02/12/96 IN INDIA, A SPRINT TURNS INTO A STUMBLE

IN INDIA, A SPRINT TURNS INTO A STUMBLE

In April, 1994, Morgan Stanley & Co. became the first foreign company to launch a domestic mutual fund for retail customers in India. It looked as if the fund was going to be a smash hit.
Awed by the company's reputation, Indian investors lined up in droves. Over the course of 2 1/2 days, 1.5 million people turned $310 million over to Morgan Stanley. That's when the trouble started. Investors, who said that the firm had promised there would be a $100 million ceiling, complained the fund was less exclusive than they had been led to believe. Morgan Stanley executives say its prospectus had clearly stated the fund had no maximum limit.
TATTERED REPUTATION. Then, before the fund's shares were listed on the Bombay Stock Exchange, the units started trading illegally--at 89 cents each instead of the initial price of 32 cents. But when the fund hit the market, the units crashed--to 19 cents apiece. Since the launch, the fund's performance has been lackluster: Since 1994, the fund has declined 16.5%, compared with a 17.7% drop for the Bombay index. Morgan Stanley was not accused of wrongdoing in the ensuing investigation into the gray market trading, but its sterling reputation was in tatters and still hasn't fully rebounded. ``When Morgan Stanley first came, people were fascinated. Now, they are very disappointed,'' says Prem Advani, an independent investment agent in New Delhi.
Morgan Stanley says the main problem is that Indian investors didn't understand mutual funds. ``People thought they were buying a Morgan Stanley share, not an emerging-market fund,'' says K.N. Vaidyanathan, vice-president of Morgan Stanley Asset Management India Private Ltd. Barry Hall, a former Peace Corps volunteer who heads Morgan Stanley's India office, acknowledges that this has ``led to a long-term PR problem.'' Other observers say Morgan Stanley doesn't appreciate the nuances of the Indian market. Says Sanjeev Mohta, head of research at James Capel B&K in Bombay: ``You cannot necessarily use global or even Asian parameters to understand things here.''
Morgan Stanley also is viewed with a bit of suspicion because it has become so big in the Indian market. Its asset-management portfolio of $1.6 billion is 1.25% of the capitalization of the Bombay market, and it represents about 7% of trading volume. That makes the firm the largest owner of Indian stocks after Unit Trust of India, the government-run mutual-fund operator. Some Indian traders say Morgan could move the market, and that makes people nervous.
Morgan Stanley officials say they will continue to expand their many businesses in India. ``Only a few firms can afford to take a long-term perspective,'' says Naina Lal Kidwai, Morgan Stanley's investment banking chief in Bombay. By forging ahead, Morgan Stanley is proving it won't be discouraged by one setback.
BY SHARON MOSHAVI IN BOMBAY