for the first $500,000,000; (ii) 0.90% of the
Funds average weekly net assets for the next $500,000,000;
(iii) 0.85% of the Funds average weekly net assets
for the next $500,000,000; and (iv) 0.75% of the
Funds average weekly net assets in excess of
$1,500,000,000. For the purposes of calculating compensation,
average weekly net assets are determined at the end of each
month based on the average of the net assets as calculated on
each valuation date (generally Fridays) during the month.
For the fiscal years ended December 31, 2006, 2007 and
2008, the Fund paid a total of $13,774,698, $20,086,320 and
$15,099,979 in management fees to Blackstone Advisors and
Advantage Advisers. Assuming that the value of the Funds
assets remained constant prior to the offer at $1.0 billion
(its approximate value as of July 2, 2009) and after
the offer at $1.4 billion (which assumes that all rights
are exercised at the estimated subscription price, including the
additional shares that may be issued under the over-subscription
privilege), the annual compensation received by Blackstone
Advisors under the Management Agreement would be increased by
approximately $3.4 million as a result of this offering.
A discussion regarding the basis for the Funds Board of
Directors approving the Funds management and country
advisory agreements is available in the Funds 2008 Annual
Report to stockholders.
Expenses. Except for the expenses borne by
Blackstone Advisors pursuant to the management agreement, the
Fund pays or causes to be paid all of their expenses and
liabilities, including, among other things, organizational and
offering expenses (which include out-of- pocket expenses, but
not overhead or employee costs, of Blackstone Advisors);
expenses for legal, accounting and auditing services; taxes and
governmental fees; dues and expenses incurred in connection with
membership in investment company organizations; fees and
expenses incurred in connection with listing the Funds
shares on any stock exchange; costs of printing and distributing
stockholder reports, proxy materials, prospectuses, stock
certificates and distributions of dividends; charges of the
Funds custodians, sub-custodians, administrators and
sub-administrators, registrars, transfer agents, dividend
disbursing agents and dividend reinvestment plan agents; payment
for portfolio pricing services to a pricing agent, if any,
registration and filing fees of the SEC; expenses of registering
or qualifying securities of the Fund for sale in the various
states; freight and other charges in connection with the
shipment of the Funds portfolio securities; fees and
expenses of non-interested Directors or non-interested members
of any advisory or investment board, committee or panel of the
Fund; travel expenses or an appropriate portion thereof of
Directors and officers of the Fund, or members of an advisory or
investment board, committee, or panel of the Fund, to the extent
that such expenses relate to attendance at meetings of the Board
of Directors or any committee thereof, or of any such advisory
of investment board committee or panel; salaries of stockholder
relations personnel; costs of stockholders meetings; insurance;
interest; brokerage costs; and litigation and other
extraordinary or non-recurring expenses.
75
Portfolio Manager. Punita Kumar-Sinha is the
Funds portfolio manager who is primarily responsible for
the day-to-day management of the Funds portfolio. For more
information about the portfolio manager, see Portfolio
Manager.
Country
Adviser
Pursuant to a country advisory agreement dated March 16,
2006 between Blackstone Advisors and Blackstone
Fund Services India Private Limited, Blackstone India
serves as the Funds Country Advisor. Blackstone India, a
company organized under the laws of India and a registered
investment adviser under the Advisers Act, has been the Country
Adviser for the Fund since December 4, 2005. Blackstone
India is an affiliate of Blackstone and Blackstone Advisors. The
address of Blackstone India is Express Towers,
5th Floor,
Nariman Point, Mumbai 400 021, India.
Pursuant to the country advisory agreement, Blackstone India
acts as a consultant to Blackstone Advisors and provides and
procures statistical and factual information and research
regarding economic and political factors and investment
opportunities in India to Blackstone Advisors. Blackstone India
is not responsible for the actual investment decisions of the
Fund. Blackstone Indias research analysts cover
approximately 200 companies.
Prior to December 4, 2005, Imperial Investment Advisors
Private Limited (Imperial), a 99%-owned subsidiary
of Advantage India, Inc., which in turn is a wholly-owned
subsidiary of Oppenheimer & Co. Inc., served as the
Funds Country Adviser.
Compensation. Under the country advisory
agreement, for its services, Blackstone India receives from
Blackstone Advisors a monthly fee at an annual rate of 0.10% of
the Funds average weekly net assets. For the fiscal years
ended December 31, 2006, 2007 and 2008, Blackstone Advisors
paid Blackstone India $1,461,192, $2,278,176 and $1,637,110,
respectively, in country advisory fees. Assuming that the value
of the Funds assets remained constant prior to the offer
at $1.0 billion (its approximate value as of July 2,
2009) and after the offer at $1.4 billion (which
assumes that all rights are exercised at the estimated
subscription price, including the additional shares that may be
issued under the over-subscription privilege), the annual
compensation received by Blackstone India would be increased by
approximately $400,833 as a result of this offering. The Country
Advisers fee is paid by the Investment Manager and not
directly by the Fund.
Expenses. Blackstone India, at its expense,
provides office space, office facilities and personnel
reasonably necessary for the performance of its services.
Administrator
The Fund is party to an administration agreement dated
January 1, 2006 between the Fund and Blackstone Advisors.
Blackstone Advisors has been the Funds Administrator since
January 1, 2006. The address of Blackstone Advisors is 345
Park Avenue, New York, New York 10154.
As Administrator, Blackstone Advisors performs various
administrative services, including providing the Fund with the
services of persons to perform administrative and clerical
functions, maintenance of the Funds books and records,
preparation of various filings, reports, statements and returns
filed with government authorities, and preparation of financial
information for the Funds proxy statements and semiannual
and annual reports to stockholders. Blackstone Advisors
subcontracts certain of its responsibilities as Administrator to
PNC Global Investment Servicing (U.S.) Inc. The address of PNC
Global Investment Servicing (U.S.) Inc. is 103 Bellevue Parkway,
Wilmington, Delaware 19809.
Compensation. The Fund pays Blackstone
Advisors a fee that is computed monthly and paid quarterly at an
annual rate of: (i) 0.20% of the value of the Funds
average monthly net assets for the first $1,500,000,000 of the
Funds average monthly net assets and (ii) 0.15% of
the value of the Funds average monthly net assets in
excess of $1,500,000,000 of the Funds average monthly net
assets. For the fiscal years ended December 31, 2006, 2007
and 2008, the Fund paid the Blackstone Administrator $2,853,655,
$4,167,265 and $3,119,597, respectively in administrative fees.
Assuming that the value of the Funds assets remained
constant prior to the offer at $1.0 billion (its
approximate value as of July 2, 2009) and after the
offer at $1.4 billion (which assumes that all rights are
exercised at the estimated subscription price, including the
additional shares that may be issued under the over-
76
subscription privilege), the annual compensation received by
Blackstone Advisors, as Administrator, would be increased by
approximately $801,666 as a result of this offering.
Expenses. Pursuant to the administration
agreement, Blackstone Advisors assumes all expenses incurred by
it, except that the Fund reimburses Blackstone Advisors for
out-of-pocket expenses incurred by its employees in connection
with their attendance at meetings of the Board of Directors or
any committee thereof or any other meeting at which their
attendance is required.
Mauritian
Administrator
The Fund is party to a Mauritian administration agreement dated
April 11, 1994 between the Fund and Multiconsult Ltd., a
company organized under the laws of Mauritius. Multiconsult Ltd.
has been the Funds Mauritius administrator since 1994.
Multiconsult Ltd.s address is Rogers House, 5, President
John Kennedy Street, P.O. Box 60, Port Louis,
Mauritius.
The Mauritian administrator performs several administrative
services, including the maintenance of certain books, records
and statements and the calculation of net asset value, and also
reports quarterly on behalf of the Fund to the Mauritius
Financial Services Commission.
Compensation. The Fund pays Multiconsult Ltd.
a monthly fee of $1,500 and a quarterly fee of $1,000 for its
calculation of net asset value, and the Fund also reimburses
Multiconsult Ltd. for all reasonable out-of-pocket expenses
reasonably incurred by it in the performance of its duties. For
the fiscal years ended December 31, 2006, 2007 and 2008,
the Fund paid the Mauritius administrator $26,986, $20,998 and
$31,056, respectively.
Expenses. Pursuant to the Mauritian
administration agreement, the Fund reimburses Multiconsult Ltd.
for all reasonable out-of-pocket expenses incurred by it in the
performance of its duties.
Duration
and Termination; Non-Exclusive Services
Unless earlier terminated as described below, each of the
management agreement and the country advisory agreement will
remain in effect from year to year if approved annually
(i) by a majority of the non-interested Directors of the
Fund and (ii) by the Board of Directors of the Fund or by a
majority of the outstanding voting securities of the Fund. At a
meeting held on October 28, 2008, the Board of Directors
approved the continuation of each of the management agreement
and the country advisory agreement for additional one-year terms
through December 31, 2009.
The management agreement may be terminated without penalty by
the Funds Board of Directors or by vote of a majority of
the outstanding voting securities of the Fund or upon
60 days written notice by Blackstone Advisors, and it
will also terminate in the event it is assigned (as defined in
the 1940 Act). The country advisory agreement may be terminated
without penalty by the Funds Board of Directors, by a vote
of a majority of the outstanding voting securities of the Fund,
upon 60 days written notice by Blackstone Advisors or
Blackstone India, and it will also terminate in the event of its
assignment (as defined in the 1940 Act).
The administration agreement will remain in effect until the
termination thereof by Blackstone Advisors on 90 days
written notice or by the Fund on 60 days written
notice, without penalty. The Mauritian administration agreement
will remain in effect until the termination thereof by
Multiconsult Ltd. on 3 months written notice or by
the Fund on 6 months written notice.
The services of Blackstone Advisors, Blackstone India and
Multiconsult Ltd. are not deemed to be exclusive, and nothing in
the relevant service agreements will prevent any of them or
their affiliates from providing similar services to other
investment companies and other clients (whether or not their
investment objectives and policies are similar to those of the
Fund) or from engaging in other activities.
77
PORTFOLIO
MANAGER
Portfolio
Manager
As of December 31, 2008, the Fund is managed by Punita
Kumar-Sinha, who has primary responsibility for the day-to-day
implementation of the Funds investment strategies.
Ms. Kumar-Sinha has been the portfolio manager for the Fund
since 1997. Ms Kumar-Sinha joined Blackstone Asia Advisors
L.L.C. (the Investment Manager) in December 2005 and
is a Senior Managing Director. Prior to joining the Investment
Manager, Ms. Kumar-Sinha was a Managing Director and Senior
Portfolio Manager at Oppenheimer Asset Management Inc. and CIBC
World Markets, where she was also the portfolio manager for the
Fund. Prior to December 4, 2005, Advantage Advisers, a
subsidiary of Oppenheimer Asset Management Inc., served as the
Funds Investment Manager.
Other
Accounts Managed by Portfolio Manager
In addition to managing the Fund, Ms. Kumar-Sinha also is
primarily responsible for the day-to-day portfolio management of
one registered investment company, The Asia Tigers Fund, Inc.,
and one unregistered pooled investment vehicle. As of
April 30, 2009, the total assets of The Asia Tigers Fund,
Inc. were approximately $55 million, and the total assets
of the unregistered pooled investment vehicle were approximately
$11 million.
Aside from these funds, Ms. Kumar-Sinha currently manages
no other registered investment companies, pooled investment
vehicles or accounts. However, in the future,
Ms. Kumar-Sinha may manage other funds or accounts for, or
work in conjunction with, Blackstones private equity
group, which may also invest in the same or similar securities
as the Fund.
Portfolio
Manager Compensation
The portfolio managers overall compensation is determined
by Blackstones Management Committee. Blackstones
compensation structure is designed to pay competitive salaries
to attract and retain top quality investment professionals.
Ms. Kumar-Sinhas compensation consists of two
elements base salary and bonus.
Base
Salary
The base salary is generally a fixed amount. The base salary is
reviewed annually and may be adjusted based on a variety of
factors, including competitive market factors and the skill,
experience and responsibilities of the individual. While
investment performance is a factor in determining the portfolio
managers compensation, it is not necessarily a decisive
factor.
Bonus
Ms. Kumar-Sinha is also eligible to receive an annual cash
bonus and Blackstone stock. The level of this bonus is based
upon evaluations and determinations made by the portfolio
managers supervisor. These reviews and evaluations often
take into account a variety of factors, including the
effectiveness of the portfolio managers investment
strategies, the performance of the accounts for which she serves
as portfolio manager relative to any benchmarks established for
those accounts over the course of the year (such as the IFC
Investable Index, the Bombay Stock Exchange 500 Index, the MSCI
AC Asia Ex-Japan Index, the MSCI India Index and the MSCI AC Far
East Ex-Japan Index), the amount of the Investment
Managers total assets under management, her ability to
work with colleagues and to supervise her investment staff and
her overall contribution to the Investment Manager in achieving
its business objectives. These reviews are generally based on
Ms. Kumar-Sinhas performance during the prior
calendar year and also takes into account her longer-term record.
Potential
Conflicts of Interest
Potential conflicts of interest may arise when a funds
portfolio manager has day-to-day management responsibilities
with respect to one or more other funds or other accounts, as is
the case for Ms. Kumar-Sinha. Ms. Kumar-Sinhas
simultaneous management of the Fund, The Asia Tigers Fund, Inc.
and an unregistered pooled investment vehicle may present actual
or apparent conflicts of interest with respect to the allocation
of Ms. Kumar-
78
Sinhas time and attention as well as with respect to the
allocation and aggregation of securities orders placed on behalf
of these accounts. The Fund, The Asia Tigers Fund, Inc. and the
unregistered pooled investment vehicle have, to varying degrees,
overlapping investment objectives since all three accounts may
invest in Indian securities. Potential conflicts may arise, for
example, when there is a limited quantity of an investment that
may be suitable for more than one of these accounts and the
investment must be allocated between them. It is also possible
that, in light of different objectives, benchmarks, industry and
sector exposures and time horizons, the portfolio manager may
take differing positions in the three accounts.
In the future, Ms. Kumar-Sinha may manage other funds or
accounts that may also invest in the same or similar securities
as the Fund, which may present similar or additional conflicts
of interest. The Investment Manager believes that such potential
conflicts are mitigated by the fact that the Investment Manager
has adopted policies that address potential conflicts of
interest, including strict adherence to investment objectives,
policies and guidelines as well as best execution and trade
allocation policies that are designed to ensure (1) that
portfolio management is seeking the best price for portfolio
securities under the circumstances, (2) fair and equitable
allocation of investment opportunities among accounts over time
and (3) compliance with applicable regulatory requirements.
All accounts are treated in a non-preferential manner, such that
allocations are not based upon account performance, fee
structure or preference of the portfolio manager
Portfolio
Manager Securities Ownership
As of December 31, 2008, Ms. Kumar-Sinha beneficially
owned between $10,001 and $50,000 in the common stock of the
Fund.
CUSTODIANS,
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Mumbai branch of Deutsche Bank AG, which is situated at
Kodak House, 222, Dr. D. N. Road, Fort Mumbai 400 001,
India, acts as the domestic custodian of the assets of the Fund.
Deutsche Bank (Mauritius) Limited, whose address is
4th Floor, Barkly Wharf East, Le Caudan Waterfront, Port
Louis, Mauritius, acts as the offshore custodian of the Fund.
PNC Global Investment Servicing (U.S.) Inc., whose address is
103 Bellevue Parkway, Wilmington Delaware 19809, acts as
transfer agent and registrar for the Funds shares. It also
acts as dividend paying agent under the dividend reinvestment
and cash purchase plan. PNC Global Investment Servicing (U.S.)
Inc.s address is P.O. Box 43027, Westborough,
Massachusetts 01581.
EXPERTS
PricewaterhouseCoopers LLP is the independent registered public
accounting firm of the Fund. The audited financial statements of
the Fund and certain of the information appearing under the
caption Financial Highlights included in this
prospectus and appearing elsewhere herein have been audited by
PricewaterhouseCoopers LLP for the periods indicated and are
included in reliance upon such reports and upon the authority of
such firm as experts in accounting and auditing.
PricewaterhouseCoopers LLP also performs tax and other
professional services for the Fund. PricewaterhouseCoopers
LLPs address is Two Commerce Square, 2001 Market Street,
Philadelphia, PA 19103.
LEGAL
MATTERS
The validity of the shares offered hereby will be passed upon
for the Fund by DLA Piper LLP (US). The Fund is represented with
respect to matters of Indian law (other than Indian tax laws) by
AZB & Partners, Mumbai, India.
ENFORCEABILITY
OF CIVIL LIABILITIES
Some of the Funds Directors (J. Marc Hardy, Stephane R.F.
Henry and Luis Rubio) reside and maintain most of their assets
outside the United States. These Directors have not appointed an
agent for service of process in the
79
United States. In addition, Blackstone India, the Funds
Country Adviser, is organized under the laws of India, and
AZB & Partners, the Funds Indian counsel, has
its principal office in India. It may not be possible,
therefore, for investors to effect service of process within the
United States upon these persons or entities to enforce against
them, in United States courts or foreign courts, judgments
obtained in United States courts predicated upon the civil
liability provisions of the federal securities laws of the
United States. In addition, it is not certain that a foreign
court would enforce, in original actions, liabilities against
these persons or entities predicated solely upon the
U.S. securities laws.
OFFICIAL
DOCUMENTS
Certain of the tabular and other statistical information set
forth in this prospectus is based upon or derived from official
public documents of the Indian government and its ministries,
the Reserve Bank of India, the National Stock Exchange and the
Mumbai Stock Exchange.
ADDITIONAL
INFORMATION
This registration statement and other information can be
inspected and copied at the Public Reference Room of the SEC
located at 100 F Street, N.E., Washington, D.C.
20549. Copies of such materials, including copies of all or a
portion of the Registration Statement can be obtained from the
Public Reference Room of the SEC at prescribed rates. You can
call the SEC at
1-800-SEC-0330
to obtain information on the operation of the Public Reference
Room. Such materials may also be accessed electronically by
means of the SECs home page on the Internet at
http://www.sec.gov.
TABLE OF
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
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Proxy Voting Procedures
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FINANCIAL
STATEMENTS
The audited financial statements for the year ended
December 31, 2008 are included in the Funds 2008
Annual Report and are incorporated by reference into this
prospectus. These statements include: the Report of Independent
Registered Public Accounting Firm; Schedule of Investments as of
December 31, 2008; Statement of Assets and Liabilities as
of December 31, 2008; Statement of Operations for the
fiscal year ended December 31, 2008; Statements of Changes
in Net Assets for the fiscal years ended December 31, 2008
and December 31, 2007; Notes to Financial Statements; and
Financial Highlights for a share of common stock outstanding
during each of the fiscal years ended December 31, 2008,
2007, 2006, 2005 and 2004. Copies of the Funds 2008 Annual
Report were filed with the SEC on March 3, 2009 and are
available on the SECs website at
http://www.sec.gov.
They may also be obtained without charge upon written or oral
request from the Funds information agent at
866-297-1264.
80
APPENDIX A
GENERAL
CHARACTERISTICS AND RISKS OF HEDGING
The Fund is authorized to use various hedging and investment
strategies. From time to time and as permitted by the 1940 Act,
the Fund may engage in certain hedging activities described
below to hedge various market risks (such as broad or specific
market movements and interest rates and currency exchange rates).
A detailed discussion of the hedging (which we define below)
that may be done by the Investment Manager on behalf of the Fund
follows below. The Fund will not be obligated, however, to do
any hedging and makes no representation as to the availability
of these techniques at this time or at any time in the future.
Hedging, as used in this appendix, refers to
entering into interest rate, currency or stock index futures
contracts, currency forward contracts and currency swaps, the
purchase and sale (or writing) of exchange listed and
over-the-counter put and call options on debt and equity
securities, currencies, interest rate, currency or stock index
futures and fixed income and stock indices and other financial
instruments, entering into various interest rate transactions
such as swaps, caps, floors, collars, entering into equity
swaps, caps, floors or trading in other types of derivatives.
The Funds ability to pursue certain of these strategies
may be limited by the federal income tax requirements applicable
to regulated investment companies that are not operated as
commodity pools and other applicable laws in India.
Put and
Call Options on Securities and Indices
The Fund may purchase and sell put and call options on debt and
equity securities and indices based upon the prices of debt or
equity securities. A put option on a security gives the
purchaser of the option the right to sell, and the writer the
obligation to buy, the underlying security at the exercise price
during the option period. The Fund may also purchase and sell
options on indices based upon the prices of debt or equity
securities (index options). Index options are
similar to options on securities except that, rather than taking
or making delivery of securities underlying the option at a
specified price upon exercise, an index option gives the holder
the right to receive cash upon exercise of the option if the
level of the index upon which the option is based is greater, in
the case of a call, or less in the case of a put, than the
exercise price of the option. The purchase of a put option on a
security would be designed to protect against a substantial
decline in the market value of a security held by the Fund. A
call option on a security gives the purchaser of the option the
right to buy and the writer the obligation to sell the
underlying security at the exercise price during the option
period. The purchase of a call option on a security would be
intended to protect the Fund against an increase in the price of
a security that it intended to purchase in the future. In the
case of either put or call options that it has purchased, if the
option expires without being sold or exercised, the Fund will
experience a loss in the amount of the option premium plus any
related commissions. When the Fund sells put and call options,
it receives a premium as the seller of the option. The premium
that the Fund receives for writing the option will serve as a
partial hedge, in the amount of the option premium, against
changes in the value of the securities in its portfolio. During
the term of the option, however, a covered call seller has, in
return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price of the option
if the value of the underlying security increases, but it has
retained the risk of loss should the price of the underlying
security decline. Conversely, a secured put seller retains the
risk of loss should the market value of the underlying security
decline below the exercise price of the option, less the premium
received on the sale of the option. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter
options that are privately negotiated with the counterparty to
such contract. Listed options are issued by the Options Clearing
Corporation (OCC), which guarantees the performance
of the obligations of the parties to such options.
All such call options sold (written) by the Fund will be
covered as long as the call is outstanding (i.e.,
the Fund will own the instrument subject to the call or other
securities or assets acceptable under applicable segregation and
coverage rules). All such put options sold (written) by the Fund
will be secured by segregated assets consisting of cash or
liquid debt securities having a value not less than the exercise
price.
A-1
The Funds ability to close out its position as a purchaser
or seller of an exchange listed put or call option is dependent
upon the existence of a liquid secondary market. Among the
possible reasons for the absence of a liquid secondary market on
an exchange are:
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insufficient trading interest in certain options;
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restrictions on transactions imposed by an exchange;
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trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying
securities;
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interruption of the normal operations on an exchange;
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inadequacy of the facilities of an exchange or the OCC to handle
current trading volume; or
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a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in
which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although
outstanding options on that exchange that had been listed by the
OCC as a result of trades on that exchange would generally
continue to be exercisable in accordance with their terms.
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Over-the-counter options are purchased from or sold to dealers,
financial institutions or other counterparties that have entered
into direct agreements with the Fund. With over-the-counter
options, such variables as expiration date, exercise price and
premium will be agreed upon between the Fund and the
counterparty, without the intermediation of a third party such
as the OCC. If the counterparty fails to make or take delivery
of the securities underlying an option that it has written or
otherwise settle the transaction in accordance with the terms of
that option as written, the Fund would lose the premium paid for
the option as well as any anticipated benefit of the
transaction. As the Fund must rely on the credit quality of the
counterparty rather than the guarantee of the OCC, it will only
enter into OTC options with counterparties with the highest
long-term credit ratings and with primary U.S. government
securities dealers recognized by the Federal Reserve Bank of New
York.
The hours of trading for options on securities may not conform
to the hours during which the underlying securities are traded.
To the extent that the option markets close before the markets
for the underlying securities, significant price and rate
movements can take place in the underlying markets that cannot
be reflected in the option markets.
Futures
Contracts and Options on Futures Contracts
Characteristics. The Fund may purchase and
sell futures contracts on interest rates and indices of debt and
equity securities and purchase and sell (write) put and call
options on such futures contracts traded on recognized domestic
exchanges as a hedge against anticipated interest rate changes
or movements in equity markets. The sale of a futures contract
creates an obligation by the Fund, as seller, to deliver the
specific type of financial instrument called for in the contract
at a specified future time for a specified price. Options on
futures contracts are similar to options on securities except
that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a
futures contract. That position is a long position
if the option is a call and a short position if the
option is a put.
Margin Requirements. At the time a futures
contract is purchased or sold, the Fund must allocate cash or
securities as a deposit payment, or an initial
margin. It is expected that the initial margin that the
Fund will pay may range from approximately 1% to approximately
5% of the value of the instruments underlying the contract. In
certain circumstances, however, such as during periods of high
volatility, the Fund may be required by an exchange to increase
the level of its initial margin payment. Additionally, initial
margin requirements may be increased in the future pursuant to
regulatory action. An outstanding futures contract is valued
daily and the payment in cash of variation margin
may be required, a process known as marking to the
market. Transactions in listed options and futures are
usually settled by entering into an offsetting transaction, and
are subject to the risk that the position may not be able to be
closed if no offsetting transaction can be arranged.
No Regulatory Limitations on Use of Futures Contracts and
Options on Futures Contracts. The Funds
futures transactions will be entered into for hedging purposes.
There is, however, no limit on the amount of the
A-2
Funds assets that can be put at risk through the use of
futures contracts and options thereon, and the value of the
Funds futures contracts and options thereon may equal or
exceed 100% of the Funds total assets. When required, a
segregated account of cash or cash equivalents will be
maintained and marked to market in an amount equal to the market
value of the contract. The Investment Manager reserves the right
to comply with such different standards as may be established
from time to time by rules and regulations of the
U.S. Commodity Exchange Commission (CFTC) with
respect to the purchase and sale of futures contracts and
options thereon.
The Fund is operated by persons who have claimed exclusions from
the definition of the term commodity pool operator
under the U.S. Commodity Exchange Act and, therefore, are
not subject to registration or regulation as commodity pool
operators under such Act.
Currency
Transactions
The Fund may engage in currency transactions with counterparties
to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value.
Currency transactions include currency forward contracts,
exchange listed currency futures contracts, exchange listed and
over-the-counter options on currencies and currency swaps. A
forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on
the notional difference among two or more currencies and
operates similarly to an interest rate swap, which is described
below. The Fund may enter into currency transactions with
counterparties that have received (or the guarantors of the
obligations of that have received) a credit rating of
P-1 or
A-1 by
Moodys Investors Service, Inc. or Standard &
Poors Ratings Services, a division of the McGraw Hill
Companies, Inc., respectively, or that have an equivalent rating
from an nationally recognized statistical rating organization or
(except for OTC currency options) are determined to be of
equivalent credit quality by the Investment Manager.
The Funds dealings in forward currency contracts and other
currency transactions such as futures contracts, options,
options on futures contracts and swaps will be limited to
hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency
transaction with respect to specific assets or liabilities of
the Fund, which will generally arise in connection with the
purchase or sale of the Funds portfolio securities or the
receipt of income from them. Position hedging is entering into a
currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency. The
Fund will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than
the aggregate market value (at the time of entering into the
transaction) of the securities held in the Funds portfolio
that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy
hedging as described below.
The Fund may cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are
expected to decline in value relative to other currencies to
which the Fund has or in which the Fund expects to have
portfolio exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of
portfolio securities, the Fund may also engage in proxy hedging.
Proxy hedging is often used when the currency to which the
Funds portfolio is exposed is difficult to hedge or to
hedge against the dollar. Proxy hedging entails entering into a
forward contract to sell a currency, the changes in the value of
which are generally considered to be linked to a currency or
currencies in which some or all of the Funds portfolio
securities are or are expected to be denominated, and to buy
dollars. The amount of the contract would not exceed the value
of the Funds securities denominated in linked currencies.
Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments,
Currency transactions can result in losses to the Fund if the
currency being hedged fluctuates in value to a degree or in a
direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be
present or may not be present during the particular time that
the Fund is engaging in proxy hedging. If the Fund enters into a
currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Currency transactions are subject to risks different from those
of other portfolio transactions. Because currency control is of
great importance to the issuing governments and influences
economic planning and policy, purchases
A-3
and sales of currency and related instruments can be adversely
affected by government exchange controls, limitations or
restrictions on repatriation of currency and manipulations or
exchange restrictions imposed by governments. These forms of
governmental actions can result in losses to the Fund if it is
unable to deliver or receive currency or monies in settlement of
obligations and could also cause hedges it has entered into to
be rendered useless, resulting in full currency exposure as well
as incurring transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of
futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a
bank based in the issuing nation. The ability to establish and
close out positions on these options is subject to the
maintenance of a liquid market that may not always be available.
Currency exchange rates may fluctuate based on factors extrinsic
to that countrys economy.
Interest
Rate Transactions
The Fund may enter into interest rate swaps and may purchase or
sell interest rate caps and floors. The Fund would enter into
these transactions to preserve a return or spread on a
particular investment or portion of its portfolio or to protect
against any increase in the price of the securities the Fund
anticipates purchasing at a later date. The Fund will not sell
interest rate caps or floors that it does not own.
The Fund may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending on
whether it is hedging its assets or liabilities, and it will
usually enter into interest rate swaps on a net basis, i.e., the
two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two
payments on the payment date. The Fund will not enter into any
interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other
party thereto is rated in the highest rating category of at
least one nationally recognized statistical rating organization
at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Fund will
have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in
recent years with a large number of banks and investment banking
firms acting both as principals and as agents utilizing
standardized swap documentation. Caps and floors are less liquid
than swaps.
Equity
Swaps and Related Transactions
The Fund may enter into equity swaps and may purchase or sell
equity caps and floors. The Fund would enter into these
transactions to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any
increase in the price of the securities that the Fund
anticipates purchasing at a later date. The Fund will not sell
equity caps or floors that it does not own.
The Fund may enter into equity swaps, caps and floors on either
an asset-based or liability-based basis, depending on whether it
is hedging its assets or liabilities, and it will usually enter
into equity swaps on a net basis, i.e., the two payment streams
are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments on the payment
date. The Fund will not enter into any equity swap, cap or floor
transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in the
highest rating category of at least one nationally recognized
statistical rating organization at the time of entering into
such transaction. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap
market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap
documentation. Caps and floors, as noted above, are less liquid
than swaps.
Risks of
Hedging
Hedging involves special risks, including the possible default
by the other party to the transaction, illiquidity and, to the
extent the Investment Managers view as to certain market
movements is incorrect, the risk that the use of hedging could
result in losses greater than if such investment strategies had
not been used.
Use of put and call options could result in losses to the Fund,
force the sale or purchase of portfolio securities at an
inopportune time or for prices higher than (in the case of put
options) or lower than (in the case of call options) current
market values, or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions could result in
the Funds incurring losses as a result of the imposition
of exchange controls, suspension of
A-4
settlements or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails
certain special risks. In particular, the variable degree of
correlation between price movements of futures contracts and
price movements in the related portfolio position of the Fund
could create the possibility that losses on the hedging
instrument are greater than gains in the value of the
Funds position. In addition, futures and options markets
could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in
certain markets, the Fund might not be able to close out a
position without incurring substantial losses. Although the
Funds use of futures and options transactions for hedging
purposes should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time,
it will tend to limit any potential gain to the Fund that might
result from an increase in value of the position. There is,
however, no limit on the amount of the Funds assets that
can be put at risk through the use of futures contracts and
options thereon, an the value of the Funds futures
contracts and options thereon may equal or exceed 100% of the
Funds total assets. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing
potential financial risk than would purchases of options, in
which case the exposure is limited to the cost of the initial
premium and transaction costs. Losses resulting from hedging
will reduce the Funds net asset value, and possibly its
income, and the losses can be greater than if the hedging had
not been used.
When conducted outside the United States, hedging may not be
regulated as rigorously as in the United States, may not involve
a clearing mechanism and related guarantees, and will be subject
to the risk of governmental actions affecting trading in, or the
prices of, foreign securities, currencies and other instruments.
The value of positions taken as part of
non-U.S. hedging
also could be adversely affected by:
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other complex foreign political, legal and economic factors;
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lesser availability of data on which to make trading decisions
than in the United States;
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delays in the Funds ability to act upon economic events
occurring in foreign markets during non- business hours in the
United States;
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the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United
States; and
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lower trading volume and liquidity.
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Segregation
and Cover Requirements
Much of the hedging that the Fund may enter into is subject to
segregation and coverage requirements established by either the
CFTC or the SEC, with the result that, if the Fund does not hold
the instrument underlying the futures contract or option, the
Fund will be required to segregate on an ongoing basis with its
custodian cash, U.S. government securities or other liquid
debt obligations in an amount at least equal to the Funds
obligations with respect to such instruments. Such amounts will
fluctuate as the market value of the obligations increases or
decreases. The segregation requirement can result in the Fund
maintaining positions that it would otherwise liquidate and
consequently segregating assets with respect thereto at a time
when it might be disadvantageous to do so. The Fund will accrue
the net amount of the excess, if any, of the Funds
obligations over its entitlements with respect to each swap on a
daily basis, and it will segregate with a custodian an amount of
cash, U.S. government securities, or other liquid debt
obligations or liquid securities having an aggregate net asset
value at least equal the accrued excess.
Other
Limitations
The degree of the Funds use of hedging may be limited by
certain provisions of the Internal Revenue Code, see
Taxation, and other applicable laws in India.
A-5
APPENDIX B
REPUBLIC
OF INDIA
The information set forth in this Appendix B has been
extracted from various government and private publications. The
Fund, its Board of Directors, the Investment Manager and the
Country Adviser make no representation as to the accuracy of the
information, nor has the Fund or its Board of Directors
attempted to verify the statistical information presented in
this Appendix B. Furthermore, no representation is made
that any correlation exists between the Republic of India or its
economy in general and the performance of the Fund. Reference in
the text below to consecutive years (for example, 2007/2008)
means the fiscal year beginning April 1 of the first year listed
and ending March 31 of the second year listed.
THE
COUNTRY
Situated in Southern Asia between latitudes 8° 4 and
37° 6 north, longitudes 68° 7 and 97°
25 east, and covering an area of approximately
3.3 million square km, India is the seventh largest country
in the world. Bounded by the Himalayas in the north, it
stretches southwards into the Indian Ocean between the Bay of
Bengal to the southeast and the Arabian Sea to the west. India
is bordered by the Peoples Republic of China, Nepal and
Bhutan to the north, Pakistan to the west, and Myanmar and
Bangladesh to the east. Sri Lanka lies off its southern shores.
The Andaman and Nicobar Islands in the Bay of Bengal and the
Lakshadweep Islands in the Arabian Sea are also part of India.
India is the worlds second most populous country. The 2001
census estimated the total population of India to be
approximately 1.03 billion. This figure is projected to
increase to 1.19 billion by 2011 and 1.27 billion by
2016. Although migration from rural to urban centers has
increased steadily, Indias population remains
predominantly rural. The 2001 census reported that 72.2% of the
total population still lives in rural areas.
GOVERNMENT
India gained its independence from the United Kingdom in August
1947, and the Indian Constitution took effect on
January 26, 1950. India is a federal republic with certain
powers reserved for its twenty-nine states and six union
territories. The Indian Constitution separates the
responsibilities of the national and state governments and also
provides for the separation of executive, legislative and
judicial powers. It also delineates areas where the national and
state governments exercise joint jurisdiction.
The Indian Constitution vests legislative power in a bicameral
parliament consisting of the Lok Sabha (House of the
People) and the Rajya Sabha (Council of
States). The maximum strength of the Lok Sabha envisaged
by the Constitution is 552, which is made up by election of up
to 530 members to represent the States, up to 20 members to
represent the Union Territories and not more than two members of
the Anglo-Indian Community to be nominated by the President, if,
in his opinion, that community is not adequately represented in
the House. Lok Sabha members are directly elected in
single-member constituencies for a term of five years on the
basis of universal adult suffrage. The Indian Constitution
provides that the Rajya Sabha cannot consist of more than 250
members, twelve of whom are nominated by the president and the
remainder of whom are elected indirectly by representatives of
the states and union territories. Elected members of the Rajya
Sabha serve six-year terms, and one-third of its members stand
for election every two years.
The executive branch is headed by a president who, as the head
of state, exercises power under the Indian Constitution with the
advice of the Council of Ministers, which is headed by the prime
minister. The president is elected for five-year terms by an
electoral college, which consists of elected members of the
national and state legislatures. The president performs a
primarily ceremonial function. Executive power in practice
resides with the prime minister, who is responsible to the Lok
Sabha. The president appoints the prime minister, and the
president appoints other ministers on the advice of the prime
minister.
The highest appellate court is the Supreme Court of India. The
judicial system of India is primarily based on common law.
B-1
The system of state government closely resembles that of the
national government, with each state having a legislature,
governor, chief minister and a council of ministers. There are
twenty-nine states in India. India has an extensive system of
local government that reaches down to the municipality and
village level.
POLITICS
India is the largest democracy in the world. Since its
independence in 1947, the Congress (I) Party and its prime
ministers selected from its leadership have dominated politics
at the national level. Previous prime ministers of India
include: Jawaharlal Nehru (1947 to 1964); Lad Bahadur Shastri
(1964 to 1966); Indira Gandhi (1966 to 1977 and 1980 to 1984);
Morarajee Desai (1977 to 1979), Chaudhary Charan Singh (1979 to
1980); Rajiv Gandhi (1984 to 1989); V. P. Singh (1989 to 1990);
Chandra Shekhar (1990 to 1991) P.V. Narasimha Rao (1991 to
1996); H.D. Deva Gowda (1996 to 1997); I.K. Gujaral (1997
to 1998); Atal Bihari Vajpayee (1999 to 2004) and Manmohan
Singh (2004 to 2009). Following the Indian general elections
held in April and May of 2009, the United Progressive Alliance
led by Congress (I) Party has again formed the Indian
government under the leadership of Prime Minister Manmohan Singh.
The Congress (I) Party has historically represented a
secular, socialist platform. However, after the formation of
Prime Minister P.V. Narasimha Raos government in 1991, the
party changed its course and promoted private sector and
market-oriented reforms. These economic reforms have now
received broad-based support with the exception of left parties
and helped India accelerate its GDP growth.
India is one of the charter members of the United Nations and
its affiliated bodies and is a founding member of the
International Monetary Fund, the International Bank for
Reconstruction and Development, the Asian Development Bank and
the African Development Bank. India is also a member of the
British Commonwealth of Nations, the Non-Aligned Movement, the
South Asian Association for Regional Cooperation and the World
Trade Organization.
With the exception of Pakistan and China, Indias foreign
relations with its neighbor have generally remained stable.
India and China fought a major war in 1962. Thereafter the
relations between these two countries remained strained for
almost two decades. However, India and China in September 1993
agreed to pursue a negotiated settlement of the two
countries longstanding border dispute. Indias
external affairs minister visited China in June 1999, which
marked the resumption of high level dialogue, and both sides
agreed on the need for a bilateral security dialogue. Since
then, several high level exchanges have taken place between the
two counties. India and China have agreed to establish a
bilateral dialogue mechanism to fight terrorism and to
accelerate the process of clarification and confirmation of the
line of actual control along the India-China
boundary. The most recent visit by the Indian Prime Minister to
China was in January 2008. During this visit India and China
signed the document Shared Visions on the
21st Century and reached a broad consensus on further
pushing forward the Strategic Cooperative Partnership between
the two countries. The improvement in the Indo-China relations
has resulted in bilateral trade exceeding US$51 billion in
2008.
Indias relations with Pakistan have been tense for many
years. The two countries have fought three major wars since
their partition in 1947. The principal dispute between India and
Pakistan relates to the claim on the Indian border states of
Jammu and Kashmir. India fought two wars with Pakistan (from
1947-1948
and in 1965) in order to retain its control over Jammu and
Kashmir, and a third war with Pakistan in 1971 resulted in the
secession of Pakistans eastern province, which is now the
Peoples Republic of Bangladesh.
Relations between India and Pakistan have improved in the recent
past. In July 2001 Pakistans the then president Pervez
Musharraf sat down in Agra, India, with the then Indian prime
minister Atal Bihari Vajpayee for a historic peace summit, which
considerably thawed tensions over Kashmir, while not producing
an immediate breakthrough. In 2003, ambassadorial ties and land
and air-traffic ties were restored. The Indian cricket team
visited Pakistan in 2004 in yet another step toward the thawing
of relations between the two countries. On June 20, 2004,
both countries agreed to extend a nuclear testing ban and to set
up a hotline between their foreign secretaries aimed at
preventing misunderstandings that might lead to a nuclear war.
Indian Prime Minister Manmohan Singh and Pakistani President
Parvez Musharraf met and issued a joint statement in New York
City in September 2004. The joint statement reiterated the
commitment of both of the countries to the implementation of
confidence building
B-2
measures and the countries agreement that possible options
for a peaceful, negotiated settlement of the Kashmir issue
should be explored in a sincere spirit and purposeful manner.
This was followed by Pervez Musharrafs three day visit to
India in April 2005 where both countries restated their
commitment to the joint statement issued in New York City. The
re-opening of a series of transportation networks near the
India-Pakistan border, the most important of which were bus
routes and railway lines, further helped in improving relations
between the two countries. A new bus service between Amritsar,
India, and Nankana Sahib in Pakistan, the birthplace of founder
of Sikh religion Guru Nanak Dev, was started in March 2006. But
relations soured again after the 2008 Mumbai Terrorist Attacks
as India announced a pause in its bilateral dialogue
with Pakistan and there is no indication of when it might resume.
Relations with the United States have generally improved since
the breakup of the former Soviet Union. The visit by
U.S. President George W. Bush in February 2006 further
strengthened India-U.S. ties. India entered into an
agreement with the United States wherein the United States
agreed to share nuclear technology, fuel and expertise for
civilian nuclear energy. This deal was finally sealed on
October 20, 2008, when U.S. President George W. Bush,
certified, as required by the legislation, that
U.S. nuclear transfers to India is consistent with the
obligation of the United States under the Nuclear
Non-proliferation Treaty (NPT). Besides the nuclear
deal, the defense cooperation between the two countries has also
improved after signing of the
U.S.-India
Defense Framework Agreement of 2005. In 2008, there were four
army-to-army, two navy-to-navy and one major multinational air
force exercises held in which Indian and American servicepersons
participated. On the economic front,
U.S.-India
trade continues to expand as did U.S. foreign direct
investment into India and Indian direct investment into the
United States. However, there appears to be a clear disconnect
between India and the U.S. on the Doha round of world trade
talks.
THE
INDIAN ECONOMY
Overview
India decisively moved towards liberalization and market
orientation of the economy in 1991 following a severe balance of
payments crisis. The break from the past protectionist regime
was also evident in the reform policies of the eighties, but the
move in 1991 was more resolute. Indias economic progress
since it embarked on the reform process has been encouraging.
Whereas the average GDP growth in the 1990s (from
1993-94
onwards) was 6.1%, in the first eight years for the current
decade (up to
2008-09) it
has been around 7.6%. However, like other economies growth has
not been uniform. The lowest growth of the current decade was
recorded in
2002-03 at
3.8% and the highest in
2006-07 at
9.7%. Although due to the current global meltdown the GDP growth
during
2008-09 has
been estimated to be around 6.7%, lower than 9.0% recorded
during
2007-08, the
Indian economy is expected to recover during the second half of
2009-10.
Moreover, with the new government in place, economic growth is
expected to get a fillip as the stalled economic reform is back
on the governments priority list. Earlier in the current
decade, significant reforms initiatives were instituted, some of
which are:
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|
|
The Indian Electricity Act was passed in 2003 which aims at
introducing competition into the power sector.
|
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|
Passing of the Indian Fiscal Responsibility Act in 2003
(provides a legal and institutional framework for controlling
deficits and stabilizing debt) and subsequently enactment of
similar fiscal responsibility legislation by 26 States.
|
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|
Constitution of a regulatory body Pension Fund Regulatory
and Development Authority (PFRDA) in August 2003 to
oversee development and regulation of the pension sector in
India.
|
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|
|
Introduction of VAT from April 1, 2005 to replace sales tax
(as of now VAT has been introduced by all States/ UTs).
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Permission for Foreign Direct Investment (FDI) up to
26% and FII investment up to 23% (subject to no single investor
holding more than 5%) in Commodity Exchanges.
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|
Passing of the Special Economic Zones Act 2005 in June 2005 and
making SEZ Rules effective from February 10, 2006.
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B-3
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|
Launch of the Jawaharlal Nehru National Urban Renewal Mission
(JNNURM) in 2005 to encourage cities to initiate
steps to bring about improvement in the existing civic services
levels in a sustainable manner.
|
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Setting up of Petroleum & Natural Gas Regulatory Board
(PNGRB) in August 2006 to regulate the refining,
processing, storage, transportation, distribution, marketing and
sale of petroleum, petroleum products and natural gas.
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De-tariffing of the general insurance industry in 2007.
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Passing of Carriage by Road Act, 2007 in October 2007 to make
transport system transparent and modern.
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|
Passing of the Airport Economic Regulatory Authority Bill 2007
in October 2008 for setting up of Airport Economic Regulatory
Authority to regulate tariff and other charges for the
aeronautical services rendered at airports and to monitor
performance standards of airports.
|
At the time of the balance of payments crisis in 1991 foreign
currency assets of India were around
US$2.2 billion down to two weeks of imports.
Indias financial credibility was very low; commercial
borrowing was impossible; inflation was high; and an inflow of
foreign currency from non-resident Indians had been reversed.
The Indian economy has come a long way since then because of the
reform process. While it is true that, due to the increased
global integration, India can no longer be insulated from the
global crisis, the economy in general and the banking system in
particular, have withstood the global crisis well and continue
to be resilient. The foreign currency assets at present (mid-May
2009) are around US$244 billion enough to
support around 15 months of imports.
Following the reforms of the foreign investment regime India has
become a favored destination for foreign investment. Foreign
direct investment has been fairly stable. Despite the global
financial crisis, India attracted approximately
$31.7 billion of foreign direct investment during fiscal
year 2008-09
(until February 2009). This is $4 billion more than the
same period last year. However, due to the global financial
crisis net FII inflows and external commercial borrowings
have been adversely affected. The fiscal deficit has emerged as
a new worry lately. Although currency movement continues to be
volatile, this is expected to be so when it is largely market
determined and global financial market is passing through a
crisis.
Overall, India seems to have withstood the global financial
crisis remarkably well compared to a number of other countries.
With further reforms on cards, the medium term outlook for the
Indian economy remains promising.
Gross
Domestic Product
GDP
Growth
Average yearly real GDP growth from
2000-01 to
2008-09 was
7.2% and in the last three years
(2006-07 to
2008-09), it
averaged 8.5%. The growth momentum that began in
2003-04
continued till
2007-08. The
average annual growth rate of 9.4% between
2005-06 and
2007-08 is
the highest ever achieved in India. However, high commodity
prices and the global financial meltdown have slowed the growth
momentum in
2008-2009.
The Indian government estimates real GDP to grow at 6.7% in
2008-09 with
agriculture, industry and services growing at 2.6%, 4.8% and
9.6% respectively.
B-4
The following table sets forth changes in Indias GDP for
the period
2000-01
through
2008-09:
Changes
in Gross Domestic Product(a)
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GDP (Absolute Values)
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% Change Over Previous Year
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Current
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1999/2000
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Current
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1999/2000
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|
Year
|
|
Prices
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|
Prices
|
|
|
Prices
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Prices
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|
(Rs. billion)
|
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2000/2001
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19,250
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18,643
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7.8
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|
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|
4.4
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|
2001/2002
|
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|
20,977
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|
|
|
19,726
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|
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9.0
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|
|
|
5.8
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|
2002/2003
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22,614
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|
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|
20,483
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7.8
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|
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3.8
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2003/2004
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25,382
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|
22,228
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|
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|
12.2
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8.5
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|
2004/2005
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28,777
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23,888
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|
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|
13.4
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|
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7.5
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|
2005/2006
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32,824
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26,161
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|
14.1
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9.5
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2006/2007(b)
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37,794
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28,711
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|
15.1
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9.7
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2007/2008(c)
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43,209
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|
31,297
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|
14.3
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|
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9.0
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2008/2009(d)
|
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49,332
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|
33,393
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14.2
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6.7
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Note
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(a) |
|
At factor cost |
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(b) |
|
Provisional |
|
(c) |
|
Quick estimate |
Source:
Central Statistical Organization Data
Composition
of GDP
Agriculture has been the largest historical contributor to GDP.
However, gradually its importance declined as Indian economy has
progressively depended less on agricultural output and more on
the manufacturing and services sectors.
Sectoral
Distribution of Gross Domestic Product (% of total
GDP)
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|
|
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|
|
|
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|
|
|
|
|
|
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Financing,
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Community,
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Agriculture,
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Electricity, Gas
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Trade, Hotels,
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Insurance, Real
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Social and
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Forestry and
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Mining and
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and Water
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Transport and
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Estate & Business
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Personal
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Fishing
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Quarrying
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Manufacturing
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Supply
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Construction
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Communication
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Services
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|
services
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1951/52 to 1955/56
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54.65
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|
1.5
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9.29
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|
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0.36
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4.44
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|
11.43
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7.55
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|
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|
10.39
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1956/57 to 1960/61
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51.61
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|
|
1.55
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|
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|
10.53
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0.5
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5.14
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|
12.58
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|
7.27
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10.38
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1961/62 to 1965/66
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46.39
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|
|
|
1.82
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|
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|
12.33
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|
|
0.75
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|
6.02
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|
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|
14.12
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|
|
|
7.04
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|
11.11
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1966/67 to 1970/71
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43.55
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1.9
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|
12.64
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|
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|
1.06
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7.03
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14.83
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6.97
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12.04
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1971/72 to 1975/76
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41.84
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|
1.81
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|
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13.26
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1.27
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6.25
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|
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|
15.53
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7.18
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|
12.69
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|
1976/77 to 1980/81
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38.56
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1.9
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|
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|
14.09
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|
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1.54
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6.48
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17
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7.5
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|
12.63
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|
1981/82 to 1985/86
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36.47
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2.23
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|
14.37
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|
1.77
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|
6
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17.79
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|
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|
8.35
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|
13.02
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|
1986/87 to 1990/91
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32.3
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|
|
|
2.5
|
|
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|
14.81
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|
|
|
2.1
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|
|
|
5.85
|
|
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|
18.47
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|
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|
10.1
|
|
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13.86
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|
1991/92 to 1995/96
|
|
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29.58
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|
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|
2.59
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|
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|
14.84
|
|
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|
2.43
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5.86
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|
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|
19.17
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|
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|
11.83
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|
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|
13.7
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|
1996/97 to 2000/01
|
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25.72
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|
2.37
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|
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|
15.5
|
|
|
|
2.47
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|
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5.61
|
|
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|
21.39
|
|
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|
12.65
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|
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|
14.27
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|
2001/02 to 2004/05
|
|
|
21.84
|
|
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|
2.22
|
|
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|
15.02
|
|
|
|
2.32
|
|
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|
6.1
|
|
|
|
24.52
|
|
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|
13.47
|
|
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|
14.52
|
|
2005/06 to 2008/09
|
|
|
18.11
|
|
|
|
2.02
|
|
|
|
15.04
|
|
|
|
2.07
|
|
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|
7.18
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|
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|
27.56
|
|
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|
14.39
|
|
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|
13.60
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|
Source: National Accounts Statistics, 2009
B-5
Growth rates of the various economic sectors (measured in
1999-2000
prices) for the period
2000-01 to
2008-09 are
set forth below:
Growth in
GDP by Sector (% annual real change)
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Agriculture,
|
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Manufacturing,
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Forestry,
|
|
|
Construction,
|
|
|
|
|
|
Financing,
|
|
|
Community,
|
|
|
|
|
|
|
Fishing,
|
|
|
Electricity, Gas
|
|
|
Trade, Hotels,
|
|
|
Insurance, Real
|
|
|
Social and
|
|
|
|
|
|
|
Mining and
|
|
|
and Water
|
|
|
Transport and
|
|
|
Estate & Business
|
|
|
Personal
|
|
|
|
|
|
|
Quarrying
|
|
|
Supply
|
|
|
Communication
|
|
|
Services
|
|
|
Services
|
|
|
Total GDP
|
|
|
2000/2001
|
|
|
0.0
|
|
|
|
6.8
|
|
|
|
7.3
|
|
|
|
4.1
|
|
|
|
4.7
|
|
|
|
4.4
|
|
2001/2002
|
|
|
5.9
|
|
|
|
2.8
|
|
|
|
9.2
|
|
|
|
7.3
|
|
|
|
4.1
|
|
|
|
5.8
|
|
2002/2003
|
|
|
(5.9
|
)
|
|
|
6.9
|
|
|
|
9.4
|
|
|
|
8.0
|
|
|
|
3.9
|
|
|
|
3.8
|
|
2003/2004
|
|
|
9.3
|
|
|
|
7.8
|
|
|
|
12.0
|
|
|
|
5.6
|
|
|
|
5.4
|
|
|
|
8.5
|
|
2004/2005
|
|
|
0.8
|
|
|
|
10.5
|
|
|
|
10.7
|
|
|
|
8.7
|
|
|
|
6.8
|
|
|
|
7.5
|
|
2005/2006
|
|
|
5.7
|
|
|
|
10.7
|
|
|
|
12.1
|
|
|
|
11.4
|
|
|
|
7.1
|
|
|
|
9.5
|
|
2006/2007(a)
|
|
|
4.4
|
|
|
|
11.2
|
|
|
|
12.8
|
|
|
|
13.8
|
|
|
|
5.7
|
|
|
|
9.7
|
|
2007/2008(b)
|
|
|
4.7
|
|
|
|
8.5
|
|
|
|
12.4
|
|
|
|
11.7
|
|
|
|
6.8
|
|
|
|
9.0
|
|
2008/2009(c)
|
|
|
1.80
|
|
|
|
3.9
|
|
|
|
9.0
|
|
|
|
7.8
|
|
|
|
13.1
|
|
|
|
6.7
|
|
Note
|
|
|
(a) |
|
Provisional |
|
(b) |
|
Quick estimate |
Source:
Central Statistical Organization Data
Inflation
Inflation in India decreased over the past several years due to
adequate food stocks, adequate foreign exchange reserves and a
stronger rupee in an environment of subdued global inflationary
expectations. The monetary policy also contained inflationary
expectations.
The average inflation based on the wholesale price index
(WPI) stood high at 7.6% for the period
1991-92 to
2000-01 and
inflation based on consumer price index for industrial workers
(CPI-IW), for the same period, soared at 8.7%.
However, for the period
2001-02 to
2007-08,
average WPI-inflation eased to 4.8%, and CPI-inflation also
stood at the same level, that is, 4.8%. But the unprecedented
spurt in crude prices during the first half of
2008-09, led
to the record high prices of fuel and commodities across the
world, with India being no exception. As a result, headline
inflation shot up to 12.8% in August 2008. Thereafter, the
global economic crisis that followed the collapse of financial
markets in major developed economies resulted in easing of
demand conditions and the prices started falling sharply. Indian
inflation fell to a near three-decade low of 0.8% in March 2009.
On an average, inflation based on WPI and CPI was recorded at
8.4% and 9.1% respectively for the year
2008-09.
The following table gives the annual rate of inflation during
the period from
2000-01 to
2008-09:
Annual
Rates of Inflation (% change over previous year)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on:
|
|
200001
|
|
|
200102
|
|
|
200203
|
|
|
200304
|
|
|
200405
|
|
|
200506
|
|
|
200607
|
|
|
200708
|
|
|
200809
|
|
|
WPI
|
|
|
7.2
|
|
|
|
3.6
|
|
|
|
3.5
|
|
|
|
5.4
|
|
|
|
6.5
|
|
|
|
4.4
|
|
|
|
5.4
|
|
|
|
4.7
|
|
|
|
8.4
|
|
CPI-IW
|
|
|
3.8
|
|
|
|
4.3
|
|
|
|
4
|
|
|
|
3.9
|
|
|
|
3.8
|
|
|
|
4.2
|
|
|
|
7
|
|
|
|
6.2
|
|
|
|
9.1
|
|
Source: Ministry of Industry and Ministry of Labour
B-6
Industry
The strategy of Indian industrialization was government
dependent prior to 1990. It emphasized heavy, public ownership
and import substitution. The governments import
substitution policies led to the development of a large
industrial base, which produced, among other items, capital
goods and components, cement, steel, consumer durables and also
consumer products. While this policy did result in impressive
industrial growth during the decades of the fifties and sixties,
its inadequacy became apparent during the seventies and eighties.
The Indian government introduced a new industrial policy in 1991
that was designed to promote industrial expansion by having
greater participation of the private sector. The new industrial
policy abolished the licensing system for industrial activity
with the exception of fifteen strategic industries, which
included defense equipment, aerospace and petroleum. In
addition, since 1991, the Indian government has permitted the
private sector to participate in industrial activity relating to
the core and basic sectors of the economy (i.e.,
electricity, coal, petroleum, petroleum refining, steel and
cement), which were previously reserved for the public sector
enterprises only.
The following table sets forth changes in the Index of
Industrial production, which is an index that measures the
growth of industrial activity in the Indian economy:
Annual
Percentage Growth Rates in Major Sectors of Industry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
|
|
|
Manufacturing
|
|
|
Electricity
|
|
|
General
|
|
|
Weighting(a)
|
|
|
104.73
|
|
|
|
793.58
|
|
|
|
101.69
|
|
|
|
1000
|
|
2000/2001
|
|
|
2.84
|
|
|
|
5.35
|
|
|
|
3.97
|
|
|
|
5.02
|
|
2001/2002
|
|
|
1.26
|
|
|
|
2.85
|
|
|
|
3.1
|
|
|
|
2.69
|
|
2002/2003
|
|
|
5.8
|
|
|
|
6.01
|
|
|
|
3.22
|
|
|
|
5.78
|
|
2003/2004
|
|
|
5.28
|
|
|
|
7.38
|
|
|
|
5.04
|
|
|
|
6.98
|
|
2004/2005
|
|
|
4.38
|
|
|
|
9.13
|
|
|
|
5.15
|
|
|
|
8.37
|
|
2005/2006
|
|
|
1.01
|
|
|
|
9.15
|
|
|
|
5.16
|
|
|
|
8.16
|
|
2006/2007
|
  |