After Osian’s will investors of Yatra Art Fund-II get justice?

Investors in Yatra Art Fund-II have alleged that the trustees have spent about 50% of the capital towards fees and expenses, including advisory fees. Will SEBI act on it?

With market regulator Securities and Exchange Board of India (SEBI) finally deciding that Osian's Art Fund was a collective investment scheme (CIS) run illegally, questions are being raised about other such art funds. An investor in Yatra Art Fund-II has alleged that the fund handed over just 50% of the principal amount invested in 2011-12, and indicated the balance as loss.


“While it is possible for an investment to lose value, in this case, the available data seems to indicate that the actual loss was primarily due to mismanagement of the fund and its assets by the trustees. Out of the actual loss, almost 50% has been wiped out over the term of the scheme in fees and expenses. The trustees had complete right on what expenses to approve and it seems that they have used it fully for personal gains at the expense of investors,” said the investor, who does not want to be named.


Mumbai-based Sakshi Art Gallery’s Geetha Mehra with the help of venture capitalist Pravin Gandhi and Sanjay Kumar launched Yatra Art Fund in 2005. These three, along with Nilesh Shah of Edelweiss Capital, were the four trustees and advisors of the fund. While Ms Mehra and Mr Kumar were promoter trustees, the other two were supposedly independent trustees.


For its first tranche, Yatra Art Fund was advised by Edelweiss and collected Rs10.75 crore in September 2005. The fund had a lock-in period of five years.


Buoyed by the success of first tranche, Yatra then launched second tranche of its Fund. The Yatra Art Fund -II, launched in 2006, mobilised around Rs23 crore from investors, mostly high networth individuals (HNIs).


The minimum investment amount into the scheme was Rs10 lakh, out of which Rs5 lakh were paid at the time of application and balance was called for later. The scheme became operational in January-February 2007 with a total committed corpus of over Rs21 crore. As per the term specified it should have ideally closed in 2011, however, investors were advised in January 2011 that it is being extended by another year as the market had turned bad.


According to the investor, each investor into the scheme was handed over only 50% of his principal in parts during 2011 and 2012 and the balance was indicated as a loss. Many investors have written to and some have even personally met the trustees to seek clarifications. However, no proper response is being provided, he said.


While investors of Yatra Art Fund received at least 50% of their principal amount, investors of Osian’s Art Fund were not that lucky. As per the Osian Art Fund prospectus, the fund distribution had to commence from 10 July 2009. The company invoked a specific clause that allows payment of the returns within a period of 120 days (four months). Backed by the clause, letters were sent to the unit holders that the money would be paid by 10 November 2009. (read Osian’s Art Fund is running late on payments)


Extension and expenses

Yatra Art Fund -II was supposed to be closed in four years. However, the tenure was extended by one more year. However, the extension did not help the fund to earn more revenues and it was foreclosed.


“In the entire tenor of the fund a large sum of money continued to be charged as expenses, most of it as advisory fees and trusteeship fees. All the fees and expenses continued to be approved even in the extended period while investors suffered losses. The cumulative effect of the various fees and expenses, other than towards actual transactions and original set-up fee itself was almost Rs5 crore or about 20% of the Fund capital. A big part of this fee was “advisory fee” and a significant part was “trusteeship fee”," the investor said.


Purchase and valuations

According to the investor, trustees used to value artwork and charge fees accordingly, however, the last audited balance sheet for FY2011-12, the year of extension, shows that artwork which was being valued at Rs10.22 crore on the books was sold for Rs3.44 crore translating into a loss of Rs6.78 crores before expenses, towards the sale. “However, surprisingly an advisory fee of Rs31 lakh was still charged in the same year. Much higher levels of expenses were charged in previous years on the same inventory. It seems that the authority to approve expenses over investor's money was misused,” he alleged.


Fire sale for ‘trustees’?

Fire sale transactions are usually done as final measure to sell unsold stock. “Yatra Art Fund-II offered art works at a fire sale price and ‘in the absence’ of response from investors, the promoter trustees picked it on their own books  at the fire sale price,” the investors said.


He said, investors into the fund did not understand the art market and don’t know how to value art pieces unlike promoters and trustees. “They had invested in this fund expecting a better job to be done by the ‘advisors’ and ‘trustees’ given their experience and background for which all the fee was charged.


“...the trustees were valuing this inventory for balance sheet very differently (read much higher), and then apparently Christie’s valued it at another level for which it had been willingly shipped off for sale. When that also did not work, it was picked at another lower price fixed by the trustees again as the other potential buyers had no clue of how to value what's on offer,” the investor said.


Buying art works in dwindling markets

The promoters and trustees of Yatra Art Fund-II were aware about the market conditions post the 2008 global meltdown. However, during 2008-09, they made purchases worth Rs2.9 crore. It was followed by other purchases worth Rs77.5 lakh in 2009-10 and Rs20 lakh in 2010-11. The last purchase was made in the year of repayment.


The investor said, “It is clear that adequate holding period was not available for these purchases and they have simply added to the losses of investors. Were these purchases made to suit or favour an entity? Investors do not have the data of who these items were purchased from (could be promoter gallery?) and what financial implication did it have on the fund.”


While there is not much data available on the art works owned by Yatra Art Fund-II, Osian’s Art Fund had inventories including artworks by famous artists like MF Hussian, Bikash Bhattarchjee, VS Gaitonde, Akbar Padamsee, Jogen Chaudhary, Somnath Hore and Tyeb Mehta. (read Osian Art Fund delays payout)


According to media reports, as of August 2008, there were five art funds operating in India. Osian Art Fund was launched by Osian's-Connoisseurs of Art Private Ltd while Yatra Art Fund was supported by Edelweiss. Copal Art Fund, after a series of funds worth Rs10 crore in 2006, launched a fund worth Rs150 crore with an option to invest in paintings of one's choice. With a minimum and maximum investment of Rs5 lakh and Rs2.5 crore, Copal Art Fund offered flexible payment plans without any lock-in period.


The fourth fund, Crayon Capital Art Fund was launched in November 2006, had art critic Ela Dutt as advisor and Vadehra Art Gallery as main source for buying and selling. Indian Fine Art Fund was set up by UK-based The Fine Art Fund group founder Philip Hoffman. This five-year close ended offshore fund had an initial corpus of $25 million.


“It seems evident that people who claim to be morally and ethically right seem to wilt and act differently when it comes to managing money for others on which they exercise full control,” he concluded.

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Osian’s: SEBI asks the Art Fund to shut shop and refund investors’ money with 10% interest pa

It took the market regulator almost six years to finally take a call on Osian's. Moneylife has been spearheading the campaign for refund of investors’ money

Market regulator Securities and Exchange Board of India (SEBI) has finally asked Osian’s-Connoisseurs of Art Pvt Ltd (or Osian's, which managed Osian's Art Fund), to wind up its existing collective investment scheme (CIS) and refund the money collected from investors. SEBI has also referred the case to state government and police for filing a civil/criminal case against Osian's and its promoters, directors and persons in-charge of its CIS. In addition, SEBI also requested the ministry of corporate affairs (MCA) to initiate proceedings to wind up the Art Fund. The change of mind by SEBI about Osian's is quite an interesting story, which was only covered by Moneylife. But more about it later.


In its order, Rajeev Kumar Agarwal, whole-time member of SEBI said, “Osian’s-Connoisseurs of Art Pvt Ltd is directed to wind up its existing “collective investment scheme” and refund the monies collected by it under its scheme but remaining unpaid, to all the investors. In addition, it shall also pay the amount of profits/income earned, if any, that is due to the investors as per the terms of its offer or pay interest at the rate of 10% per annum from the date of investment till the date of refund, whichever is higher”.


Osian's raised Rs102.40 crore from 656 unit holders across 39 cities, most of them high net-worth individuals (HNIs). The scheme used to declare NAVs showing 30% returns, but when it was time for redemption, the money was not forthcoming. The scheme was wound up on 10 July 2009.


SEBI's dilemmas about Osian's Art Fund

Osian's Art Fund was launched in 2006 and was served a show-cause notice by SEBI in November 2007 asking as to why the Fund should not be regulated.


The market regulator has a mandate to regulate CIS, which pool together investors’ money to invest in a variety of schemes. However, SEBI failed to regulate the Osian Art Fund, which was the first fund among the unregulated art funds, which were floated during that time.


In February 2008, though, SEBI issued an official advisory that art funds were collective investment schemes and would have to be registered with it or be liable to civil and criminal action. The advisory states that “in terms of section  12 (1B) of the SEBI Act, 1992, no ‘person’ shall sponsor or cause to be sponsored or cause to be carried on a collective investment scheme unless he obtains a certificate of registration from the Board in accordance with the regulations.” SEBI clarified that for a collective investment scheme to raise money from the public it is prerequisite that the entity must (a) be a company, and (b) registered with SEBI as a Collective Investment Management Company.


“Therefore, the launching/floating of ‘art funds’ or schemes without obtaining a certificate of registration from the Board in terms of the provisions of the Regulations amounts to violation of the provisions of Section 12 read with Section 11 and 11AA of the SEBI Act and the Regulations. For such violations, appropriate actions, civil and criminal, under the SEBI Act may be taken by SEBI against such funds/companies,” the advisory said. Strangely, despite this, it took no action against Osian’s.


SEBI rejects investor's complaint forgetting its own advisory

While the market regulator seemed uninterested to act against Osian’s, AK Muthuswamy, who had invested Rs25 lakh, was knocking on SEBI’s doors about the failure of the Art Fund. The three-year fund was supposed to return investors’ money by 2009 but did not do so. On 31 January 2011, SEBI dismissed Mr Muthuswamy's complaint by arguing that the case did not fall under its purview! Yes, its February 2008 advisory notwithstanding.


SEBI later pointed to the 16 April 2012 judgement of the Madras High Court, which ostensibly ruled that the regulator does not have power to review its own orders.


This was somewhat of a white lie. The high court held that it could not issue direction to deal with the complaint which was not maintainable in law. It, however, gave liberty to Muthuswamy to challenge SEBI's letters dated 31 January 2011 by filing an appeal.


Mr Muthuswamy then approached the Securities Appellate Tribunal (SAT) which asked SEBI to re-examine the issue. In its order on 29 November 2012, the SAT set aside SEBI’s letter dated 31 January 2011 and directed the market regulator to re-examine the matter after hearing both the parties.


SEBI contended before SAT that it was willing to re-examine the issue but is facing some constraint because of an order passed by the Madras High Court on 16 April 2012 saying that the regulator does not have power to review its own orders.


However, SAT noted that the High Court has categorically stated that its order “shall not bar the petitioner to challenge the order passed by SEBI, if so permissible in law, by filing an appeal or taking other remedies to address the grievance “.


Later in the day, Osian's Art Fund said it does not fall under the regulatory authority of SEBI. “The Osian's Art Fund position from inception is that it or any other art fund does not qualify as a CIS under the SEBI (Collective Investment Scheme) Regulations, 1999.


“In the Private Placement Memorandum, the Risk Factors and Special Considerations clearly stated and disclosed that we are not regulated by or registered with any regulatory authority, such as SEBI, whether in India or abroad,” the Art Fund said in a statement.


The game of confusion and shirking responsibility

Osian’s-Connoisseurs of Art Pvt Ltd refused to take any responsibility for the Osian's Art Fund by claiming that it was only the sponsor to the Art Fund, which was a private trust formed under the Indian Trust Act, 1882. Oseta Investments Trustee Company Pvt Ltd (Oseta) was the trustee and Osian’s-Connoisseurs of Art acted just as an asset management company (AMC) for the Art Fund.


Osian's Art Fund launched a “Scheme – Contemporary -1” which involved pooling of investments from investors with the objective to generate income and capital growth from portfolio of investment and management in the art works. Osian’s-Connoisseurs of Art was managing the investments/ contributions received from investors.


When SEBI issued a show-cause notice to Osian’s-Connoisseurs of Art on 12 October 2007, it was Oseta, which responded to the notice. In its letter on 21 December 2007, Oseta assumed the responsibility to respond to the notice and filed reply for itself and on behalf of Osian’s-Connoisseurs of Art.


Oseta and Osian’s-Connoisseurs of Art told SEBI that in the confidential information memorandum (CIM), it categorically disclosed risk factor and otherwise that neither the Trust nor the Fund nor the scheme had been registered with the SEBI or any other governmental or unregistered entity.


SEBI said, after the reply by Oseta to its show-cause notice, there was confusion with regard to jurisdiction and not action was taken.


Neville Tuli, chief advisor was admittedly responsible in advising the AMC and Oseta for formulation of investment policies and strategies for the Art Fund and in relation to the investment and management of the corpus of the Art Fund, SEBI said in its latest order.


Why Osian's was wrong?

Both Oseta and Osian’s-Connoisseurs of Art maintained that the SEBI's CIS regulations does not cover art fund and were meant only for plantation and agro companies.


SEBI in its latest order says that provisions of section 12(1B) and regulation 3 are mandatory and both contain substantive provisions of law. “On careful examination of these provisions it is clear that they intend to cover the whole gamut of entities or persons, natural, juristic or otherwise, who sponsor or cause to sponsor a collective investment scheme so as to bring them into the regulatory framework of SEBI Act and CIS Regulations through registration. Therefore, no person other than a Collective Investment Management Company that has obtained certificate of registration from the Board can sponsor or cause to sponsor a collective investment scheme,” it said.


The expression “Collective Investment Management Company” is defined in regulation 2(h) of the CIS Regulations as under:

“2(h) Collective Investment Management Company means a company incorporated under the Companies Act, 1956 (1 of 1956) and registered with the Board under these regulations, whose object is to organise, operate and manage a collective investment scheme;”


“In view of above provisions, a person can launch or sponsor or cause to sponsor a collective investment scheme only if it is registered as a Collective Investment Management Company in accordance with the CIS Regulations. Any other structure for sponsoring or causing to sponsor a collective investment scheme is, thus, not permissible as per law. Accordingly, a person cannot sponsor or cause to sponsor a collective investment through a private trust,” the SEBI order says.


Mr Agarwal, in his order noted that Swaraj Tuli, mother of Neville Tuli (founder and chairman of Osian’s-Connoisseurs of Art) has 99% holding in Oseta and together they hold 48.41% shares of the Osian’s-Connoisseurs of Art. “It is relevant to note here that the next biggest shareholder holds only 6.08% shares in Osian’s-Connoisseurs of Art. Mr Tuli is admittedly chief advisor of the Art Fund and also responsible in advising the Osian’s-Connoisseurs of Art i.e. AMC and the Oseta for the formulation of investment policies and strategies for the Art Fund and in relation to the investment and management of the corpus of the Art Fund. I, therefore find that all these entities viz, Osian’s-Connoisseurs of Art, Oseta are closely connected to each other and Mr Tuli along with his mother Mrs Tuli is having control over them,” the order stated.


Osian’s-Connoisseurs of Art had argued that subscription to its scheme is undertaken as private contract with specific sophisticated investors on a private placement basis, hence it is not a CIS. However, Mr Agarwal, noted that SEBI has been receiving complaints about the Art Fund from investors across the country and overseas.


He said, “All those complainant shave not been approached to invest in the

scheme so as to make the offer/scheme a domestic concern. I, further, note from the complaints that the investors were approached by marketing agents soliciting investments from them. In the facts and circumstances of this case, it is clear that the offer in the scheme of the noticee was open to all investors who were eligible as per its terms and whosoever from public was eligible could invest in the scheme. In view of these observations, I find that the offer in question was to public and cannot be regarded as private placement merely because only sophisticated investors could subscribe to it.”


Here are the highlights of the directions given by SEBI...

(a) Osian’s-Connoisseurs of Art Private Limited is directed to wind up its existing 'collective investment scheme' and refund the monies, collected by it under its scheme but remaining unpaid, to all the investors. In addition, it shall also pay the amount of profits/income earned, if any, that is due to the investors as per the terms of its offer or pay interest at the rate of 10% per annum from the date of investment till the date of refund, whichever is higher;


(b) Osian’s-Connoisseurs of Art Private Limited is further directed to comply with directions in clause (a) above within a period of three months from the date of this order and submit a winding up and repayment report to SEBI in accordance with the CIS regulations failing which the following actions shall follow:

i. SEBI would initiate prosecution proceedings under Section 24 and adjudication proceedings under Chapter VI of the SEBI Act, against Osian’s-Connoisseurs of Art Private Limited and its promoters;

ii.  A reference would be made to the state government/ local police to register a civil/ criminal case against Osian’s-Connoisseurs of Art Private Limited and its promoters, directors and its managers/ persons in charge of the business of its scheme(s) for possible offences of fraud, cheating, criminal breach of trust and misappropriation of public funds; and

iii. A reference would be made to the ministry of corporate affairs to initiate the process of winding up of Osian’s-Connoisseurs of Art Private Limited;


(c) Osian’s-Connoisseurs of Art Private Limited is directed not to access the capital market and is further restrained and prohibited from buying, selling or otherwise dealing in the securities market till its collective investment scheme/sis/are wound up and all the monies mobilised through them are refunded to the investors.


Moneylife has extensively written about Osian’ Art fund. Click on the following links to access some of the many stories.


How SEBI failed to regulate the Osian Art Fund

Osian Art Fund: Dirty canvass by Sucheta Dalal

Undeterred by poor returns and liquidity, Osian Art plans another art fund

ABN AMRO customers upset over their Osian Fund investment

Osian’s Art Fund: Some unit holders still awaiting first payment

SEBI in a tough spot: Are art funds collective investment schemes or not?

The Art of Speculation

Osian Art Fund failure: Mr Tuli’s version

Osian Art Fund delays payout

Around 85 Osian Art Fund investors awaiting first payment

Osian Art Fund to be redeemed

Osian’s Art Fund is running late on payments

The Osian saga continues

Read other Osian stories here

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choksi R

6 years ago

I happen to be an investor and have not yet received the full payment with income/interest. Following the SEBI Order, I have written and hand-delivered a letter to their Nariman Point, Mumbai office, asking to make my balance payment as per the Clause 45(a) and (b) in the Order.


6 years ago

The onus also lies with the promoters of the fund like RBS and others. They were supposed to have checked the credentials and all the paper work. The took their commission but stopped responding to the complaints.Some sort of regulation is required for them too.

when is the fund likely to be returned.

Bosco Menezes

6 years ago

My Thanks to MoneyLife for covering this issue diligently over the years.
Hopefully, we will reach the end of this saga soon, one way or the other.

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