The Art Fund Racket

The Securities and Exchange Board of India (SEBI) has handed out a note of caution to various Art Funds saying that the launching or floating of art funds or schemes without obtaining registration from SEBI would amount to violation of SEBI Act and Regulations.

According to SEBI, an art fund is a 'Collective Investment Vehicle' (CIV) and the entity has to seek a certificate of registration in accordance with the regulation. However, at present there is not a single entity registered with SEBI under the collective investment vehicle regulations and hence not authorized to launch an art fund.

Art funds basically work like any other CIVs, wherein people pool in funds, purchase the art and try to sell it at a premium, which is then divided amongst the investors. The fund manager or the art manager is entrusted with the responsibility of buying and selling art. While the Indian art markets seem to have caught the fancy of developed markets, where it is done in a more regulated manner and has emerged as a true asset class, in India or in Asia for that matter, the market is opaque.

“Not all in the art business are convinced by the investment rationale for art from Asia, a region notorious for fakes, poor authentication and high transaction costs,” says Mei Jianping, former New York City professor and the creator of Mei/Moses index, which tracks prices of western art.

Large investment sizes (which could be up to $10,000), illiquid markets, close ended for 3 years, appraisal after an interval of 12 months and shortage of art connoisseurs, are some of the factors that plague the market. It might be a good investment for HNIs and institutions, but certainly not for the retail investor. The move to bring art funds under the regulatory ambit would also reduce the probability of unscrupulous raising and misuse of funds for purposes of investing in 'Art'. So, when the market regulator wants to increase the accountability, the retail investor should actually feel more secure. Besides, the funds will have wider participation with the legitimacy of the regulator, while the investors will have one more credible asset class - which has very low correlation with equity markets. It's a move in the interest of investors as they are (Art) relatively new investment options and some degree of regulation is warranted until this investment option attains some degree of maturity and its performance ratified. Hence, once a regulatory mechanism is in place, there would be a minimum set of guidelines which market participants would need to adhere to and this should help in the orderly development of the industry over the long term.