A research study conducted by Capital MSL, MSLGROUP's UK-based financial communications consultancy. Featuring views of institutional investors about investing in Indian companies. Study conducted in partnership with the London Stock Exchange.

1. India Investment Study
June 2011

2. Introduction
Capital MSL and the London Stock Exchange undertook a research study of international
institutional investor attitudes towards investing in India and Indian companies. The aim of the
survey was to research the views of fund managers from blue chip institutions in Europe that
invest in emerging markets.
This research was conducted ahead of two major conferences hosted in June by the London Stock
Exchange in Mumbai and New Delhi for Indian companies interested in understanding how to raise
capital domestically and abroad.
We hope you find the following study informative.
Richard Campbell & Nick Bastin Tracey Pierce
Director of Equity Primary Markets
Capital MSL London Stock Exchange Group
+44 207 307 5330 +44 207 7797 4152
www.capitalmsl.com www.londonstockexchangegroup.com
About Capital MSL
Capital MSL is an international strategic communications consultancy that delivers advice to
many of the world’s leading businesses and financial institutions, often during critical stages in
their development.
The foundation of our success is the quality of the long term relationships that we nurture
with our clients, our staff and the intermediaries that impact an organisation’s reputation.
We lead the industry in client and staff retention.
We are committed to senior advice, and combine deep sector knowledge with a thorough
understanding of capital markets.
Part owned by the management team, we are majority owned by MSLGROUP, Publicis
Groupe’s flagship specialist communications, PR and events network.
MSLGROUP is the world’s fifth biggest PR firm, with 2,500 communications professionals in
22 countries, including in every major capital market.
Our sister company, Hanmer MSL, is one of India’s largest communications firms.
We build corporate reputations that are envied, in sectors that we know and understand.
Our teams deliver innovative, bespoke solutions, across a diverse set of stakeholders, that
address the communications demands of organisations, both large and small.
Our capabilities are broad, and range from helping to build corporate reputations to
employee and capital market communications, including M&A and IPO support.
Together with our client Essar Energy, Capital MSL was recently awarded the UK’s Chartered
Institute for Public Relations (CIPR) Excellence Award in Investor Relations for our work advising
Essar Energy on its May 2010 $1.9bn IPO on the London Stock Exchange.
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3. Summary
India unquestionably remains of significant interest to foreign investors. While there are some
short term issues, such as inflation and rising interest rates, the longer term picture is recognised
as being very strong.
The key findings of the research are:
Top market: 23% of participants gave India and Brazil the most positive ratings as an
investment destination relative to their emerging market peers. China was in third place
with 20%.
Strong outlook: The overwhelming majority of investors remain confident in the Indian
growth story in the longer term, with 73% of investors very confident in respect of India’s
outlook in 12-18 months time. However, the short term picture is less positive, with only 5%
of respondents being very confident of the picture for the next six months, pointing to
concerns over the inflation outlook and interest rates.
Investors believe that, despite these issues at play, Indian corporates will continue to
perform well and record strong growth.
Macro criteria: When looking at India as an investment destination, 17% of investors cited
inflation and corporate valuation as the most important investment criteria, with GDP
growth and regulation cited by 14% and 11% of investors respectively.
Company specific factors: Investors rated corporate governance, disclosure and
transparency equally, with 15% of top ratings each, as the most important considerations
when making an investment decision in an Indian company. These were followed closely by
management access (14%), regulation (13%) and liquidity (12%).
Sectors: Consumer industries (14% of top ratings), financial services (12%), infrastructure
(11%) and technology (9%) were highlighted as the most attractive sectors, although power
(7%) and renewable energy (7%), if combined, would have ranked joint first.
Horizon: 67% of investors said that a one to three year period is the preferred term for
holding investments. This was usually determined by a combination of factors, including
investment policy, long term return potential and tax considerations. However, 29% said
their time horizon was in excess of three years: a sign of commitment to, and confidence in,
the Indian market.
Access: 46% of those surveyed access the Indian market through the domestic exchange, due
to the liquidity available. However, a number cited regulatory constraints as a hindrance,
and 24% of respondents prefer to invest through the London Stock Exchange and a further
24% through depositary receipts and / or participatory notes.
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4. While the research does show that Indian companies could make improvements that would make
them even more attractive to foreign institutional investors, these are eminently resolvable.
Those areas highlighted by investors include corporate governance, financial reporting and
transparency and access to management:
Reporting standards and transparency
Respondents were keen to stress the importance of adequate reporting and the following of best
practice standards by Indian companies.
“I would like to reiterate the importance of reporting standards, which is a hindrance at
the moment. We are taking a wait and hold policy, watching progress on this. There is a
lot of capital on the sidelines that could potentially find its way if this is addressed.”
“India must improve institutions, governance, regulation & reporting before its
companies can be taken seriously.”
The need for improved corporate governance…
“India is strangled by a public sector that is too big. This encourages
conglomerates and discourages transparency.”
“We need to see better corporate governance and better alignment with minority
shareholders.”
…and more frequent interaction with management
All survey respondents agreed that better exposure is required to Indian companies – of all sizes
and from all sectors – to improve understanding and access to these businesses.
“We believe that better roadshows need to be held, whether in London or in India,
to give investors wider exposure to Indian companies of all sectors and sizes.”
Is summary, the picture for listed Indian corporates is bright. There is significant interest from
international investors that could be converted into capital to fund India’s continued growth and
the London Stock Exchange remains an attractive market for Indian companies looking to raise
money – either through main market listings or depositary receipts. While there are areas where
Indian companies need to improve their interaction with investors, these are easily
surmountable.
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5. Detailed investor feedback
Investors were asked a series of questions about access, confidence in India, concerns and areas
of interest. Almost all investors were currently invested in India and had a good knowledge of the
Indian market.
Below is an analysis of the survey findings broken down according to the questionnaire. Verbatim
comments from respondents are included in italics. To show an accurate picture of the strength
of views, we have also shown the conviction of investors by including the percentage of total
respondents that gave a 4 or 5 rating from the response scale. Not every investor answered every
question.
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6. Access
1. What is your preferred route of investing in emerging market / Indian companies?
Almost half of the investors surveyed (46%) access the Indian market through the domestic
exchange due to the liquidity available. However, a number of respondents cited this as a
hindrance due to regulatory constraints. 24% prefer to invest in India through ordinary shares of
companies / investment vehicles listed on the London Stock Exchange and an equal number
through depositary receipts or participatory notes.
46%
24% 24%
5%
Investing directly Through ordinary shares Through ordinary shares Through Depositary
through ordinary shares of companies / of companies / Receipts or Participatory
of companies on investment vehicles investment vehicles Notes
domestic exchanges listed on the London listed on the other
Stock Exchange exchanges
“It is often easier to invest in local markets and exchanges, which opens more
options and access to companies.”
“We prefer to go where the liquidity is, for India this is through domestic
exchanges and hence that currently tends to be the preference to invest through.”
Almost half of the respondents (48%) stated a preference to invest in India through companies
listed on the London Stock Exchange or through Depositary Receipts or Participatory Notes.
“We would prefer to invest in Indian companies and access investment in India
through listings on the London Stock Exchange.”
“It must be said that reporting standards at Indian companies leave a lot to be
desired and prove a hindrance. Access is also difficult and takes time to open the
market. We would hope to see a lot more of Indian companies come to London in
the near future.”
Just 5% expressed an interest in investing through ordinary shares of companies / investment
vehicles listed on other exchanges.
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7. Sentiment
2. As a firm, what is your overall sentiment towards India in the near and long term?
The overwhelming majority of investors (73%) remain confident in the Indian growth story in the
longer term. However, in the short term there is concern regarding the macro outlook – with
respondents citing rising inflation and interest rates.
90%
80%
70% 18%
60%
50%
40% 73%
9%
30% 63%
20%
32%
10%
5%
0%
Very confident Somewhat confident Neutral
6 months 12 - 18 months
“We are positive towards the longer term.”
“Longer term we are seeing some head winds and expect the market to improve
further.”
“We remain positive towards India despite the recent volatility – the long
term story is strong.”
63% of investors still remain “somewhat confident” towards India in the short term, while 32%
chose “neutral” as their response. Notably, a number of respondents voiced caution on the
recent volatility and developments in India, saying that they have revised their outlook, but
believe that the long term story remains robust.
“At the macro level, India is still among the best. Indian companies are witnessing
real economic growth and strong performance despite rising inflation.”
Investors believe that despite the macro issues at play, Indian corporates continue to perform
well and record strong growth: nearly three quarters of survey respondents remaining buoyant on
India in the next 12-18 months.
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8. 3. How has this changed in the past six months?
An equal number of investors (39%) stated that they had become more cautious over the past six
months or their views on the Indian market remained unchanged. About a fifth (22%) of
respondents, however, recorded a more positive outlook.
“We have become more cautious towards emerging markets, including India. The
macro picture looks cloudy at the moment. However, we are confident that Indian
corporates are charting the waters comfortably.”
45%
40%
35%
30%
25% 39% 39%
20%
15% 22%
10%
5%
0%
Increased Decreased No change
“We believe the whole market has moved from being optimistic to being more
cautious. There are interest rate concerns.”
“We are concerned about inflation as well as interest rates, which have been
rising.”
“India has had a good run in the past 18 months, so we expect a correction.
Commodity fears also add to our caution.”
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9. 4. As an investment destination, please rate the following markets.
In terms of the relative attractiveness of India, it was ranked the highest alongside Brazil by the
investors surveyed. 23% of participants gave India and Brazil the most positive ratings (a rating of
four or five, on a scale of one to five, where one is low and five is high) as an investment
destination relative to their emerging market peers, with China in third place with 20%.
India 23%
Brazil 23%
China 20%
Indonesia 10%
Turkey 8%
Russia 8%
Frontier markets 7%
Middle East 2%
0% 5% 10% 15% 20% 25%
% of respondents who gave a 4 or 5 rating
India
Brazil
China
Indonesia
Turkey
Russia
Frontier markets
Middle East
0% 20% 40% 60% 80% 100%
1 2 3 4 5
Scale from 1 to 5, where 1 is low and five is high
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10. Investment considerations
5. When investing in India, how important are the following criteria?
When looking at India as an investment destination, 17% of investors cited inflation and corporate
valuation as the most important investment criteria, followed by GDP growth and regulation
which were cited by 14% and 11% respectively by those surveyed.
Valuation 17%
Inflation 17%
GDP growth 14%
Regulation 12%
Liquidity 11%
Political risk 9%
Currency stability 7%
Quality of research 7%
Volatility 6%
0% 5% 10% 15% 20%
% of respondents who gave a 4 or 5 rating
While political risk and currency stability were not high on the agenda with respect to India,
valuation was, and a number of investors were of the view that “Indian stocks are overpriced”
and “India is an expensive market.”
Concerns around rising inflation in India continue to dominate investor attitudes with inflation
ranking closely with valuation as the primary concern.
A few investors also highlighted the hindrances regulatory requirements pose in accessing the
Indian stock market. These investors stated that they prefer investing in Indian companies listed
in London and access exposure to India through depositary receipts.
“Indian stocks are overpriced, it is an expensive market.”
“We would like to have access to the market, but this is a headache to get the
requisite licenses etc. We prefer to invest in companies listed in London and
through DRs and ADRS.”
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11. 6. When making an investment in an Indian company, how would you rate the following
considerations?
Investors cited corporate governance (15% of top ratings), disclosure (15%) and transparency
(15%) as the most important considerations when making an investment decision in an Indian
company. This is followed closely by management access (14%), regulation (13%) and liquidity
(12%).
Corporate governance 15%
Disclosure 15%
Transparency 15%
Management access 14%
Regulation 13%
Liquidity 12%
Investor relations 8%
Financial communications 7%
Dividend yield 0%
0% 2% 4% 6% 8% 10% 12% 14% 16%
% of respondents who gave a 4 or 5 rating
Corporate governance
Transparency
Disclosure
Management access
Regulation
Liquidity
Investor relations
Financial communications
Dividend yield
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
1 2 3 4 5
Scale from 1 to 5, where 1 is low and five is high
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12. Corporate governance, disclosure and transparency remain top of mind and the most critical
evaluating criteria when fund managers are making an investment decision. A number of
respondents stressed the need for better reporting by Indian companies.
Disclosure was highlighted as an area for potential improvement, but it was acknowledged that a
lot of good work is already done by the larger companies and that this just needs to continue to
develop.
“Reporting standards can be quite weak for Indian companies.”
“Reporting by companies is usually inversely proportional – with big companies
having better structures in place in comparison to smaller ones that report
inadequately.”
“Reporting is an important consideration.”
“Quality of financial disclosure is very important.”
Management access ranked highly. Investors stressed the need to meet with management before
making an investment decision. Furthermore, they also added that, on average, meetings with
management in London or the home country are necessary at least twice a year.
“Management access is always poor and an issue. We like to meet management at
least two to three times a year.”
“Compared to other emerging markets, there is poor access to management at
Indian companies.”
On the issue of dividend yield, this was ranked as a low priority by a majority of investors
receiving a ranking of 1to 3 on a scale of 1 to 5, where 1 is low and 5 high. While this may not be
totally surprising, given the nature of a fast growing market like India, where share price
appreciation is typically the focus, two investors did comment that Indian companies are not on
par with other emerging markets in respect of dividend policy and payout.
“India ranks worst in almost any emerging markets on the matter of dividend
yield. I believe this is its greatest failing.”
“Dividend yield is an issue. India’s atrocious policies on this are in stark contrast
to those of other emerging markets, especially Brazil and Chile, where they have
good payout ratios.”
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13. 7. Investment prospects by sector
Consumer industries (14% of top ratings), financial services (12%), infrastructure (11%) and
technology (9%) were highlighted as the most attractive sectors, although power (7%) and
renewable energy (7%), if combined, would have ranked joint first.
Consumer industries 14%
Financial 12%
Infrastructure 11%
Technology 9%
Renewable energy 7%
Power 7%
Healthcare 7%
Industrials 6%
Oil & gas 5%
Metals and mining 5%
Telecommunications 5%
Transport 5%
Leisure 2%
Real Estate 2%
Utilities 1%
0% 5% 10% 15%
% of respondents who gave a 4 or 5 rating
Consumer industries
Financial
Infrastructure
Technology
Renewable energy
Power
Healthcare
Industrials
Oil & gas
Metals and mining
Telecommunications
Transport
Leisure
Real estate
Utilities
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
1 2 3 4 5
Scale from 1 to 5, where 1 is low and five is high
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14. 8. For what length of time do you usually hold Indian company investments?
67% of investors said that a one to three year period is the preferred term for holding
investments. This was usually determined by a combination of factors, including investment
policy, long term return potential and tax considerations. However, 29% said their time horizon
was in excess of three years.
70%
60%
50% 67%
40%
30%
20% 29%
10%
5%
0%
Under 12 months 1 – 3 years Over 3 years
“We give management time to deliver results and the market to appreciate and
correctly value it.”
“We hold if the investment is performing in line with expectations.”
“The generation of cash flows as expected, relative valuation and no “accidents”
are all considerations for the length of tenure.”
“The four things that matter to us are quality, value, change and valuations –
these are the criteria we use in determining the term of an investment.”
“We have a buy and hold approach, and invest for over five years. We don’t take
these investments lightly.”
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15. Methodology
The London Stock Exchange and Capital MSL conducted the research survey amongst key
emerging market investors located in Europe to gauge current perceptions of investing in Indian
companies from an equity investment perspective.
The survey consisted of an online, quantitative survey and a number of telephone interviews with
fund managers.
A total of 30 fund managers participated in the survey which was conducted on an anonymous
basis.
The survey was undertaken in May and June 2011.
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16. Capital MSL
81 Whitfield Street
London
W1T 4HG
Tel: +44 (0)20 7307 5330
Fax: +44 (0)20 7307 5331
www.capitalmsl.com
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