<PAGE>
MORGAN STANLEY
INDIA INVESTMENT FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs Samuel T. Reeves
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
Stefanie V. Chang
Michael F. Klein VICE PRESIDENT
PRESIDENT AND DIRECTOR
Harold J. Schaaff, Jr.
John Chu VICE PRESIDENT
DIRECTOR
Joseph P. Stadler
Gerald la Hausse de Louviere VICE PRESIDENT
DIRECTOR
Valerie Y. Lewis
Gerard E. Jones SECRETARY
DIRECTOR
Joanna M. Haigney
John A. Levin TREASURER
DIRECTOR
Belinda A. Brady
Fergus Reid ASSISTANT TREASURER
DIRECTOR
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
- --------------------------------------------------------------------------------
MORGAN STANLEY
INDIA INVESTMENT
FUND, INC.
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, the total return of the Morgan Stanley
India Investment Fund, Inc. based on net asset value per share, was 0.23%
compared to 6.43% for the U.S. dollar adjusted Bombay Stock Exchange (BSE)
National Index (the "BSE National Index"). For the period since the Fund's
commencement of operations on February 25, 1994 through December 31, 1997, the
Fund's total return, based on net asset value per share, was -36.43% compared
with -37.23% for the BSE National Index. On December 31, 1997, the closing
price of the fund's shares on the New York Stock Exchange was $8 3/8,
representing a 5.0% discount to the Fund's net asset value per share.
Calendar year 1997 began against the background of easing liquidity, strong
agricultural growth and healthy consumer demand. A number of positive
measures announced by the Reserve Bank of India to increase the money supply
resulted in the decline of interest rates by as much as 500 basis points for
prime borrowers. The easing of liquidity buoyed the markets and in January
1997, the market was up 25% from its lowest level and there was renewed
optimism that the retail investors were returning to the market. The finance
minister P. Chidambaram presented the Union Budget on February 28, 1997. The
budget ushered in sweeping changes and tossed aside decades of socialist
cobwebs. The cornerstone of the budget was tax rationalization. Large tax
cuts were proposed on personal income, corporate income and dividends,
potentially leaving India with the lowest tax rates in the developing world.
The government anticipated that reduced tax rates would lead to a more than
proportional increase in the tax base and act as an incentive for greater
compliance, ultimately resulting in an increase in tax revenues.
Apart from tax cuts, the budget also reduced import tariffs, increased the limit
of foreign ownership in Indian companies, introduced an amnesty scheme for
surrendering "black money", and put in limits on the financing of the government
by the Reserve Bank of India. The government achieved its revenue target for
financial year ended March 1997 despite an economic slowdown and contained the
fiscal deficit at 5% of GDP. The fact that a coalition government successfully
presented one of the best budgets in the recent past clearly reiterated the
political consensus on the liberalization process.
The euphoria created by the budget suffered a jolt on March 30 when the Congress
Party decided to withdraw its support for the United Front coalition government.
As is typical with Indian markets, all the bad news was discounted on a single
trading day with the market tumbling 8% on March 31. On April 11, the
government was finally voted out of power in the Indian Parliament.
Subsequently, the Congress Party consented to renew support for a new United
Front coalition government subject to a change in the leadership of the United
Front government. The United Front coalition replaced Mr. Deve Gowda with Mr.
I.K. Gujral who was the foreign minister in the outgoing United Front
government. Mr. Gujral took charge as the new Prime Minister. The other cabinet
members of the United Front coalition remained in the government.
The three months ended June 30, 1997 was probably one of the better quarters for
the Indian markets in recent times. Foreign index funds were getting overweight
in Indian securities due to India's relative economic stability compared to
other Asian markets like Thailand, Malaysia and Indonesia. With local
institutional players like Unit Trust of India increasing investment in stocks,
a shortage of supply was observed. The market rally, which was focused on
large-cap pivotal stocks, was driven more by fund flows than expectations of a
dramatic change in the fundamentals. Due to declining interest rates,
high-yield fixed income avenues were limited and equities re-emerged as an
attractive option. The expansion in domestic liquidity driven by higher
disposable incomes and strong rural incomes also translated into the broadening
of the market rally with mid-cap stocks exhibiting revival signs. On June 30,
the BSE National Index closed up at 1827 points, up 34% year-to-date.
The third quarter saw the Indian market move southwards largely in sympathy with
the economic turmoil and stock market collapses in many south east Asian
markets. Foreign inflows slowed down and most funds cut profitable Indian
positions. Corporate results for the period ended September 30, 1997 were
unexciting and the earnings growth estimates for March 1998 were downgraded to
around 15%. Empirical recovery in certain industries like housing and
automobiles did not bring great cheer to the market. On the economic front, the
expected economic recovery seemed to be getting delayed, apparently due to the
severe shock the Indian corporate system took in 1997, varying degrees of
political uncertainty and lack of adequate government spending in infrastructure
areas.
2
<PAGE>
During the fourth quarter, two events took center stage: the political
situation and the depreciation of the Indian rupee. On November 28, 1997, the
Congress Party once again withdrew its support to the United Front and plunged
the nation into a political crisis. Due to dim prospects of the emergence of
another stable coalition government, the outgoing government recommended
dissolution of the Indian Parliament and the holding of new elections. The
political uncertainty and the spreading Asian contagion accelerated the
depreciation of the Indian rupee against the U.S. dollar and the rupee
depreciated by around 2% during the month of December. The benchmark Index
ended the last quarter with a further decline of 6%.
OUTLOOK
The tentacles of the Asian contagion are extending and have contributed to great
volatility in the world markets. The somewhat insulated Indian stock market
could not entirely escape this contagion. The BSE National Index declined 13%
over the second half of 1997 and the Indian rupee depreciated against the U.S.
dollar.
India has been the least disfavored market in these turbulent times, for a
number of reasons including the following:
From a macro standpoint, India does not suffer from the problems of
over-indebtedness and foreign exchange reserve shortages, atypical of East Asian
economies. The Indian corporate sector is under-leveraged with domestic
credit/GDP being one of the lowest in the region. The Indian rupee, though
volatile lately on the back of falling Asian currencies, has remained relatively
stable falling only 10% against the U.S. dollar over the year. The link between
interest rates and currency remains weak in India due to restrictions in capital
flows and limited opportunities for interest rate arbitrage.
Political news in India continues to be disappointing, We have been at the nadir
of the political cycle for some time now, and the markets have fully discounted
every sort of political risk. The economic recovery we expected in the first
quarter of calendar year 1998 has surely been delayed by one or two quarters,
due to the dissolution of the Indian Parliament and holding of early elections
in March, 1998. However, we believe that there is no structural impediment to
economic recovery. India has been suffering from a state of political vacuum
throughout 1997 and policy implementation has been often haphazard. We believe
that the biggest factor influencing the market in the medium term will be the
post-election political scenario. Current opinion polls hint at a hung
parliament once again, with no single party securing an absolute majority. Our
best bet is that even with another coalition government in place, there is still
a strong likelihood of a more broad-based and stable government. The pace of
economic reform process may vary depending on the composition of the newly
elected government, but the broad thrust of the process is expected to continue.
We continue to take advantage of dips in the market, to switch into, what we
believe will be, long-term out-performers. Despite political uncertainties and
slower moving reforms, India is expected to be a safe-harbor and record one of
the highest GDP growths in the Asia-Pacific region in the medium term.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Vinod Sethi
Vinod Sethi
PORTFOLIO MANAGER
January 1998
3
<PAGE>
MORGAN STANLY INDIA INVESTMENT FUND, INC.
INVESTMENT SUMMARY AS OF DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
HISTORICAL
INFORMATION TOTAL RETURN (%)
----------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
One Year -11.84% -11.84% 0.23% 0.23% 6.43% 6.43%
Since Inception* -39.70 -12.31 -36.43 -11.10 -37.23 -11.40
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[CHART]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
1994* 1995 1996 1997
------- ------ ------- --------
<S> <C> <C> <C> <C>
Net Asset Value Per Share . . . $13.99 $8.91 $8.81 $8.83
Market Value Per Share . . . . $11.25 $9.13 $9.50 $8.38
Premium/(Discount) . . . . . . -19.6% 2.5% 7.8% -5.1%
Capital Gains Distributions . . $0.17 -- -- --
Fund Total Return (2) . . . . . 0.72% -36.31% -1.12% 0.23%
Index Total Return (3) . . . . -7.88% -31.53% -6.49% 6.43%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The Bombay Stock Exchange (BSE) National Index is a market capitalization
weighted index including the equity shares of 100 companies from the
"Specified" and the "Non-specified" list of the 5 major stock exchanges,
namely, Bombay, Calcutta, Delhi, Ahmedabad and Madras. Prior to fiscal year
1997, the Fund used the Bombay Stock Exchange Sensitive Index as its
benchmark for performance purposes. Beginning in 1997, the Fund is using
the Bombay Stock Exchange National Index for the purpose of performance
comparisons. This index more closely represents the investment strategy of
the Fund.
* The Fund commenced operations on February 25, 1994.
4
<PAGE>
MORGAN STANLEY INDIA INVESTMENT FUND, INC.
PORTFOLIO SUMMARY AS OF DECEMBER 31, 1997
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
[CHART]
Fixed Income Securities 0.2%
Equity Securities 97.8%
Short-Term Investments 2.0%
- --------------------------------------------------------------------------------
SECTORS (UNAUDITED)
[CHART]
Other 13.7%
Transportation - Road & Rail 7.4%
Machinery & Engineering 4.7%
Health & Personal Care 9.4%
Financial Services 8.0%
Automobiles 15.9%
Banking 5.5%
Broadcasting & Publishing 2.3%
Chemicals 3.9%
Electronic Components & Instruments 7.4%
Energy Equipment & Services 21.8%
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C> <C>
1. Bharat Heavy Electricals Ltd. 20.5%
2. Housing Development Finance Corp. Ltd. 7.9
3. Container Corp of India 7.4
4. Infosys Technology Ltd. 6.2
5. State Bank of India Ltd. 4.5
6. Hero Honda Ltd. 3.3
7. Smithkline Beecham Pharmaceutical Ltd. 2.1
8. Punjab Tractors Ltd. 2.0
9. ITC Ltd. 2.0
10. Hoechst Schering Agrevo Ltd. 1.9
57.8%
</TABLE>
5
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.9%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
APPLIANCES & HOUSEHOLD DURABLES (1.7%)
(a,b) Bharat Pipes & Fittings Ltd. 150 U.S.$ --@
Blow Plast Ltd. 434,600 377
Phillips India Ltd. 692,150 1,148
Punjab Anand Lamp Industries Ltd. 227,000 153
Supreme Industries Ltd. 782,900 3,635
VIP Industries Ltd. 161,900 103
-----------
5,416
-----------
- --------------------------------------------------------------------------------
AUTOMOBILES (15.9%)
Apollo Tyres Ltd. 491,775 997
(a,b) Apollo Tyres Ltd. (Rights) 159 --
(a,b) Apollo Tyres Ltd. (Warrants), expiring 2/28/98 141,846 4
Ashok Leyland Ltd. 4,900 5
Autolec Industries Ltd. 45 --@
(a) Autolite Ltd. 132,670 89
Baja Auto Ltd. 19,900 307
Bajaj Tempo Ltd. 4,131 25
(a,b) Bajaj Tempo Ltd. (Rights) 851 3
Castrol (India) Ltd. 231,540 4,400
Ceat Ltd. 833,547 500
Denso India Ltd. 647,900 777
Elgi Tyres & Tread Ltd. 273,400 2,270
Engine Values Ltd. 185,700 905
Escorts Ltd. 150 --@
GKN Invel Transmissions Ltd. 100 --@
Hero Honda Ltd. 435,785 10,258
(a) LML Ltd. 1,200 3
Lumax Automatic Parts Industries Ltd. 441,200 605
(a) Modi Rubber Ltd. 100 --@
Motherson Sumi Systems Ltd. 335,907 366
(a,b) Motherson Sumi Systems Ltd. (Rights) 40 -
Motor Industries Co., Ltd. 20,497 2,588
MRF Ltd. 109,280 5,389
O.E.N. Connectors Ltd. 59,726 62
(a,b) Patheja Bros Forgings and Stamp Ltd. 450,000 222
(a) Patheja Forgings and Auto Ltd. 325,000 54
Premier Instruments Ltd. 245,987 653
Punjab Tractors Ltd. 368,420 6,398
(b) Rane Brakes and Lining Ltd. 7,500 31
Rane Madras Ltd. 213,100 555
Rico Auto Industries Ltd. 221,000 423
S.K.F. Bearings Ltd. 52,358 1,674
Subros Auto Ltd. 159,395 390
(a,b) Sundaram Brake Ltd. 2,850 9
Sundaram Fasteners Ltd. 481,000 5,608
Tata Engineering & Locomotive Ltd. 22,852 173
TVS Suzuki Ltd. 376,550 4,260
VST Tillers & Tractors Ltd. 173,000 139
-----------
50,142
-----------
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
BANKING (5.5%)
Federal Bank Ltd. 100 U.S.$ --@
HDFC Bank Ltd. 1,558,700 3,102
State Bank of India Ltd. 2,274,870 14,102
-----------
17,204
-----------
- --------------------------------------------------------------------------------
BEVERAGES & TOBACCO (2.0%)
(a) ITC Ltd. 401,441 6,334
McDowell & Co., Ltd. 300 --@
-----------
6,334
-----------
- --------------------------------------------------------------------------------
BROADCASTING & PUBLISHING (2.3%)
Cosmo Films Ltd. 109,900 39
Navneet Publications Ltd. 233,100 491
(a,b) New Delhi Television Ltd. 333,300 689
Tata Donnelley Ltd. 293,250 1,653
Zee Telefilms Ltd. 1,859,600 4,459
-----------
7,331
-----------
- --------------------------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS (0.5%)
Associated Cement Co. Ltd. 36 1
(a) Bell Ceramics Ltd. 524,750 71
(a) Gujarat Sidhee Cement Ltd. 2,199,400 225
Hindustan Sanitaryware and Industries Ltd. 70,000 152
ITW Signode India Ltd. 574,950 1,118
Murudeshwar Ceramics Ltd. 346,300 93
(a) Shree Cements Ltd. 50 --@
-----------
1,660
-----------
- --------------------------------------------------------------------------------
CHEMICALS (3.9%)
(b) Ciba Specialty Chemicals (India) Ltd. 165,485 --@
Colour Chem Ltd. 52,602 3,355
Hoechst Schering Agrevo Ltd. 374,880 5,929
ICI India Ltd. 484,400 2,181
(a) Indian Organic Chemical Ltd. 426,050 65
Indian Petro Chemical Corp. Ltd. 200 --@
ITC Agrotech Co., Ltd. 100 --@
Jaysynth Dyechem Ltd. 340,500 89
MSL Industries Ltd. 48,800 27
Reliance Industries Ltd. 48,152 203
Sudarshan Chemicals Ltd. 258,877 360
-----------
12,209
-----------
- --------------------------------------------------------------------------------
CONSTRUCTION & HOUSING (0.1%)
Hindustan Construction Co. 350,000 116
Nagarjuna Construction Ltd. 253,600 107
(a,b) Nagarjuna Construction Ltd. - New 97,500 34
-----------
257
-----------
- --------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS (0.2%)
Asian Electronics Ltd. 211,600 486
BPL Ltd. 100 --@
-----------
486
-----------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONIC COMPONENTS & INSTRUMENTS (7.4%)
Datar Switchgear Ltd. 275,900 U.S.$ 229
(a) Fujitsu ICIM Ltd. 655,215 179
Infosys Technology Ltd. 619,100 19,469
Mastek Ltd. 171,400 962
Modi Xerox Ltd. 1,127,500 2,244
Rolta India Ltd. 5,000 2
S&S Power Switchgear Ltd. 226,055 94
Samtel Colour Ltd. 756,950 186
(a,b) VHEL Industries Ltd. 100 --@
-----------
23,365
-----------
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES (21.8%)
Bharat Heavy Electricals Ltd. 7,157,600 64,628
Crompton Greaves Ltd. 627,380 476
Jyoti Structure Ltd. 167,750 356
KEC International Ltd. 536,857 370
Kirloskar Oil Engine Ltd. 380,440 282
(a) Modern Malleables Ltd. - New 420,000 26
Shiram Honda Power Equipment Ltd. 353,630 2,476
Uniflex Cables Ltd. 287,400 58
-----------
68,672
-----------
- --------------------------------------------------------------------------------
ENERGY SOURCES (0.0%)
(a) Renewable Energy Ltd. 247,800 85
-----------
- --------------------------------------------------------------------------------
FINANCIAL SERVICES (8.0%)
Canfin Homes Ltd. 922,050 306
Housing Development Finance Corp. Ltd. 317,382 24,917
ICICI Ltd. - New 980 2
Industrial Finance Corp. (India) Ltd. 3,400 3
(a) UTI Master Gain 367,500 101
UTI MasterShares Ltd. 11,755 4
-----------
25,333
-----------
- --------------------------------------------------------------------------------
FOOD & HOUSEHOLD PRODUCTS (0.6%)
(a) American Dry Fruits Ltd. 536,000 67
(a) Aruna Sugars & Enterprises Ltd. 50 --@
Dhampur Sugar Mills Ltd. 67,500 98
Smithkline Beecham Consumer Health Care Ltd. 84,120 702
Thiru Arooran Sugars Ltd. 469,313 749
(a) Umred Agro Complex Ltd. 124,500 2
Western Hatcheries Ltd. 237,933 130
-----------
1,748
-----------
- --------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (0.4%)
Ballarpur Industries Ltd. 602,842 369
Paper Products Ltd. - New 299,900 562
Pudumjee Ltd. 221,600 211
Tamilnadu Newsprint and Paper Ltd. 385,000 226
-----------
1,368
-----------
- --------------------------------------------------------------------------------
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
HEALTH & PERSONAL CARE (9.4%)
Cheminor Drugs Ltd. 243,650 U.S.$ 783
(b) Cipla Ltd. 318,050 5,132
Clariant (India) Ltd. 67,000 323
E. Merck (India) Ltd. 406,275 2,182
Godrej Soaps Ltd. 573,850 500
Hindustan Lever Ltd. 292 10
(a) Hoechst Marion Roussel India Ltd. 585,200 5,031
Indian Shaving Products Ltd. 600 9
Lakme Ltd. 540,830 3,949
Marico Industries Ltd. 283,200 1,864
Pfizer Ltd. 2,510 26
(a) Rhone Poulenc (India) Ltd. 100 1
Searle (India) Ltd. 300,000 321
Smithkline Beecham Pharmaceutical Ltd. 490,695 6,691
Sun Pharmaceutical Industries Ltd. 443,800 2,539
(a) TTK Biomed Ltd. 143,700 39
Unichem Labs Ltd. 162,700 369
-----------
29,769
-----------
- --------------------------------------------------------------------------------
INDUSTRIAL COMPONENTS (0.7%)
Carborundum Universal Ltd. 493,300 999
Chicago Pneumatic India Ltd. 324,940 1,150
-----------
2,149
-----------
- --------------------------------------------------------------------------------
LEISURE & TOURISM (0.2%)
Indian Hotels Co., Ltd. 50 1
ITC Hotels Ltd. 251,725 642
-----------
643
-----------
- --------------------------------------------------------------------------------
MACHINERY & ENGINEERING (4.7%)
Advani-Oerlikon Ltd. 450,027 299
Ahmednagar Forgings Ltd. 166,000 72
Baharat Earth Movers Ltd. 268,400 510
Elgi Equipments Ltd. 107,850 603
Esab India Ltd. 564,850 1,563
Graphite India Ltd. 271,200 181
(a,b) Indian Seamless Metal Tubes Ltd. 530,600 206
Kabra Extrusion Technik Ltd. 152,600 84
Kirloskar Cummins Ltd. 307,090 3,721
Lakshmi Machine Works Ltd. 18,788 1,007
(a) Lakshmi Synthetic Machinery Ltd. 152,400 170
M.M. Forgings Ltd. 200 --@
Praj Industries Ltd. 221,600 237
RevathiCP Equipment Ltd. 298,600 2,657
(a) Siemens Ltd. 25 --@
Thermax Ltd. 444,100 1,971
Wartsila Diesel Ltd. 391,500 1,553
-----------
14,834
-----------
- --------------------------------------------------------------------------------
METALS -- NON-FERROUS (0.1%)
(a) Pennar Aluminum Co., Ltd. 1,632,800 171
-----------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
METALS -- STEEL (0.5%)
India Seamless Steel & Alloy Ltd. 897,100 U.S.$ 57
Isibars Ltd. 500,000 202
(a) Panchmahal Steels Ltd. 197,700 39
(a) Shri Ishar Alloy Steels Ltd. 369,500 25
Steel Authority of India Ltd. 3,000,000 746
Steel Authority of India Ltd. GDR 150,000 488
Tata Iron & Steel Co., Ltd. 400 1
Tata SSL Ltd. - New 76,350 27
Uttam Galva Steels Ltd. 436,250 70
-----------
1,655
-----------
- --------------------------------------------------------------------------------
MISCELLANEOUS MATERIALS & COMMODITIES (0.7%)
Essel Packaging Ltd. 368,100 1,066
(a) Flex Industries Ltd. 50 --@
Garware Plastics & Polyester Ltd. 397,789 211
(a) Su-Raj Diamonds Ltd. 100 --@
Titan Industries Ltd. 543,985 919
-----------
2,196
-----------
- --------------------------------------------------------------------------------
MULTI-INDUSTRY (1.1%)
Birla VXL Ltd. 100 --@
(a,b) Delta International 570,000 62
JK Corp Ltd. 230 --@
Larsen & Toubro Ltd. 1,295 7
(b) Novartis India Ltd. 376,650 3,596
-----------
3,665
-----------
- --------------------------------------------------------------------------------
RECREATION, OTHER CONSUMER GOODS (0.5%)
Tube Investments of India Ltd. 283,316 250
Tube Investments of India Ltd. GDR 198,133 188
Vashishti Detergents Ltd. 1,062,267 1,050
-----------
1,488
-----------
- --------------------------------------------------------------------------------
RETAIL -- GENERAL (0.0%)
(a) Timex Watches Ltd. 67,000 47
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.1%)
(a) Indian Telephone Industries Ltd. 1,700 --@
Mahanagar Telephone Nigam Ltd. 21,700 143
Punjab Wire Ltd. 200 --@
-----------
143
-----------
- --------------------------------------------------------------------------------
TEXTILES & APPAREL (2.2%)
(a,b) Bata India Ltd. 395,602 1,695
Coates of India Ltd. 238,150 626
Coates of Viyella India Ltd. 131,300 167
(b) Coates of Viyella India Ltd. - New 300,000 369
(b) Coates of Viyella India Ltd. (Rights) 30 --@
(a) Cosmos Leather Exports Ltd. 325,000 4
(a) DCL Polyesters Ltd. 899,600 80
G.T.N. Textiles Ltd. 257,500 266
Indo Rama Synthetics Ltd. 2,278,040 784
(a) J.K. Synthetics Ltd. 2,091,958 85
Mahavir Spinning Mills Ltd. 491,000 620
- --------------------------------------------------------------------------------
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
Maral Overseas Ltd. 650,600 U.S.$ 357
PSM Spg Mills Ltd. 200 --@
Raymond Ltd. 325 1
Raymond Ltd. GDR 10,000 28
Raymond Ltd. GDR 42,000 116
(a) Sanotgen Exports Ltd. 100 --@
Shree Rajasthan Syntex Ltd. 150 --@
(a) SIV Industries Ltd. GDR 313,500 125
SRF Ltd. 665,119 358
Super Spinning Mills Ltd. 200,357 273
Vardhaman Polytex Ltd. 282,200 252
Vardhaman Spinning & General Mills Ltd. 373,500 667
(a) Viral Syntex Ltd. 209,200 20
Woolworth India Ltd. 1,100 1
-----------
6,894
-----------
- --------------------------------------------------------------------------------
TRANSPORTATION -- ROAD & RAIL (7.4%)
Container Corp. of India Ltd. 2,185,600 23,417
-----------
- --------------------------------------------------------------------------------
UTILITIES -- ELECTRICAL & GAS (0.0%)
Andhra Valley Power Supply Co., Ltd. 95 --@
Tata Hydro Electric Power Supply Co. Ltd. 50 --@
-----------
--@
-----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$377,068) 308,681
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
<S> <C> <C>
FIXED INCOME SECURITIES (0.2%)
- --------------------------------------------------------------------------------
METALS -- STEEL (0.0%)
(a,b) Tata SSL Ltd. - New 14.00%
12/6/02 INR 14 13
-----------
- --------------------------------------------------------------------------------
MISCELLANEOUS MATERIALS & COMMODITIES (0.2%)
(b) Garware Plastics & Polyester Ltd.
16.00% 5/1/05 277 599
-----------
- --------------------------------------------------------------------------------
TOTAL FIXED INCOME SECURITIES
(Cost U.S.$899) 612
-----------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (0.1%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT (0.1%)
Chase Securities, Inc., 5.95%,
dated 12/31/97, due 1/2/98,
to be repurchased at U.S.$409,
collateralized by U.S.$415,
United States Treasury Notes,
5.625%, due 2/15/06, valued
at U.S.$419
(Cost U.S.$409) U.S.$ 409 U.S.$ 409
-------------
- -------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (1.8%)
Indian Rupee (Cost U.S.$5,879) INR 226,066 5,767
-------------
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost U.S.$384,255) 315,469
-------------
- -------------------------------------------------------------------------------
OTHER ASSETS (1.9%)
Receivable for Investments Sold U.S.$ 4,945
Dividends Receivable 390
Foreign Withholding Tax
Reclaim Receivable 652
Share Application Money 27
Deferred Organization Costs 15
Other Assets 34 6,063
-------------
- -------------------------------------------------------------------------------
LIABILITIES (-1.9%)
Payable For:
Investments Purchased (4,895)
Custodian Fees (596)
Investment Advisory Fees (293)
Professional Fees (93)
Shareholder Reporting Expenses (80)
Director's Fees and Expenses (33)
Administrative Fees (32)
Bank Overdraft (1)
Other Liabilities (63) (6,086)
-------------
- -------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 35,707,092, issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$ 315,446
-------------
- -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 8.83
-------------
- -------------------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------
Common Stock U.S.$ 357
Capital Surplus 489,541
Accumulated Net Investment Loss (214)
Accumulated Net Realized Loss (105,453)
Unrealized Depreciation on Investments
and Foreign Currency Translations (68,785)
- -------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 315,446
-------------
- -------------------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing
(b) -- Security valued at fair value - see note A-1 to financial statements.
@ -- Value is less than U.S.$500.
144A -- Certain conditions for public sale may exist.
GDR -- Global Depositary Receipt
INR -- Indian Rupee
December 31, 1997 exchange rate -- Indian Rupee (INR) 39.200 = U.S. $1.00.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
STATEMENT OF OPERATIONS (000)
- -----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 4,998
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Less: Foreign Taxes Withheld . . . . . . . . . . . . . . . . . . . . . (129)
- -----------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,020
- -----------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . 4,052
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,547
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 407
Shareholder Reporting Expenses . . . . . . . . . . . . . . . . . . . . 159
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 123
Annual Meeting and Proxy Expenses . . . . . . . . . . . . . . . . . . . 53
Sub-Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . 25
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
- -----------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,597
- -----------------------------------------------------------------------------------------------
Net Investment Loss . . . . . . . . . . . . . . . . . . . . . . . (2,577)
- -----------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . (49,022)
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . (662)
- -----------------------------------------------------------------------------------------------
Net Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . (49,684)
- -----------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments . . . . . . . . . . . . . . . . . . . . . . 52,995
Appreciation on Foreign Currency Translations . . . . . . . . . . . . . 289
- -----------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . 53,284
- -----------------------------------------------------------------------------------------------
Net Realized Loss and Change in Unrealized Appreciation/Depreciation . . . 3,600
- -----------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . U.S.$ 1,023
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Loss . . . . . . . . . . . . . . . . . U.S.$ (2,577) U.S.$ (2,958)
Net Realized Loss . . . . . . . . . . . . . . . . . . (49,684) (29,796)
Change in Unrealized Appreciation/Depreciation. . . . 53,284 29,132
- -----------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . . . 1,023 (3,622)
- -----------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period . . . . . . . . . . . . . . . . . 314,423 318,045
- -----------------------------------------------------------------------------------------------
End of Period (including accumulated net investment
loss of U.S.$214 and U.S.$47, respectively.). . . . U.S.$ 315,446 U.S.$ 314,423
- -----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD FROM
------------------------------------------------ FEBRUARY 25, 1994* TO
SELECTED PER SHARE DATA AND RATIOS: 1997 1996 1995 DECEMBER 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period . . . . . . . . . . U.S.$ 8.81 U.S.$ 8.91 U.S.$ 13.99 U.S.$ 14.10
- ----------------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . . . . . . . . . . . - - - (0.03)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) . . . . . . . . . . . . . . (0.07) (0.08) (0.16) 0.04
Net Realized and Unrealized Gain (Loss) on Investments . 0.09 (0.02) (4.92) 0.05
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . . . . . . 0.02 (0.10) (5.08) 0.09
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Realized Gain . . . . . . . . . . . . . . . . . . - - - (0.09)
In Excess of Net Realized Gain. . . . . . . . . . . . - - - (0.08)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . - - - (0.17)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . U.S.$ 8.83 U.S.$ 8.81 U.S.$ 8.91 U.S.$ 13.99
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD . . . . . . . . . U.S.$ 8.38 U.S.$ 9.50 U.S.$ 9.13 U.S.$ 11.25
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value. . . . . . . . . . . . . . . . . . . . . (11.84)% 4.11% (18.89)% (19.01)%
Net Asset Value (1) . . . . . . . . . . . . . . . . . 0.23% (1.12)% (36.31)% 0.72%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Thousands) . . . . . . . . . U.S.$ 315,446 U.S.$ 314,423 U.S.$ 318,045 U.S.$ 499,481
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets . . . . . . . . 2.06% 2.10% 3.16% 1.61%**
Ratio of Net Investment Income to Average Net Assets . . (0.70)% (0.85)% (1.48)% 0.33%**
Portfolio Turnover Rate. . . . . . . . . . . . . . . . . 25% 28% 28% 19%
Average Commission Rate (2):
Per Share. . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 0.0268 U.S.$ 0.0476 N/A N/A
As a Percentage of Trade Amount . . . . . . . . . . . . 0.66% 0.82% N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. This percentage is not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(2) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
portfolio trades on which commissions were charged during the period.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
The Morgan Stanley India Investment Fund, Inc. (the "Fund") was
incorporated in Maryland on December 22, 1993, and is registered as a
non-diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective is long-term
capital appreciation through investments primarily in equity securities.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities for
which market quotations are readily available are valued at the last sales
price on the valuation date, or if there was no sale on such date, at the
mean between the current bid and asked prices. Securities which are traded
over-the-counter are valued at the average of the mean of current bid and
asked prices obtained from brokers. Short-term securities which mature in
60 days or less are valued at amortized cost. All other securities and
assets for which market values are not readily available (including
investments which are subject to limitations as to their sale) are valued
at fair value as determined in good faith by the Board of Directors (the
"Board"), although the actual calculations may be done by others. Due to
the Indian securities market's smaller size, degree of liquidity and
volatility, the price which the Fund may realize upon sale of securities
may not be equal to the value presented in the financial statements.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for U.S. Federal income taxes is required in the financial
statements.
The Fund invests in India through a registered branch office established in
Mauritius and expects to obtain benefits under the double taxation treaty
between Mauritius and India. To obtain benefits under the double taxation
treaty the Fund must meet certain tests and conditions, including the
establishment of Mauritius tax residence and related requirements. The Fund
has obtained a tax residence certification from the Mauritian authorities
and believes such certification is determinative of its resident status for
treaty purposes. A fund which is a tax resident in Mauritius under the
treaty but has no branch or permanent establishment in India, will not be
subject to capital gains tax in India on the sale of securities but was
subject to a 15% withholding tax on dividends up to May 31, 1997.
Subsequent to that date, the Indian Government has withdrawn the
withholding tax on dividends. The Fund is subject to and accrues Indian
withholding tax on interest earned on Indian securities at the rate of 20%.
A portion of Foreign Withholding Tax Reclaim Receivable at December 31,
1997 relates to taxes that will be refunded to the Fund upon the filing of
the Fund's Indian tax return for the fiscal year ending March 31, 1998.
In Mauritius, the Fund is liable for income tax under the current Mauritian
legislation at the rate of 0%. However, the Fund may, in any year, elect to
pay tax on its net investment income at any rate between 0% and 35%. As of
the date of these financial statements, no provision for Mauritius taxes is
considered necessary as a result of net investment losses incurred by the
Fund.
The foregoing is based on current interpretation and practice and is
subject to any future changes in Indian or Mauritian tax laws and in the
tax treaty between India and Mauritius.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To
the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to determine
the adequacy of the collateral. In the event of default on the obligation
to repurchase, the Fund has the right to liquidate the collateral and apply
the proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counter-party to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal
proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Amounts denominated in Indian rupees are
translated into U.S. dollars at the mean of the bid and asked prices of
such currency against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rate of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rate
of exchange on the dates of such transactions.
12
<PAGE>
Although the net assets of the Fund are presented at the foreign exchange
rate and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rate from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in the foreign
exchange rate from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currency, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Net
Assets. The change in unrealized currency gains (losses) for the period is
reflected in the Statement of Operations.
The Fund intends to use derivatives more actively than it has in the past.
The Fund intends to engage in transactions in futures contracts on foreign
currencies, stock indices, as well as in options, swaps and structured notes.
Consistent with the Fund's investment objectives and policies, the Fund
intends to use derivatives for non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated
risks that the Fund intends to utilize:
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward foreign currency exchange contracts generally to attempt to protect
securities and related receivables and payables against changes in future
foreign exchange rates and, in certain situations, to gain exposure to a
foreign currency. A foreign currency exchange contract is an agreement
between two parties to buy or sell currency at a set price on a future
date. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is marked-to-market daily and the
change in market value is recorded by the Fund as unrealized gain or loss.
The Fund records realized gains or losses when the contract is closed equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. Risk may arise upon
entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and is generally
limited to the amount of unrealized gain on the contracts, if any, at the
date of default. Risks may also arise from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar.
6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, 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 and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets in an amount at least equal in value to the Fund's
commitments to purchase such securities or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward commitment or when-issued or delayed-delivery basis may 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 time of delivery.
7. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange the
return generated by one security, instrument or basket of instruments for
the return generated by another security, instrument or basket of
instruments. The following summarizes swaps which may be entered into by
the Fund:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security, instrument or basket of
instruments underlying the transaction exceeds or falls short of the
offsetting interest obligation, the Fund will receive a payment from or
make a payment to the counterparty, respectively. Total return swaps
13
<PAGE>
are marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gains or losses in the Statement
of Operations. Periodic payments received or made at the end of each
measurement period, but prior to termination, are recorded as realized
gains or losses in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Fund terminated its position in the agreement. Risks may
arise upon entering into these agreements from the potential inability of
the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the date of default.
8. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. Structured Securities, invested
in by the Fund, generally will have credit risk equivalent to that of the
underlying instruments. Structured Securities are typically sold in private
placement transactions with no active trading market. Investments in
structured securities may be more volatile than their underlying
instruments, however, any loss is limited to the amount of the original
investment.
9. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
10. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Investments in new Indian securities are made by
making applications in the public offerings. The issue price, or a portion
thereof, is paid at the time of application and reflected as share
application money on the Statement of Net Assets. Upon allotment of the
securities, this amount plus any remaining amount of issue price is
recorded as cost of investments. Realized gains and losses on the sale of
investment securities are determined on the specific identified cost basis.
Interest income is recognized on an accrual basis. Dividend income is
recorded on the ex-dividend date (except certain dividends which may be
recorded as soon as the Fund is informed of such dividend) net of
applicable withholding taxes. Distributions to shareholders are recorded on
the ex-date.
The amount and character of income and capital gain distributions to be
paid are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences
are primarily due to differing book and tax treatments for foreign currency
transactions, net operating losses, gains on certain securities of
corporations designated as "passive foreign investment companies" and the
timing of the recognition of losses on securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.
Adjustments for permanent book-tax differences, if any, are not reflected
in ending undistributed net investment income (loss) for the purposes of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. (the "Adviser") provides investment
advisory services to the Fund under the terms of an Investment Advisory and
Management Agreement (the "Agreement"). Under the Agreement, the Adviser is paid
a fee computed weekly and payable monthly at an annual rate of 1.10% of the
Fund's average weekly net assets.
C. The Chase Manhattan Bank, through its affiliate Chase Global Funds Services
Company (the "Administrator"), provides administrative services to the Fund
under an Administration Agreement. Under the Administration Agreement, the
Administrator is paid a fee computed weekly and payable monthly at an annual
rate of 0.09% of the Fund's average weekly net assets, plus $65,000 per annum.
In addition, the Fund is charged certain out-of-pocket expenses by the
Administrator. The Chase Manhattan Bank acts as custodian for the Fund's assets
held in the United States.
14
<PAGE>
Multiconsult, Ltd., whose registered office is in Mauritius, provides
sub-administrative services to the Fund, including maintaining certain Fund
records and preparing certain periodic filings, under an agreement whereby
Multiconsult is paid a fee of $22,000 per annum.
D. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with a Custody Agreement. International Custodian fees are
payable monthly based on Fund assets under custody plus an amount for each
transaction effected. For the year ended December 31, 1997, the Fund incurred
international custodian fees of $2,516,000, of which $595,000 was payable to the
International Custodian at December 31, 1997.
E. During the year ended December 31, 1997, the Fund made purchases and sales
totaling $86,947,000 and $88,447,000 respectively, of investment securities
other than long-term U.S. Government securities and short-term investments.
There were no purchases and sales of long-term U.S. Government securities. At
December 31, 1997, the U.S. Federal income tax cost basis of securities was
$378,761,000, and, accordingly, net unrealized depreciation for U.S. Federal
income tax purposes was $69,059,000, of which $86,708,000 related to appreciated
securities and $155,767,000 related to depreciated securities. At December 31,
1997, the Fund had a capital loss carryforward for U.S. Federal income tax
purposes of approximately $96,874,000 available to offset future capital gains
of which $19,397,000 will expire on December 31, 2003, $31,596,000 will expire
on December 31, 2004 and $45,881,000 will expire on December 31, 2005. To the
extent that capital gains are offset, such gains will not be distributed to
shareholders. For the year ended December 31, 1997, the Fund intends to elect to
defer to January 1, 1998 for U.S. Federal income tax purposes, post-October
currency losses of $213,000 and post-October capital losses of $8,196,000.
F. In connection with its organization and initial public offering of shares,
the Fund incurred $65,000 and $1,164,000 of organization and offering costs,
respectively. The organization costs are being amortized on a straight-line
basis over a five year period beginning February 25, 1994, the date the Fund
commenced operations. The offering costs were charged to capital.
G. A significant portion of the Fund's net assets consist of Indian securities
which involve certain considerations and risks not typically associated with
investments in the United States. In addition to its smaller size, less
liquidity and greater volatility, the Indian securities market is less developed
than the U.S. securities market and there is often substantially less publicly
available information about Indian issuers than there is about U.S. issuers.
Settlement mechanisms are also less developed and are accomplished only through
physical delivery, which may cause the Fund to experience delays or other
difficulties in effecting transactions. At December 31, 1997, the Fund owned an
aggregate of approximately $18,281,000 in securities which were either out for
transfer in the name of the Fund, were under objection for transfer in the name
of the Fund, or were due from companies and/or brokers for various capital
changes. Such securities are valued in accordance with the Fund's security
valuation policy as described in Note A-1, but may not be saleable at the value
shown in the Statement of Net Assets at December 31, 1997. The Fund has no
intention of selling such securities until they are transferred in the name of
the Fund.
Future economic and political developments in India could adversely affect the
liquidity or value, or both, of securities in which the Fund is invested. In
addition, the Fund's ability to hedge its currency risk is limited and
accordingly, the Fund may be exposed to currency devaluation and other exchange
rate fluctuations.
H. Each Director of the Fund who is not an officer of the Fund or an
affiliated person as defined under the Investment Company Act of 1940, as
amended, may elect to participate in the Directors' Deferred Compensation Plan
(the "Plan"). Under the Plan, such Directors may elect to defer payment of a
percentage of their total fees earned as a Director of the Fund. These deferred
portions are treated, based on an election by the Director, as if they were
either invested in the Fund's shares or invested in U.S. Treasury Bills, as
defined under the Plan. The deferred fees payable, under the Plan, at December
31, 1997 totaled $18,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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To the Shareholders and Board of Directors of
Morgan Stanley India Investment Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Morgan Stanley India Investment Fund, Inc. (the "Fund") at December 31, 1997,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the three years in the period then ended and for the
period February 25, 1994 (commencement of operations) through December 31, 1994,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodians and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 18, 1998
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DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each shareholder will be deemed to have elected, unless American Stock
Transfer & Trust Company (the "Plan Agent") is otherwise instructed by the
shareholder in writing, to have all distributions automatically reinvested in
Fund shares. Participants in the Plan have the option of making additional
voluntary cash payments to the Plan Agent, annually, in any amount from $100
to $3,000, for investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is
less than 95% of the market price on the reinvestment date, shares will be
issued at 95% of the market price. If net asset value exceeds the market price
on the reinvestment date, participants will receive shares valued at market
price. The Fund may purchase shares of its Common Stock in the open market in
connection with dividend reinvestment requirements at the discretion of the
Board of Directors. Should the Fund declare a dividend or capital gain
distribution payable only in cash, the Plan Agent will purchase Fund shares
for participants in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged
a pro rata share of brokerage commissions incurred on any open market
purchases effected on such participant's behalf. A participant will also pay
brokerage commissions incurred on purchases made by voluntary cash payments.
Although shareholders in the Plan may receive no cash distributions,
participation in the Plan will not relieve participants of any income tax
which may be payable on such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the shareholder as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who are
participating in the Plan.
Shareholders who do not wish to have distributions automatically
reinvested should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
Morgan Stanley India Investment Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
40 Wall Street
New York, NY 10005
1-800-278-4353
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