The move of the securities market regulator to bring art funds
within the ambit of the securities law regulatory framework is
incorrect. In essence, the press release dated February 13, 2008
asserts that 'art funds' are "collective investment
Collective investment schemes are required to register
themselves with the Securities and Exchange Board of India Act
under the SEBI (Collective Investment Scheme), 1999
("the Regulations"). In effect, the
press release would imply that registration with SEBI would be
required for any entity to launch or float art funds. The press
release further states that launching and floating art funds
without obtaining a certificate of registration under the
Regulations would amount to a violation of the SEBI Act and the
Regulations framed, thereby attracting civil and criminal action
under the SEBI Act for non-compliance.
It is important to understand what these art funds entail to
inspire attention from the regulator, bringing them within the
ambit of the regulator's jurisdiction. To put it simply, art
funds operate by mobilizing funds from select investors and use it
to buy art objects that have huge appreciation potential. With the
kind of economic growth that India is experiencing and the
escalation of individual wealth, numerous art funds have cropped up
over the past two or three years. Though the intention of SEBI in
regularizing the art funds can be understood, a number of legal and
factual aspects seem to have been completely disregarded by
Some of these funds have been set up in the form of private
trusts, for the benefit of a select and clearly identifiable group
of beneficiaries rather than as funds that raise money from the
general public, a fact that has been ignored by SEBI while bringing
all art funds within its purview.
Further the act of SEBI would seem to amount to exercise of
jurisdiction not vested in it, in light of the objects of the SEBI
Act and the purpose for which SEBI was constituted. The preamble to
the SEBI Act provides that, it is an Act to provide for the
protection of the interest of investors in securities and for
regulating the securities market.
In other words, SEBI has been constituted to protect the
interests of investors in the securities market and to promote the
development of the securities market. The definition of
'securities' is as defined under Section 2(h) of the
Securities Contracts (Regulation) Act, 1956. In case of certain art
funds, neither any security nor any units or other instrument under
a collective investment scheme as defined under the SEBI Act are
The decision of SEBI, a securities market regulator, to regulate
all art funds, regardless of whether securities are being issued by
such funds, thus seems questionable. A writ court is quite likely
to strike down the circular as being excessive and in excess of
jurisdiction vested in SEBI.
It is also pertinent to note that SEBI is silent as to whether
the requirement of registration is merely for art funds floated and
launched after the publication of the clarification or whether it
intends to bring existing art funds too within the regulatory
ambit. The press release merely records that art funds have been
floated without obtaining registration. It is not expressly clear
whether all the existing art funds would require to register
themselves with SEBI or if art funds that conduct themselves in any
particular manner would fall within the ambit and scope of
SEBI's jurisdiction. This is not a light matter since failure
to register entails civil and criminal liability. In fact SEBI has
started issuing show cause notices to various art funds inter alia
requiring them to refund the moneys collected by these art funds in
case of their failure to satisfy SEBI on the requirement of
It is imperative that any statutory authority acts within the
scope of the jurisdiction vested in it under a parent Act. This is
even more important in a case where a particular authority is
burdened with the twin object of legislating and also performing
quasi judicial function. It is only when this mandate is exceeded
that it leads to legal intricacies which are unwarranted.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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