5,800,000 Shares
Morgan Stanley
Emerging Markets Fund, Inc.
COMMON STOCK
Issuable Upon Exercise.of Rights
to Subscribe for Such Shares of Common Stock
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Morgan Stanley Emerging Markets Fund, Inc. (the "Fund") is issuing to its shareholders of record as of the close of business on May 30, 1996 (the "Record Date") transferable rights ("Rights") entitling the holders thereof to subscribe for up to an aggregate of 5,800,000 shares (the "Shares") of the common stock, par value $.01 per share ("Common Stock”), of the Fund (the "Offer") at the rate of one share of Common Stock for each three Rights held. In addition, Record Date Shareholders (as defined below) will be entitled to subscribe, subject to certain limitations and subject to allotment, for any Shares not acquired by exercise of the primary subscription Rights. The number of Rights to be issued to Record Date Shareholders (as defined below) will be rounded up to the nearest number of Rights evenly divisible by three. In the case of shares of Common Stock held of record by Cede & Co., the nominee for The Depository Trust Company, or any other depository or nominee (in each instance a "Nominee Holder"), the number of Rights issued to such Nominee Holder will be adjusted to permit rounding up (to the nearest number of Rights evenly divisible by three) of the Rights to be received by beneficial holders for whom it is the holder of record only if the Nominee Holder provides to the Fund on or before the close of business on June 13, 1995 written representation of the number of Rights required for such rounding. Shareholders of record on the Record Date and beneficial holders with respect to whom Nominee Holders have submitted such written representation are referred to herein as "Record Date Shareholders." Fractional Shares will not be issued. The Rights are transferable and the Rights and the Shares will be listed for trading on the Now York Stock Bxchange (the “NYSE"). The Fund's Common Stock is traded on the NYSE under the symbol "MSF”. The Rights will be traded under the symbol “MSF.RT”. See "The Offer." THE SUBSCRIPTION PRICE PER SHARE (THE "SUBSCRIPTION PRICE") WILL BE $14.00.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, ON June 20, 1995, unless extended as described herein. The Fund announced the Offer after the close of trading on the NYSE on April 21, 1995. The net asset value per share of Common Stock at the close of business on April 21, 1995 and May 30, 1995 was $17.05 and $17.89, respectively, and the last reported sale price of a share of Common Stock on the NYSE on such dates was $18.125 and $18.50, respectively.
The Fund is a non diversified, closed end management investment company. The Fund's investment objective is long term capital appreciation through investment primarily in emerging country equity securities. See "Investment Objective and Policies." There can be no assurance that the Fund's investment objective will be achieved. Investment in the Fund involves special considerations and risks that are not typically associated with investments in tbe securities of U.S. issuers, sucb as controls on foreign investment, currency excbange rate fluctuations and greater social, economic and political uncertainty. Emerging country securities markets are generally cbaracterized by a relatively small number of equity issues and low trading volumes, resulting in comparatively greater price volatility and lesser liquidity of portfolio investments. In addition the securities of certain companies in wbicb the Fund may invest may be considered speculative. See “Risk Factors and Special Considerations.” Morgan Stanley Asset Management Inc. serves as the Fund's Investment Manager. The address bf the Fund is 1221 Avenue of the Americas, New York, New York 10020 (telephone, number (212) 296 7100).
This Prospectus sets forth concisely the information about the Fund that a prospective investor ought to know before investing. Investors are advised to read this Prospectus and to retain it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Proceeds
Subscription PriceSales Load (1)to the Fund(2)
Per Share ...... $14.00(3) $0.525$13,475
Total ...... $81,200,000$3,046,000$78,163,000(4)
(Footnotes on following page)
An immediate dilution, which could be substantial, of the aggregate net asset value of the Common Stock owned by Record Date Shareholders who do not fully exercise their Rights is likely to occur as a result of the offer because the Subscription Price per Share is less than the Fund's net asset value per share on the Record Date, and the number of shares outstanding after the Offer is likely to increase in a greater percentage than the increase in the size of the Fund's assets. In addition, as a result of the Offer, Record Date Shareholders who do not fully exercise their Rights should expect that they will, at the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. See Risk Factors and Special Considerations."
MORGAN STANLEY& CO.
Incorporated
May 30, 1995
Employee Plan Considerations
Shareholders that are employee benefit plans subject to the Employee Retirement income Security Act of 1974, as amended ("ERISA”), (including corporate savings and 401 (k) plans), Keogh or H.R.10 plans of self employed individuals and Individual Retirement Accounts ("IRAs") and other plans eligible for special tax treatment under the Code or subject to Section 4975 of the Code (collectively, "Plans") should be aware that additional contributions of cash to the Plan (other than rollover contributions or trustee to trustee transfers from other Plans) in order to exercise Rights would be treated as Plan contributions and, when taken together with contributions previously made, may subject a Plan to excise taxes for excess or nondeductible contributions. In the case of Plans qualified under Section 401 (a) of the Code and certain other plans, additional cash contributions could cause the maximum contribution limitations of Section 415 of the Code or other qualification rules to be violated. Furthermore, it may be a reportable distribution and there may be other adverse tax consequences if Rights are sold or transferred by a Plan to another account. A sale of Rights by a Plan account to an unrelated third party and retention of cash proceeds by the Plan account, or the direct exercise of Rights by a Plan account, should not be treated as a taxable Plan distribution. Plans contemplating making additional cash contributions to exercise Rights should consult with their counsel prior to making such contributions.
Plans and other tax exempt entities, including governmental plans, should also be aware that if they borrow in order to finance their exercise of Rights, they may become subject to the tax on unrelated business taxable income ("UBTI") under Section 511 of the Code. If any portion of an Individual Retirement Account ("IRA") is used as security for a loan, the portion so used is also treated as distributed to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the Code contain prohibited transaction rules that may impact the exercise or transfer of Rights. Due to the complexity of these rules and the penalties for noncompliance, Plans should consult with their counsel regarding the consequences of their exercise or transfer of Rights under ERISA and the Code.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risks and special considerations, including the following:
Dilution
An immediate dilution of the aggregate net asset value of the Common Stock owned by Record Date Shareholders who do not fully exercise their Rights is likely to occur as a result of the Offer because the Subscription Price per Share is less than the Fund's net asset value per share on the Record Date, and the number of shares outstanding after the Offer is likely to increase in a greater percentage than the increase in the size of the Fund’s assets. In addition, as a result of the Offer, Record Date Shareholders who do not fully exercise their Rights should expect that they will, upon completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. Although it is not possible to state precisely the amount of such a decrease in net asset value, because it is not known at this time what the net asset value per share will be on the Expiration Date or what proportion of the Rights will be exercised, such dilution could be substantial. For example, assuming that all Rights are exercised and that the Subscription Price of $14.00 is 21.7% below the Fund's net asset value of $17.89 per share as of May 30, 1995, the Fund's net asset value per share would be reduced by approximately $1.17 per share.
Foreign Currency Considerations
The Fund's assets are invested principally in equity securities of companies in emerging countries and substantially all of the income received by the Fund is in foreign currencies. However, the Fund computes and distributes its income in U.S. dollars, and the computation of income is made on the date that the income is tamed by the Fund at the foreign exchange rate in effect on that date. Therefore, if the value of the foreign currencies in which the Fund receives its income falls, relative to the U.S. dollar, between the earning of the
income and the time at which the Fund converts the foreign currencies to U.S. dollars, the Fund may be required to liquidate securities in order to make distributions if the Fund has insufficient cash in U.S. dollars to meet distribution requirements. See "Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan." The liquidation of investments, if required, may have an adverse impact on the Fund's performance. In addition, if the liquidated investments include securities that have been held less than three months, such sales may jeopardize the Fund's status as a regulated investment company under the Code. See "Taxation U.S. Federal Income Taxes."
Since the Fund invests in securities denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency exchange rates will affect the value of securities in the Fund's portfolio and the unrealized appreciation or depreciation of investments. For example, on December 20, 1994, the Mexican Government devalued the Mexican New Peso and then subsequently permitted it to float freely against other currencies. As a result of these actions, the Mexican New Peso lost 52.8% of its value against the U.S. dollar between December 19, 1994 and March 9, 1995. This has had a direct and significant adverse impact on the Fund's Mexican investments, which made up approximately 13.7% of the Fund's investment portfolio at the end of November 1994. The crisis in Mexico also has had adverse effects on the currencies and securities markets of other emerging countries.
In addition to changes in the value of the Fund's portfolio investments resulting from currency fluctuations, the Fund may incur costs in connection with conversions between various currencies. Foreign exchange dealers realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer normally will offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire immediately to resell that currency to the dealer. The Fund conducts its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward, futures or options contracts to purchase or sell foreign currencies.
The Fund may seek to protect the value of some portion or all of its portfolio holdings against currency risks by engaging in hedging transactions. The Fund may enter into forward currency exchange contracts and currency futures contracts and options on such futures contracts, as well as purchase put or call options on currencies, in U.S. or foreign markets. In order to hedge against adverse market shifts, the Fund may purchase put and call options on stocks, write covered call options on stocks and enter into stock index futures contracts and related options. For a description of such hedging strategies, see "Investment Objective and Policies Foreign Currency Hedging Transactions and Stock Options and Index Futures Contracts" and Appendix D to this Prospectus. There can be no guarantee that instruments suitable for hedging currency or market shifts will be available at the time when the Fund wishes to use them. Moreover, investors should be aware that in most emerging countries the markets for certain of these hedging instruments are not highly developed and that in many emerging countries no such markets currently exist.
Investment and Repatriation Restrictions
Some emerging countries have laws and regulations that currently limit or preclude direct foreign investment in the securities of their companies. However, indirect foreign investment in the securities of companies listed and traded on the stock exchanges in these countries is permitted by certain emerging countries through specially authorized investment funds. The Fund may invest in these investment funds subject to the provisions of the 1940 Act as discussed below under "Investment Restrictions." If the Fund invests in such investment funds, the Fund's shareholders will bear not only their proportionate share of the expenses of the Fund (including operating expenses and the fees of the Investment Manager), but also will indirectly bear similar expenses of the underlying investment funds. See also "Taxation U.S. Federal Income Taxes Passive Foreign Investment Companies." Consequently, the costs and expenses of the Fund of investing in such countries may be higher than the cost and expenses of investing in countries that permit direct foreign investment.
Certain of the investment funds referred to in the preceding paragraph are advised by the Investment Manager. The Fund may, to the extent permitted under the 1940 Act, invest in these investment funds. If the
21
Fund does elect to make an investment in such an investment fund, it will only purchase the securities of such investment fund in the secondary market.
In addition to the foregoing investment restrictions, prior governmental approval for foreign investments may be required under certain circumstances in some emerging countries, and the extent of foreign investment in domestic companies may be subject to limitation in other emerging countries. Foreign ownership limitations also may be imposed by the charters of individual companies in emerging countries to prevent, among other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by foreign investors may require governmental registration and/or approval in some emerging countries. The Fund could be adversely affected by delays in or a refusal to grant any required governmental registration or approval for such repatriation or by withholding taxes imposed by emerging ma , rket countries on interest. or dividends paid on* securities held by the Fund or gains from the disposition of such securities. If for. any reason the Fund were unable to distribute an amount equal to substantially all of its investment company. taxable income (as defined for U.S. federal tax purposes) within applicable time periods, the Fund would cease to qualify for the favorable tax treatment afforded to regulated investment companies under the Code. See "Taxation U.S. Federal Income Taxes."
Emerging Country Securities Markets
Trading volume in emerging country securities markets is substantially less than that in the United States. Further, securities of some emerging country companies are less liquid and more volatile than securities of comparable U.S. companies. A high proportion of the shares of many emerging country issuers may be held by a limited number of persons, which may limit the number of shares available for investment by the Fund. A limited number of issuers in most emerging country securities markets may represent a disproportionately large percentage of market capitalization and trading value. In addition, the application of certain 1940 Act provisions may limit the Fund's ability to invest in certain emerging country issuers and to participate in public offerings in emerging markets. The limited liquidity of emerging country securities markets may also affect the Fund's ability to acquire or dispose of securities at the price and time it wishes to do so. In addition, certain emerging country securities markets are susceptible to being influenced by large investors trading significant blocks of securities or making large dispositions of securities resulting from the failure to meet margin calls when due. Commissions for trading on emerging country stock exchanges are generally higher than commissions for trading on U.S. exchanges, although the Fund endeavors to achieve the most favorable net results on its portfolio transactions and may, in certain instances, be able to purchase its portfolio investments on other stock exchanges where commissions are negotiable.