Rise and fall of Indian art funds
Art may be a good asset to own if you enjoy it. But if you’re only looking to speculate, think twice
Contemporary art, pink champagne, gemstones — it is always tempting to believe that hiring professional managers to select exotic investments such as these can yield far better returns, than investing in boring old bonds or equity. But the experience of investors in Indian art funds floated 10 years ago tells us that when it comes to investments, it is sometimes better to stick with the boring.
The story of the rise and fall of art funds can be pieced together from the recent rulings by SEBI and the Securities Appellate Tribunal, on complaints from aggrieved investors in India’s first art funds. This is how it goes.
Renaissance to Dark Ages
The Indian art market was seeing renaissance from 2000 to 2005, with works by modern Indian artists, helped by the economic boom, fetching record sums at global auctions. This prompted two sponsors in India to launch their own art funds, so that wealthy investors who did not understand art could benefit from the price appreciation in this new ‘asset class’.
The Yatra Fund, launched in 2005, promised to invest in the works of Indian artists such as M F Husain, F N Souza and V S Gaitonde, apart from sculptures, photographs and other forms of contemporary Indian art.
Noting that art as an asset class offered ‘higher average returns’ than most other assets, the fund promised to deliver ‘attractive investment returns’ over four to five years with ‘relatively low risk’.
Investors rushed to commit the minimum ₹20 lakh apiece to this fund, with over 50 affluent investors sinking a total of ₹10.9 crore into it. A second fund from the same sponsor soon followed and managed to rake in ₹21.9 crore from 132 investors.
Both funds were close-ended and required investors to lock in the sums for four to five years.
Close on the heels of the Yatra Fund came the Osian Art Fund in June 2006. This fund was even more sought after, because it was floated by Osian Connoiseurs of Art, one of the best known collectors and auction houses in the country.
Widely recommended to the wealthy by private banks and financial advisers, Osian Art Fund collected ₹102.6 crore from as many as 656 investors, with investors committing ₹10 lakh apiece to invest in works of contemporary Indian art. This one came with a lock-in period of 36 months. This fund promised redemption of units issued at a net asset value that would be disclosed later.
Though investors in these funds were probably novices at buying art, these art funds were advised by some of the best known names in the Indian art world.
The large collections that the sponsors of these funds themselves owned, were expected to give them an exclusive edge in cherry picking the best artists and works for their fund investors.
Their expertise and clout in the art world was expected to help these funds get their hands on exclusive works with good potential for appreciation.
But alluring as this model sounded, it didn’t take much for Art Funds to unravel.
Crisis strikes The global financial crisis that unfolded from 2007 proved to be the undoing of the global art market much as it did of the stock, bond and other financial markets. By the time the Indian art funds came up for redemption, the once-thriving art market had collapsed. Demand at public auctions had simply melted away. Hardly any deals were being done by once-avid private collectors. Prices for works, even by the acknowledged Masters, were down by 50-60 per cent from their peaks.
This hit the said Art Funds quite hard because they were looking to sell, not one or two individual pieces of art, but entire portfolios.
This forced both the Yatra Funds to extend their redemption dates by one to two years. When the funds were finally wound down and investors repaid, Yatra Fund-I could only repay 81 per cent of the capital originally collected from investors.
Its portfolio had suffered an erosion of nearly ₹2 crore in value. Yatra Fund II saw an even steeper erosion with its investors forced to take a 50 per cent haircut and losing capital of ₹11 crore in total.
But the Osian Art Fund was in even more dire straits. Having disclosed to its investors that the fund had an NAV of ₹117.1 per unit in May 2009 (against a face value of ₹100), the managers found that the liquidated value of its portfolio was nowhere near this number. The fund delayed repayments — which were by now pouring in thick and fast — and pledged its assets to borrow from banks to meet the shortfall.
With banks now breathing down the fund’s neck, the fund was forced to resort to distress sales, further battering its ‘NAV’. According to Tuli’s assessment, had Osian resorted to liquidating its entire ‘portfolio’ of art at the time, the fund’s NAV would have been no greater than ₹54.65, against the earlier disclosed NAV of ₹117! No value
Later, in an essay on how the Osian Art Fund unravelled, Neville Tuli, advisor to the fund, admitted: “Many buyers, who had promised to buy art at preset prices in 2007-08, refused to pay those prices in 2009 when redemption demanded it as, by then, the prices had fallen by more than 50-60 per cent. But, more importantly, confidence was at an all-time low and liquidity at an exceptional premium. Assumptions that the art would sell at a 20-30 per cent discount, compared to earlier sales proved incorrect, as the art would not sell at any price. The liquidity just did not exist even at a junk value discount.”
As they delayed repayments, a few investors in these art funds complained to market regulator SEBI. After a long-drawn legal skirmish in which both funds questioned the regulator’s jurisdiction over them, SEBI passed its final orders against the Osian Art Fund in 2013 and against Yatra Art Fund this November. SEBI’s orders essentially held that both the Yatra and Osian Art Funds were ‘collective investment schemes’ that should have registered with the regulator before collecting public money. SEBI has directed both funds to refund investors the sums due to them with interest at 10 per cent per annum from the date of investment.
Whether investors in India’s first home-grown art funds can look forward to a happy ending now, is still far from clear. The Securities Appellate Tribunal has noted, in the Osian case, that SEBI’s direction asking it to refund investors with 10 per cent interest, was hard to justify. As art funds only promised to pool in money to invest in art, the SAT feels, they cannot be held liable for guaranteed returns to their investors.
Learnings While the legal battles may not yet be over for the investors in art funds, the saga does have two key learnings. One, exclusivity may seem like a desirable attribute while investing in assets, such as art, wine or antiques. But the truth is that exclusivity can work against you in an adverse market. Unlike financial instruments, which are widely traded, the market for passion investments is so narrow that liquidity can dry up when the going gets tough. And arising from this, while ‘diversifying’ across a large portfolio of holdings may work to your benefit in the case of stocks and bonds, it may not be so for art.
Two, passion investments are subject to the same laws of demand, supply, boom and bust as financial investments.
Own them if you genuinely enjoy and understand them. But if your intention is to pocket a monetary gain, speculating in the financial markets may yield far better rewards.