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The Art Fund Fraud

The relative ease with which art funds have been able to skirt regulations puts a question mark on the efficacy of the regulation mechanism

India’s art fund racket has reached inevitable conclusion. Investors – if investors is the right word – are crying and the so-called art fund managers are either giving excuses, or paying back, to those who are crying the loudest, in dribs and drabs.

However, the investment performance of these particular funds is not the main issue. The main issue is the ease with which investment schemes of dubious legality are able to work their way around our securities laws with thin disguises. According to the law of the land, ‘collective investment schemes’ can only be run by entities specifically permitted to do so. The entities that run any investment fund, as well as the funds themselves, have to conform to some strict rules about how they are run, where they invest, and most importantly, about valuation and liquidity.

Art funds and other ‘alternative’ investments typically work their way around the law by not advertising or openly contacting the general public. This enables them to claim that they are a private activity and investors come in by invitation. They claim that since they are not offered to the public, they don’t qualify as a collective investment scheme under the law. However, this is just a fig leaf. Typically, people read about these funds in the media, get in touch with those running them, and are invited to join. Those who’d bought into the story helped sell it to their friends as well. This is facilitated by a lax definition of what is private activity. Basically, people came to hear of an investment which described itself using the word ‘fund’ and eventually were able to invest in it. But because these so-called funds were not bound to any securities regulations, there was no check on where they invested, at what valuations, from whom they bought their investments, and the veracity and realisability of the valuations they reported to the investors.

This is not primarily about the Rs 200 crore or so that were apparently invested in these particular funds. The real issue is the ease with which fake investment vehicles can get away with a minimum of subterfuge and whether we have a mechanism for preventing such activities. Art funds have had an easier time than other investments that tread the borderline of legality, but that’s mostly because they were gushingly written about by a gullible media and by the general smartness and well-connectedness of the art world. Other than that, this is much the same sort of investment as are tree plantations and gold pyramid schemes.