Mutual Fund CONTENTS

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1 Mutual Fund Annual Report March 31, 1998 Registered Office : Corporate Office : 125, Free Press House, Nariman Point, Bombay , India. Sakhar Bhavan, 1st Floor, 230 Backbay Reclamation, Nariman Point, Bombay Telephone : (91-22) Facsimile : (91-22) CONTENTS Chairman s letter to the unitholders... 2 Report of the Chairman of the Trustee Company... 3 Templeton India Growth Fund Report of the Principal Portfolio Manager... 6 Auditors Report... 8 Balance Sheet... 9 Revenue Account Notes to the Financial Statements Industry and Company Particulars Historical per unit Statistics Templeton India Income Fund Report of the Portfolio Manager Auditors Report Balance Sheet Revenue Account Notes to the Financial Statements Industry and Company Particulars Historical per unit Statistics Unitholder Information

2 CHAIRMAN'S LETTER TO THE UNITHOLDERS Dear Investor, Franklin Templeton, a global fund management company, is dedicated to continually expanding the scope of its business, while maintaining its commitment to top quality service and outstanding long-term results. We believe the future belongs to organisations, that have the resources to invest globally and service locally. In continuation of that endeavour, we set up an office in India, in 1995, to offer mutual fund products to Indian citizens. I am pleased to inform you that the Indian office has made significant progress in a short time. We believe that investors differ in their investment needs based on their personal financial goals. To help investors towards achieving their long, medium and short-term financial goals, we have launched Templeton India Growth Fund (TIGF), an equity fund for long-term capital appreciation, and Templeton India Income Fund (TIIF), a fixed income fund to provide regular returns over the medium-term and hope to soon launch Templeton India Liquid Fund (TILF), a high liquidity income fund to meet short-term needs. We have established representative offices at Bangalore, Delhi and Chennai, in addition to our office in Mumbai, to further enhance our service to investors and distributors. During the past two years, we continued in our efforts at creating awareness about the benefits of long-term savings and the fundamentals of mutual funds amongst the Indian public and worked closely with the distributors to empower them to provide improved financial planning advice to clients. We are pleased to report that Franklin Resources Inc., the holding company of the Franklin Templeton Group, based at California, USA, has continued to enjoy strong financial results over the past year. During the year ending 1997, total assets under management grew from $ billion (Rs.5,91,240 crores) to $ billion (Rs.8,81,400 crores). The Net profit climbed to $ million (Rs.1,693 crores) from $ million (Rs.1,227 crores). Our worldwide employee count grew to 6,400 from 4,900 a year earlier was a banner year for the global activities of the Franklin Templeton group. We made significant strides in developing distribution of investment management products and services in markets outside the US, especially for the Templeton emerging markets team. In the last year, nine new analysts joined the emerging markets team and new offices were opened in Brazil, the United Arab Emirates and Japan. The emerging markets team won a string of awards from various international organisations to add to the many received in previous years including the award from Portfolio International s European Independent Financial Advisers Network (EIFAN), Moneywise, Investment Week and Micropal. Our success depends upon our dedicated employees and their commitment to providing quality investment products and a high level of service. Markets are unpredictable but the quality of our people and their efforts are not. Thank you for your continued support for our products in India. Date : April 9, 1998 Sincerely, Charles E. Johnson 2

3 REPORT OF THE TRUSTEE Dear Investor, It is our pleasure to present you the second Annual Report of Templeton Mutual Fund for the year ending March 31, During the past year, we continued to witness structural changes taking place in the Indian Capital Markets. While the South East Asian currency crisis and the continued political uncertainty led to an erratic performance of the stock market in India, there have been a series of important positive policy decisions taken by the government towards further financial sector reforms, including the opening up of markets to FII debt funds, the report on capital account convertibility and the recent RBI guidelines on Non-Banking Finance Companies. However, we believe that it is important for investors at all times to remember that even though the markets move up and down, and mixed in with good years can be some bad years, as an investor - one should expect such fluctuations as realities of the market, and should continue to keep sight of one s financial goals and maintain a long-term perspective towards one s investments. We believe that investors differ in their investment needs based on their personal financial goals. To help investors towards achieving their long and medium-term goals, we currently offer two funds, namely Templeton India Growth Fund (TIGF), an open end fund for long-term capital appreciation and Templeton India Income Fund (TIIF), an open end fixed income fund suitable to meet medium-term financial goals. We also hope to soon launch Templeton India Liquid Fund (TILF), a high liquidity income scheme to help investors towards meeting their short-term needs. During the past year, we continued in our efforts to enhance our service to the investors and even designed a new approach towards the pricing of our products, that reflects our deep understanding of our clients and their needs. Meanwhile, we continue to be encouraged by the participation of new investors in Templeton funds. The total assets under management of Templeton Mutual Fund as of March 31, 1998 is Rs million as compared to the assets under management of Rs million as on March 31, 1997, resulting in a growth of Rs million in the assets during the year. The reports of the portfolio managers reviewing the performance and describing the future outlook of both TIGF and TIIF forms part of this Annual Report. The Balance Sheet as on March 31, 1998 and the Revenue Account for the period ending March 31, 1998 for both TIGF and TIIF are annexed to this report. We are pleased to inform you we have declared a dividend of 15% on the face value of Rs.10/-, for the year ending March 31, 1998, under the Dividend Plan of TIIF. With a view to improve the efficiency of the business operations of the AMC, Templeton has invested in technology and systems to support a business with national and global reach. We have also increased the share capital of the Trustee Company and inducted a full time employee to help the Trustee Company discharge its functions effectively. With the implementation of revised SEBI Mutual Funds Regulations, 1996, Securities and Exchange Board of India (SEBI) has introduced further measures to ensure that Mutual Funds operations are carefully monitored and the quality of disclosures are further improved. Templeton continued to play a key role in the development process of the Mutual Fund industry through its 3

4 efforts at creating awareness among investors about the benefits of investing through mutual funds and also by serving on various committees set up by SEBI and the Association of Mutual Funds in India (AMFI). Templeton Mutual Fund thanks the Government of India, the Securities and Exchange Board of India and the Reserve Bank of India for their guidance and support during the past year. We are also thankful to the Fund s Custodian, Registrar and Transfer Agents and Banks for their valued support. We are optimistic about the future of the mutual fund industry in India and assure you of our best services of all times. Date : April 9, 1998 Yours sincerely, Templeton Trust Services Pvt. Ltd. Samuel J. Forester Jr. Chairman 4

5 TEMPLETON INDIA GROWTH FUND (TIGF) 5

6 TEMPLETON INDIA GROWTH FUND REPORT OF THE PRINCIPAL PORTFOLIO MANAGER Introduction It is a pleasure to bring you the Second Annual Report for the Templeton India Growth Fund. During the past year, the assets under management have grown from Rs million as on March 31, 1997 to Rs million as on March 31, Of the current assets under management, Rs million has been invested in equities representing 79.4% of the total assets. The remaining assets have been invested in call money and short-term deposits. The equity portfolio comprised of 37 companies spread over 15 industry sectors. Banks & Financial Institutions represented the largest individual sector exposure with 17.37% of total equities. The other significant industry exposures, each accounting for around 10% of total equities, were automobiles, refineries, chemicals, telecommunications and diversifieds. The NAV as on March 31, 1998 was Rs Politics, Markets and Economy The year which began rather eventfully with the fall of the United Front led by Deve Gowda continued to witness uncertainty with the fall of the Gujral government and the announcement of general elections. As widely expected, the elections threw up a rather fractured mandate with no party having a clear majority. The BJP & its allies have however, managed to form the government at the centre, albeit with a waferthin majority. The political uncertainty had its effect on the market which exhibited a volatile behaviour for most of the period. April-June witnessed a strong upsurge in share prices, the BSE Sensex rising nearly 30% from the lows in March and finally peaking in early August, 1997 at 4500 levels. In addition to strong buying support from local institutions and investors, strong FII inflows of nearly US$ 1 billion during this period also contributed to the sharp rise in the share prices. As evidence of the economic slow-down became more visible, the stock markets maintained a declining trend further aggravated by the South East Asian currency crisis and the fall of the government at the centre towards the close of the year. The markets have subsequently rallied, as investors become generally more positive with fading political uncertainty and stability returning to the region s badly shaken stock markets. The performance of the economy belied the hopes raised by Budget 1998 and for most of the year the economy continued its sluggish trend thus upsetting fiscal projections. Lower than expected GDP growth and the consequent shortfall in revenues have resulted in the fiscal deficit coming in at 6.1% of GDP, well over the targeted 4.5% of GDP levels. Recent government data indicate a 5% yoy increase in industrial production during the April-December 1997 period, falling well short of expectations. Equally disconcerting is the marked slow-down in export growth of 2% yoy, despite the exchange rate depreciating 8% vis-a-vis the dollar over the same period. The further decline in exports in January 1998 suggest that the competitiveness of Indian exports has been affected by the currency turmoil in the South East Asian countries. In addition, there has been a sharp decline in the output of the domestic capital goods industry, as both the government and the industry continued to reel under the pressure of having little investible surpluses. The abundance of liquidity in the banking sector seems to suggest that the inventory adjustment 6

7 process is underway and a cyclical recovery seems imminent which could be given a further fillip by the government increasing the investment outlay in the infrastructure sector. The BJP-led government would need to address the long-term structural problems to ensure sustained growth. In particular, the challenge of financing, creating and pricing infrastructure remains considerable in the wake of weak fiscal balances of the government, a difficult external trade environment and an increasingly risk averse international investment community. Outlook We remain committed to our long-term value oriented investment philosophy and the fund continues to be weighted in several large resilient corporations which are well poised to benefit from the revival of the domestic economy. Significantly, many of these companies which have witnessed a steep decline in share prices over the last year, are yet to fully participate in the market recovery even as, the spotlight continues on defensive stocks. Many of these companies have improved or restructured their operations and we believe the current values do not fully reflect their long-term economic potential. Going forward, progressive legislation permitting share buy-back and take-overs could be among the key drivers in unlocking shareholder value. Improving corporate governance and financial reporting standards coupled with positive market developments such as commencement of dematerialised trading in shares, will also go a long way in enhancing investor confidence and participation in the stock markets. I thank you for your continued interest and support. Dr. J. Mark Mobius Date : April 9,

8 AUDITORS REPORT To the Trustee of TEMPLETON MUTUAL FUND - TEMPLETON INDIA GROWTH FUND : We have audited the balance sheet of TEMPLETON MUTUAL FUND - TEMPLETON INDIA GROWTH FUND at March 31, 1998 and the related revenue account for the year then ended. Our audit was performed in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other procedures as we considered necessary in the circumstances. We have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit. In our opinion, the accompanying financial statements referred to above give a true and fair view of the state of affairs of TEMPLETON MUTUAL FUND - TEMPLETON INDIA GROWTH FUND at March 31, 1998 and of its deficit for the year then ended. The balance sheet and the related revenue account are in agreement with the books of account and have been prepared in conformity with the accounting policies and standards prescribed in the Ninth Schedule to the Securities and Exchange Board of India (Mutual Funds) Regulations, Bombay April 9, 1998 Arthur Andersen & Associates Chartered Accountants Narayan K. Seshadri Partner 8

9 TEMPLETON MUTUAL FUND - TEMPLETON INDIA GROWTH FUND BALANCE SHEET AS AT MARCH 31, 1998 (All amounts in thousands of Rupees) SOURCES OF FUNDS Note Unit capital 2(a) & 3 931, ,883 Reserves and surplus 2(a) & 4 8,384 3,875 Current liabilities 5 20, , ,372 1,034,934 APPLICATION OF FUNDS Investments 2(b), 6 & , ,186 Deposits 7 191, ,700 Other current assets 8 15,348 6,048 Net deficit 33, ,372 1,034,934 The accompanying notes are an integral part of this balance sheet. Templeton Asset Management (India) Private Limited Templeton Trust Services Rajan Raheja Private Limited Director Arthur Andersen & Associates Anand J. Vashi Vijay C. Advani Chartered Accountants Director President & Chief Executive Officer Bombay Narayan K. Seshadri Percy Jal Pardiwalla B. Swaminathan April 9, 1998 Partner Director Vice President (Operations) & Company Secretary 9

10 TEMPLETON MUTUAL FUND - TEMPLETON INDIA GROWTH FUND REVENUE ACCOUNT FOR THE YEAR ENDED MARCH 31, 1998 (All amounts in thousands of Rupees) INCOME 10 Note (Note 15) Dividend 2(c) 22, Interest 9 17,717 34,189 Profit on sale/redemption of investments, net 2(c) 2,537 42,465 34,321 EXPENSES AND LOSSES Change in net unrealised loss in value of investments 2(b) & 6(iii) 52,866 34,050 Management fee 10 9,601 4,464 Trusteeship fee Registration and local charges 250 Custodian service charges 3,667 2,639 Registrar service charges 1, Commission to distributors 12 6,675 1,677 Audit fee Other operating expenses ,219 44,469 Deficit for the year 33,754 10,148 Equalisation debit/(credit) 2(d) 735 (10,885) 34,489 (737) Retained surplus, beginning of year (737) Net deficit/(surplus), end of year 33,752 (737) The accompanying notes are an integral part of this statement. Templeton Asset Management (India) Private Limited Templeton Trust Services Rajan Raheja Private Limited Director Arthur Andersen & Associates Anand J. Vashi Vijay C. Advani Chartered Accountants Director President & Chief Executive Officer Bombay Narayan K. Seshadri Percy Jal Pardiwalla B. Swaminathan April 9, 1998 Partner Director Vice President (Operations) & Company Secretary

11 TEMPLETON MUTUAL FUND - TEMPLETON INDIA GROWTH FUND NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 1998 (All amounts in thousands of Rupees unless specified otherwise) 1. BACKGROUND Templeton Mutual Fund - Templeton India Growth Fund ( the Scheme ) was launched on August 19, 1996 as an open ended, growth oriented mutual fund scheme. Templeton Mutual Fund ( the Fund ) was established as a trust under the Indian Trusts Act, 1882, by way of trust deed dated January 4, 1996 and a supplementary trust deed dated March 30, 1996 executed by Templeton International Inc., USA, the sponsor of the Fund. In accordance with the Securities and Exchange Board of India ( SEBI ) (Mutual Funds) Regulations, 1996 ( the SEBI Regulations ), the Board of Directors of Templeton Trust Services Private Limited ( the Trustee ) has appointed Templeton Asset Management (India) Private Limited ( the AMC ) to manage the Fund s affairs and operate its schemes. The objective of the Scheme is to provide long-term capital appreciation to its investors through investing its corpus primarily in equity and equity related instruments. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements are prepared on the accrual basis of accounting, under the historical cost convention, as modified for investments, which are marked-to-market. The significant accounting policies, which are in accordance with the SEBI Regulations and have been approved by the Boards of Directors of the AMC and the Trustee, are stated below (a) Unit capital Unit capital represents the net outstanding units at the balance sheet date. Upon issue and redemption of units, the net premium or discount to the face value of units is adjusted against the unit premium reserve of the Scheme, after an appropriate portion of the issue proceeds and redemption payouts is credited or debited respectively to the equalisation account, a mandatory requirement for open-ended mutual fund schemes. The net premium or discount for the period ended March 31, 1997, which had been credited to the general reserve, has been transferred to the unit premium reserve during the current year. (b) Investments Accounting for investment transactions Purchase and sale of investments are recorded on the date of the transaction, at cost and sale price respectively, after considering brokerage, commission, and fees payable or receivable, if any. Right entitlements are recognised as investments on the ex-rights date. Bonus entitlements are recognised 11

12 (c) (d) as investments on the ex-bonus date. The uncalled portion of partly paid investments is disclosed as a contingent liability. Valuation of investments Investments in securities which have traded during a period of sixty days prior to the balance sheet date are stated at the closing prices on the balance sheet date or the last trading day before the balance sheet date, as may be applicable, on the stock exchange where a majority (in terms of value) of these securities are principally traded. All other investments are stated at their fair value as determined by the AMC in accordance with the SEBI Regulations and approved by the Trustee. The change in the unrealised loss in the value of investments between two balance sheet dates is recognised in the revenue account. Revenue recognition Dividend income is recognised on the ex-dividend date. Profit or loss on sale of investments is determined on the basis of the weighted average cost method. Equalisation account The purpose of equalisation account is to maintain per unit amount of the Scheme s undistributed income earned during the accounting year, so that continuing unitholders share of undistributed income remains unchanged on issue or redemption of units. When units are issued or redeemed, the total undistributed income from the beginning of the accounting year to the date of the transaction is determined. Based on the number of units outstanding on the transaction date, the undistributed income associated with each unit is computed. The per unit amount so determined is credited and debited to the equalisation account on issue and redemption of each unit respectively. At year end, the balance in the equalisation account is transferred to the revenue account UNIT CAPITAL Units of Rs.10/- each fully paid up Units outstanding, beginning of year: 87,088, (1997 Nil) 870,883 Units issued: initial offer: Nil ( ,151,550) 501,515 during the year: 8,133, ( ,084, ) 81, ,848 Units redeemed: 2,025, ( , ) 20,250 1,480 Units outstanding, end of year: 93,197, ( ,088, ) 931, ,883 12

13 4. RESERVES AND SURPLUS General reserve relating to unit capital Balance, beginning of year 3,138 Transferred to unit premium reserve (3,138) Net premium on issue/ redemption of units 3,138 Balance, end of year 3,138 Unit premium reserve Transferred from general reserve 3,138 Net premium on issue/ redemption of units 5,246 Balance, end of year 8,384 Retained surplus CURRENT LIABILITIES 8,384 3,875 Management fee 2,568 1,413 Trusteeship fee Contracts for purchase of investments 16, ,600 Other current liabilities 1,088 4, INVESTMENTS 20, ,176 Equity shares 720, ,186 Privately placed debentures 50,000 (i) 720, ,186 The investments of the Scheme are registered in the name of the Trustee for the benefit of the Scheme s unitholders. (ii) Included in equity shares are: securities amounting to Rs.0.13 million (1997 Rs.3.05 million) in respect of which defective transfer forms have been returned to brokers for rectification. The AMC expects that these defects will be rectified by brokers. securities amounting to Rs million (1997 Rs million) lodged with the issuers for transfer and registration. The AMC expects proper registration of the scrips. (iii) Aggregate appreciation and depreciation in the value of equity shares are as follows: appreciation 44,934 6,780 (iv) 7. DEPOSITS depreciation 131,850 40,830 The aggregate value of investments purchased and sold/redeemed by the Scheme during the year is Rs million (1997 Rs million) [45.88 per cent ( per cent) of average daily net assets] and Rs million (1997 Rs million) [23.17 per cent ( per cent) of average daily net assets] respectively. Deposits with scheduled banks 190, ,700 Deposit with a company , ,700 13

14 8. OTHER CURRENT ASSETS 14 Balances with banks in current accounts 4,685 2,250 Contracts for sale of investments 10,576 Outstanding and accrued income 87 3, INTEREST 15,348 6,048 Deposits with banks 13,379 19,097 Call money lending 3, Debentures 758 6,105 Certificates of deposit 8,220 17,717 34, MANAGEMENT AND TRUSTEESHIP FEE The Scheme pays fees for investment management and trusteeship services under separate agreements with the AMC and the Trustee which provide for computation of such fee at an annual rate of 1.25 per cent and 0.05 per cent respectively, of the Scheme s average daily net assets excluding the net asset value of the AMC s investment in the Scheme. 11. INCOME AND EXPENDITURE The total income and expenditure and these amounts as a percentage of the Scheme s average daily net assets are provided below: Income amount 42,465 34,321 as a percentage of average daily net assets Expenditure amount 23,353 10,419 as a percentage of average daily net assets During the year ended March 31, 1998, expenditure pertaining to the Scheme, to the extent it exceeded 2.5 per cent of the Scheme s average daily net assets, has been directly borne by the AMC in accordance with the SEBI Regulations and is not included in these financial statements. 12. RELATED PARTY TRANSACTIONS Included in Commission to distributors is Rs.6.20 million (1997 Rs.1.47 million) as commission to Hathway Securities Limited, a subsidiary of Hathway Investments Limited ( HIL ), for procuring unit subscriptions for the Scheme. HIL holds per cent ( per cent) of the share capital of the AMC. The commission is at rates similar to those offered to other distributors by the Scheme. 13. CONTINGENT LIABILITY Uncalled liability on partly paid equity shares 8, NET ASSET VALUE Net asset value of each unit of Rs.10/- of the Scheme Rs.9.73 Rs The net asset value of the Scheme s unit is determined after including unit capital and reserves and surplus, and reducing net deficit, if any. 15. PRIOR PERIOD COMPARATIVES Prior period amounts have been reclassified, wherever applicable, to conform to current year s presentation. The prior period amounts relating to the revenue account are

15 for a period from August 19, 1996 to March 31, 1997 and are therefore not directly comparable with current year amounts. 16. SUPPLEMENTARY INVESTMENT PORTFOLIO INFORMATION AND INDUSTRYWISE CLASSIFICATION Details of investment portfolio and industrywise classification of the Scheme s investments in equity shares as at March 31, 1998 are presented below. The industry and company exposures are stated as a percentage of the Scheme s net assets as at March 31, 1998, as well as the aggregate investments in equity shares. Percentage Percentage to to investment Industry and company particulars Quantity Amount net assets category EQUITY SHARES Banks & Financial Institutions 1,379, , Industrial Credit and Investment Corporation of India Limited 410,000 37, Bank of Baroda 278,300 29, Oriental Bank of Commerce 375,000 24, Industrial Development Bank of India 282,000 24, State Bank of India 33,850 9, Multi-Industry 311,496 74, Larsen & Toubro Limited 173,000 42, Grasim Industries Limited 56,000 17, Indian Rayon & Industries Limited 82,496 14, Automobiles 184,200 74, Tata Engineering & Locomotive Company Limited 110,000 32, Bajaj Auto Limited 52,500 31, TVS Suzuki Limited 21,700 10, Telecommunications 196,100 72, Mahanagar Telephone Nigam Limited 154,000 40, Videsh Sanchar Nigam Limited 42,100 32, Energy Sources 193,350 69, Hindustan Petroleum Corporation Limited 89,000 39, Bharat Petroleum Corporation Limited 41,500 15, Cochin Refineries Limited 62,850 14, Chemicals 815,800 69, Indian Petrochemicals Corporation Limited 365,000 25, Reliance Industries Limited 125,800 22, Tata Chemicals Limited 125,000 18, Hindustan Organic Chemical Limited 200,000 2,

16 Percentage Percentage to to investment Industry and company particulars Quantity Amount net assets category Metals - Non-Ferrous 1,550,100 52, National Aluminium Company Limited 1,450,000 41, Indian Aluminium Company Limited 100,000 10, Hindalco Industries Limited Transportation - Shipping 1,268,800 49, Great Eastern Shipping Company Limited 955,300 37, Shipping Corporation of India Limited 313,500 12, Metal - Ferrous 1,165,000 35, Tata Iron & Steel Company Limited 170,000 25, Steel Authority of India Limited 995,000 9, Cement 27,200 28, Madras Cements Limited 5,200 22, Gujarat Ambuja Cements Limited 22,000 6, Utilities - Electricity & Gas 383,200 18, Tata Hydro Electric Power Supply Limited 135,800 12, Gujarat Industries Power Company Limited 247,000 6, Gujarat Gas Company Limited Textiles & Apparel 228,750 15, Arvind Mills Limited 228,750 15, Appliances & Household Durables 260,000 14, Titan Industries Limited 260,000 14, Energy Equipment & Services 68,000 14, Thermax Limited 68,000 14, Health & Personal Care 13,000 3, Dabur India Limited 13,000 3, Electrical & Electronics 8,300 1, Siemens Limited 8,300 1, Total 720, DEPOSITS 191, OTHER CURRENT ASSETS 15, TOTAL ASSETS 926, LESS: CURRENT LIABILITIES 20, NET ASSETS 906,

17 HISTORICAL PER UNIT STATISTICS The following are the details of per unit statistics of Templeton India Growth Fund as on 31st March, 1998 and 31st March, 1997 As at As at 31/3/98 31/3/97 a) Gross Income per unit Rs. P Rs. P i) Income other than profit on sale of investment per unit ii) Income from profit on Inter Scheme sales/transfer per unit iii) Income from profit on sale of investment to third party per unit 0.03 iv) Transfer to revenue account, per unit b) Less: Aggregate of expenses, write off, amortisation and charges per unit c) Less: Unrealised depreciation in value of Investments as adjusted against previous year, net per unit d) Add: Unrealised appreciation in value of Investments per unit e) Net Income per unit (0.36) (0.12) Add: Equalisation Credit & Premium Reserve Reserve of the previous year Growth per unit (0.27) 0.04 f) Net Asset Value per unit g) Repurchase Prices during the period* i) Highest ii) Lowest h) Resale Prices during the period* i) Highest ii) Lowest i) Ratio of expenses to average net assets (%) j) Ratio of Gross Income to average net assets(%) * Repurchase and Resale prices include exit/entry loads as applicable. 17

18 18 TEMPLETON INDIA INCOME FUND (TIIF)

19 TEMPLETON INDIA INCOME FUND REPORT OF THE PORTFOLIO MANAGER Introduction It is with great pleasure that we bring you the First Annual Report for the Templeton India Income Fund (TIIF). After a successful initial launch during which we raised Rs.321 million, TIIF reopened for ongoing sales on March 1, As on March 31, 1998, the funds under management has grown to Rs million. The growth in the NAV and the annualised return under the Dividend and Growth plan during this period is as under: Name of the Plan NAV NAV Annualised as on as on Return March 31, 98 March 6, 97 Dividend Plan % Growth Plan % The Economy Despite the optimism generated by a promising budget presented by the former finance minister, Mr. P. Chidambaram, the Indian economy failed to deliver the much-awaited recovery in the financial year The economy suffered from the tight monetary policy followed in , which weighted heavily on the performance of India s industries for the better part of the current year. The uncertainty in the political arena also played a role in suppressing economic activity in The economy, which was projected to grow at 6.5 per cent at the beginning of the year, is now expected to grow at 5 per cent. In addition to internal factors, the impact of the South East Asian crisis and the subsequent measures announced by the RBI in January 1998, to support the Rupee is likely to delay the economic recovery even further. The rising fiscal deficit and the lack of political consensus on crucial reforms do not bode well for a return to a more robust real economic expansion in the near term. The economy is further constrained by bottlenecks in infrastructure, and may be adversely affected if India s international rating, (which is currently under review) is downgraded from the investment grade level. On the bright side, the continuous flow of foreign investment, both direct and portfolio, and the encouraging trends in inflation management, current account deficit and savings rate can be seen as an impetus in the medium-term to boost real economic activity. It is important, however, that the new coalition government aggressively push economic and financial reforms in the coming year. Reforms are especially needed in banking and insurance. Privatisation and infrastructure funding will also need to be actively pursued in the coming year. Interest Rate Outlook The first half of the current year witnessed distinct downward trends in interest rates in response to the RBI s easing of liquidity and to subdued credit growth. The South East Asian currency crisis spread to India in January 1998 and led to the sliding of the Rupee, which was faltering under the pressure of high liquidity and speculation in the market. The RBI reacted by tightening the monetary policy in the middle of January 1998, to support the depreciating Rupee. Short-term interest rates went up sharply prompting an increase in Prime Lending Rates. By March 1998, interest rates started settling down as the RBI began the partial reversal of the tight monetary measures taken in January

20 The year ahead is expected to start with high liquidity, pushing interest rates lower, unless pressure on the Rupee resumes. The pressure on interest rates will build up midway due to the large size of government s borrowing programme. The level at which rates will settle will be a function of the RBI s corrective measure to accommodate the government s borrowing programme, the Rupee movement and the pace of the economic recovery. Strategy The investment process at Templeton is highly evolved and we use the analytical techniques developed by the Templeton Global Bond Managers at Ft. Lauderdale, Florida, USA. We are extremely selective regarding the investments in the portfolio. The corporate debt in the portfolio is selected after a rigorous credit analysis. We look for securities that have the potential to move up the rating curve in the medium-term. These securities are unique, because they have a clear market niche & a sustainable competitive advantage in a global environment. We also actively manage the portfolio duration to benefit from the movement in interest rates. Going forward, we will look for trading opportunities in the short-term horizon to take advantage of the downward trend in the interest rates. Until the interest rate outlook for the medium term is clearer, however, we plan to focus on liquid short to medium-term instruments. We intend to continue to provide superior riskadjusted returns, by actively managing the TIIF portfolio, based on our fundamental research driven disciplined investment approach. We thank you for your continued support. Neil Devlin Nilesh Shah Shobhit Mehrotra Date : April 9,

21 AUDITORS REPORT TEMPLETON INDIA INCOME FUND To the Trustee of TEMPLETON MUTUAL FUND - TEMPLETON INDIA INCOME FUND : We have audited the balance sheet of TEMPLETON MUTUAL FUND - TEMPLETON INDIA INCOME FUND at March 31, 1998 and the related revenue account for the period from February 3, 1997 (the date of launch) to March 31, Our audit was performed in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other procedures as we considered necessary in the circumstances. We have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit. MUTUAL FUND - TEMPLETON INDIA INCOME FUND at March 31, 1998 and of its surplus for the period from February 3, 1997 to March 31, The balance sheet and the related revenue account are in agreement with the books of account and have been prepared in conformity with the accounting policies and standards prescribed in the Ninth Schedule to the Securities and Exchange Board of India (Mutual Funds) Regulations, Arthur Andersen & Associates Chartered Accountants In our opinion, the accompanying financial statements referred to above give a true and fair view of the state of affairs of TEMPLETON Bombay April 9, 1998 Narayan K. Seshadri Partner 21

22 TEMPLETON MUTUAL FUND - TEMPLETON INDIA INCOME FUND BALANCE SHEET AS AT MARCH 31, 1998 (All amounts in thousands of Rupees) SOURCES OF FUNDS Note Unit capital 2(b) & 3 797,334 Reserves and surplus 2(b) & 4 119,257 Current liabilities and provisions 5 8, ,753 APPLICATION OF FUNDS Investments 2(c), 6 & ,022 Deposits 7 57,900 Other current assets 8 50, ,753 The accompanying notes are an integral part of this balance sheet. Templeton Asset Management (India) Private Limited Templeton Trust Services Rajan Raheja Private Limited Director Arthur Andersen & Associates Anand J. Vashi Vijay C. Advani Chartered Accountants Director President & Chief Executive Officer Bombay Narayan K. Seshadri Percy Jal Pardiwalla B. Swaminathan April 9, 1998 Partner Director Vice President (Operations) & Company Secretary 22

23 TEMPLETON MUTUAL FUND - TEMPLETON INDIA INCOME FUND REVENUE ACCOUNT FOR THE PERIOD FROM FEBRUARY 3, 1997 (DATE OF LAUNCH) TO MARCH 31, 1998 (All amounts in thousands of Rupees) Note INCOME Interest 2(d) & 9 98,524 Profit on sale/redemption of investments, net 2(d) 403 Net unrealised gain in value of investments 2(c) & 6(ii) 751 Other income ,983 EXPENSES AND LOSSES Management fee 10 7,535 Trusteeship fee Custodian service charges 1,849 Registrar service charges 680 Commission to distributors 13 2,781 Audit fee 300 Other operating expenses ,229 Surplus for the period 85,754 Equalisation credit 2(e) 33,336 Provision for distribution on capital account Dividend Plan 11 (6,477) Retained surplus, end of period 4 112,613 The accompanying notes are an integral part of this statement. Templeton Asset Management (India) Private Limited Templeton Trust Services Rajan Raheja Private Limited Director Arthur Andersen & Associates Anand J. Vashi Vijay C. Advani Chartered Accountants Director President & Chief Executive Officer Bombay Narayan K. Seshadri Percy Jal Pardiwalla B. Swaminathan April 9, 1998 Partner Director Vice President (Operations) & Company Secretary 23

24 TEMPLETON MUTUAL FUND - TEMPLETON INDIA INCOME FUND NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 3, 1997 (DATE OF LAUNCH) TO MARCH 31, 1998 (All amounts in thousands of Rupees unless specified otherwise) 1. BACKGROUND Templeton Mutual Fund - Templeton India Income Fund ( the Scheme ) was launched on February 3, 1997 as an open ended mutual fund scheme. Templeton Mutual Fund ( the Fund ) was established as a trust under the Indian Trusts Act, 1882, by way of a trust deed dated January 4, 1996 and a supplementary trust deed dated March 30, 1996 executed by Templeton International Inc., USA, the sponsor of the Fund. In accordance with the Securities and Exchange Board of India ( SEBI ) (Mutual Funds) Regulations, 1996 ( the SEBI Regulations ), the Board of Directors of Templeton Trust Services Private Limited ( the Trustee ) has appointed Templeton Asset Management (India) Private Limited ( the AMC ) to manage the Fund s affairs and operate its schemes. The primary investment objective of the Scheme is to generate a steady stream of income through investment primarily in fixed income securities. A secondary objective is to generate capital appreciation. The Scheme offers its investors two plans: the Dividend Plan and the Growth Plan. The Scheme aims to distribute dividend from time to time to its investors under the Dividend Plan, and to achieve capital appreciation for its investors under the Growth Plan. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements are prepared on the accrual basis of accounting, under the historical cost convention, as modified for investments, which are marked-to-market. The significant accounting policies, which are in accordance with the SEBI Regulations and have been approved by the Boards of Directors of the AMC and the Trustee, are stated below: (a) (b) Determination of net asset value The net asset value of the units of the Scheme is determined separately for units issued under the Dividend and Growth Plans ( the Plans ). For reporting the two net asset values, the funds received under each Plan and their deployment are separately accounted for. Further, income arising from such deployment, including unrealised gain or loss in the value of investments, are separately determined and accounted for each of the Plans. Expenses incurred by the Scheme are allocated to the Plans in proportion to their average daily net assets. Unit capital Unit capital represents the net 24

25 (c) outstanding units at the balance sheet date. Upon issue and redemption of units, the net premium or discount to the face value of units is adjusted against the unit premium reserve of the Scheme, after an appropriate portion of the issue proceeds and redemption payouts is credited or debited respectively to the equalisation account, a mandatory requirement for open-ended mutual fund schemes. Investments Accounting for investment transactions Purchase and sale of investments are recorded on the date of the transaction, at cost and sale price respectively, after considering brokerage, commission and fees payable or receivable, if any. Any front-end discount on privately placed investments is reduced from the cost of such investments. Valuation of investments Investments in securities which have traded during a period of sixty days prior to the balance sheet date are stated at the closing prices on the balance sheet date or the last trading day before the balance sheet date, as may be applicable, on the stock exchange where a majority (in terms of value) of these securities are principally traded. Privately placed fixed income investments are stated at their fair value as determined by the AMC in accordance with the SEBI Regulations using yields for comparable securities, indicated by an external agency approved by the Trustee, and applying a discount for lower liquidity. Investments in commercial paper are stated at carrying cost, which includes discount accrued on a straight line basis over the period to maturity. (d) Revenue recognition (e) Profit or loss on sale of investments is determined on the basis of the weighted average cost method. In respect of investments in deep discount bonds, the discount to the redemption value is amortised and recognised as interest income over the period to redemption, based on the yield to maturity at which such bonds were acquired. Equalisation account The purpose of equalisation account is to maintain per unit amount of a Plan s share of the Scheme s undistributed income earned during the accounting period, so that continuing unitholders share of undistributed income remains unchanged on issue or redemption of units under that Plan. 25

26 When units are issued or redeemed, the total undistributed income from the beginning of the accounting period to the date of the transaction is determined. Based on the number of units outstanding on the transaction date, the undistributed income associated with each unit is computed. The per unit amount so determined is credited and debited to the equalisation account on issue and redemption of each unit respectively. At year end, the balance in the equalisation account is transferred to the revenue account. 3. UNIT CAPITAL Units of Rs.10 each fully paid up Dividend Plan Units issued: initial offer: 1,433,600 units 14,336 during the period: 3,065, units 30,657 Units redeemed: 181, units 1,813 Units outstanding, end of period: 4,317, units 43,180 Growth Plan Units issued: initial offer: 31,277,550 units 312,776 during the period: 46,057, units 460,575 Units redeemed: 1,919, units 19,197 Units outstanding, end of period: 75,415, units 754,154 Total Units issued: initial offer: 32,711,150 units 327,112 during the period: 49,123, units 491,232 Units redeemed: 2,100, units 21,010 Units outstanding, end of period: 79,733, units 797, RESERVES AND SURPLUS Unit premium reserve Net premium on issue/redemption of units Dividend Plan 886 Growth Plan 5,758 6,644 Retained surplus Transferred from the revenue account Dividend Plan 201 Growth Plan 112, ,613 Total 119, CURRENT LIABILITIES AND PROVISIONS Management fee 811 Trusteeship fee 41 Other current liabilities 833 Provision for distribution on capital account 6,477 8, INVESTMENTS Privately placed debentures 537,347 Other debenture and bonds 147,608 Central government securities 81,102 Commercial paper 49, ,022 (i) The investments of the Scheme are 26

27 registered in the name of the Trustee for the benefit of the Scheme s unitholders. (ii) Aggregate appreciation and depreciation in the value of investments are as follows: Privately placed debentures appreciation 1,174 depreciation 1,317 Other debentures and bonds appreciation 2,760 depreciation 754 Central government securities appreciation depreciation 1,112 (iii) The aggregate value of investments acquired and sold/redeemed during the period were Rs 1, million ( per cent of average daily net assets) and Rs. 1, million ( per cent of average daily net assets) respectively. (iv) Debentures amounting to Rs million obtained through private placements are not listed on any stock exchange and accordingly, have not been traded during a period of sixty days prior to March 31, Further, other debentures and bonds amounting to Rs million have not been traded during a period of sixty days prior to March 31, DEPOSITS Deposits with scheduled banks 8,900 Deposit with a company 49,000 57, OTHER CURRENT ASSETS Balances with banks in current accounts 15,800 Outstanding and accrued income 35,031 50, INTEREST Debentures and bonds 93,199 Call money lending 3,112 Deposits with banks 1,947 Commercial papers , MANAGEMENT AND TRUSTEESHIP FEE The Scheme pays fees for investment management and trusteeship services under separate agreements with the AMC and the Trustee, which provide for computation of such fee at an annual rate of 1.25 per cent and 0.05 per cent respectively, of the Scheme s average daily net assets. However, for the period from December 1, 1997 to March 31, 1998, the AMC had reduced the annual rate of management fee to 0.9 per cent of the Scheme s average daily net assets. 11. DISTRIBUTABLE INCOME Surplus for the period 85,754 Equalisation credit 33,336 Net unrealised gain in value of investments (751) Distributable income 118,339 Dividend Plan Share of distributable income 6,540 Provision for distribution on capital account (6,477) Rate of dividend (per cent) INCOME AND EXPENDITURE The total income (excluding net unrealised gain in value of investments) and expenditure and these amounts as a percentage of the Scheme s average daily net assets are provided below: Income amount 99,232 as a percentage of average daily net assets

28 Expenditure amount 14,229 as a percentage of average daily net assets RELATED PARTY TRANSACTIONS Included in Commission to Distributors is Rs. 0.8 million as commission to Hathway Securities Limited, a subsidiary of Hathway Investments Limited ( HIL ), for procuring unit subscriptions for the Scheme. HIL holds per cent of the share capital of the AMC. The commission is at rates similar to those offered to other distributors by the Scheme. 14. NET ASSET VALUE Net asset value of each unit of Rs. 10 of the Scheme: Dividend Plan Growth Plan The net asset value of the Scheme s unit is determined separately for units issued under the Dividend and Growth Plans after including the respective unit capital and reserves and surplus. 15. PRIOR PERIOD COMPARATIVES As these are the first financial statements of the Scheme since the date of its launch, there are no comparatives for the prior period. 16. SUPPLEMENTARY INVESTMENT PORTFOLIO INFORMATION AND INDUSTRYWISE CLASSIFICATION Details of investment portfolio and industrywise classification of the Scheme s investments in privately placed debentures, other debentures and bonds and commercial paper as at March 31, 1998 are presented below. The industry and company exposures are stated as a percentage of the Scheme s net assets as at March 31, 1998, as well as the aggregate investments in privately placed debentures, other debentures and bonds and commercial paper respectively. Percentage Percentage to to investment Industry and company particulars Quantity Amount net assets category PRIVATELY PLACED DEBENTURES Financial Services 602, , Kotak Mahindra Primus Limited 600,000 60, GE Capital Services India Limited 2,120 79, Diversified 5,350 52, Orient Paper & Industries Limited 5,350 52, Utilities - Electricity and Gas 50,000 50, Gujarat Industries Power Company Limited 50,000 50, Computers - Software 500,000 50, Satyam Computer Services Limited 500,000 50, Chemicals 300,000 30, Search Chem Industries Limited 300,000 30,

29 Percentage Percentage to to investment Industry and company particulars Quantity Amount net assets category Pharmaceuticals 300,000 30, Siris Limited 300,000 30, Miscellaneous 1,850, , Secure Meters Limited 500,000 50, Viral Filaments Limited 400,000 40, Precision Fasteners Limited 300,000 30, Flat Products Equipment India Limited 300,000 30, Unitech Limited 200,000 20, Multi-Arc (India) Limited 150,000 15, Total 537, OTHER DEBENTURES AND BONDS Chemicals 1,009,200 70, Reliance Industries Limited 1,009,000 49, Indian Petrochemicals Corporation Limited , Financial Services 60 47, Reliance Capital Limited 60 47, Municipalities 20,000 20, Ahmedabad Municipal Corporation 20,000 20, Financial Institutions 2,841 9, Industrial Credit and Investment Corporation of India Limited 2,841 9, Total 147, COMMERCIAL PAPER Diversified 49, Century Textiles and Industries Limited 49, Total 49, CENTRAL GOVERNMENT SECURITIES 81, DEPOSITS 57, OTHER CURRENT ASSETS 50, TOTAL ASSETS 924, LESS: CURRENT LIABILITIES 8, NET ASSETS 916,