In 2008, SEBI declared that art funds are collective investment schemes as per its regulations issued in 1999. In 2012, it dismissed a complaint filed by an investor against Osian's Art fund saying that the case does not fall under its purview. What exactly is happening?

Collective Investment Schemes (CIS) are rampant across the country but the market regulator Securities and Exchange Board of India (SEBI) which regulates CIS is unable to spot them. But when it does a flip flop over the most celebrated recent case of CIS, on wonders does it really intend to apply the CIS rules seriously. Indeed, the way it has changed its stance over the years regarding regulation of art funds, especially Osian's Art Fund, makes one wonder, whether the market regulator is under some kind of amnesia.

• • CIS rules came into effect in October 1999 after rampant loot by the so-called plantation companies such as Anubhav Plantations, AVI Plantation and Floriculture (SEBI’s data on companies who run CIS, contains 605 names, mostly of the plantation companies. SEBI’s CIS regulations stated that “any person proposing to carry any activity as a Collective Investment Management Company on or after the commencement of these regulations shall make an application to the Board for the grant of registration in Form A.”
• • In 2006 Osian’s launched an art fund which pooled money to invest in art. This was an open and shut case of CIS. But Osian’s did not care to be registered under SEBI’s CIS rules. The SEBI chairman then was M Damodaran, a member of Indian Administrative Service (IAS).
• • In November 2007, SEBI served a show-cause notice on Osian’s asking as to why the Fund should not be regulated. There was no consequence of this notice.
• • Osian’s half-yearly report released in February 2008, states, “Osian’s presented the case to SEBI through its legal galaxy, explained their viewpoint at length on legal as well as industry-specific issues and made submissions; since then, there has been no further communication from SEBI. No directions for registration under the CIS Regulations have been issued to the Art Fund or Oseta Investment Trustee Co Pvt Ltd as of date”. In other words, SEBI couldn’t care much.
• • 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 the  ‘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.
• • It woke up and granted Osian’s an opportunity for a hearing before the whole-time director of SEBI on 5 September 2008. Again, there was no further communication from SEBI after the hearing. By this time, SEBI chairman was another illustrious member of the elite IAS, CB Bhave, whose Sebi reign has been among the worst.
• • While SEBI seemed uninterested to act against Osian’s, AK Muthuswamy was knocking on SEBI’s doors about the failure of the Osian’s Art. The three-year fund was supposed to return investors’ money by 2009 but did not do so. SEBI dismissed this complaint by arguing that the case did not fall under its purview! Yes, the February 2008 advisory notwithstanding.
• • Mr Muthuswamy approached the Securities Appellate Tribunal (SAT) which asked SEBI to re-examine the issue but this time SEBI came up with another excuse. It pointed to a Madras High Court of 16 April 2012 which ostensibly ruled that the regulator does not have power to review its own orders.
• • This was somewhat of a white lie. The 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.”

You wonder what will be SEBI’s next step and when it will take that step. After all, the regulator is not accountable to work within a specific timeframe. Osian’s Art Fund was a three-year close-ended fund launched in June 2006.

It 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 wasn’t forthcoming. The scheme was wound up on 10 July 2009.

The turn of events, change in stance by SEBI in the Osian's case makes one wonder, what exactly is happening. Is the market regulator under amnesia so much so that it does not even remember its own regulations, advisory and stance taken earlier? Or are Osian’s lawyers too ‘persuasive’?