India has one of the richest art and cultural heritage in the world, spanning thousands of years, but the fine art market has stagnated and structurally is probably amongst the weakest and least developed.

India has one of the richest art and cultural heritage in the world, spanning thousands of years, but the fine art market has stagnated and structurally is probably amongst the weakest and least developed. Here
Amit Sarup, president of
Religare Art and Family Office, Religare
Enterprises, discusses some of the issues faced by art investment funds in
India and prospects for the future. This piece originally appeared in the
Winter edition of Art Fund Tracker, distributed by Fine Art Wealth Management.

At the time
this piece is being written it appears that the art market in India, from an
investment fund perspective, seems to be at its nadir after having gone through
the first phase of evolution during the past five to six years. This initial
phase brought about a strong level of interest and emergence of this sector
amidst a booming economic background which saw humungous gains coming about
across all different asset classes together in an unprecedented move.

This is
somewhat in line with the economic and infrastructural of the country which
also lagged behind in a major way till recently. The situation on the country’s
economic front took a positive turn in the early nineties, with major economic
reforms being brought about. These reforms along with compelling demographics
started moving the country onto a high growth path.

This has
resulted in a tremendous increase in the overall prosperity and wealth creation
over past couple of decades. The effects of this development also influenced
the Indian art market, with the prices of many of the well-recognised artists
appreciating multi-fold in a one way upwards trend, between late nineties to
around 2007 period. This not only created a buzz in terms of art receiving
coverage in the media but also led to the concept of art being looked at
seriously as an emerging asset class by various stakeholders and participants.

Towards the
latter part of this era a substantial number of investors, hereto only used to
investing in the financial markets and real estate, started showing keenness to
participate in the art market boom with a part of their surpluses. However, not
being familiar with the art market nuances’ and the inability to appreciate the
right kind of art was big barrier, which limited the capacity of these
investors to purchase artworks directly on an individual basis. This gap led to
the rise of art funds being structured as financial investment products.
Various intermediaries, both from the art market as well as financial markets
stepped in to fill this void. The propositions were packaged in the form of a
financial instrument which promised to provide the investor an opportunity
diversify their portfolio into a new area of investment and add an alpha to
their wealth portfolios albeit at a higher risk.

Within a
short time frame, a number of funds mushroomed. The initial ones raised very
small corpuses, limited to distribution by word of mouth or personal contacts
of the fund managers. As the interest grew, another set of funds followed,
which were raised more in line with the process of other financial investment
products, with distribution by some of the well-known banks and intermediaries
across the country to their high net worth clients.

These funds
managed to raise much larger assets leading to strengthening the belief of art
as an emerging asset class. Though operating in an unregulated area, the fact
that well known financial intermediaries and distribution houses brought the
art fund distribution onto their platforms, gave strength and credibility to
this belief, with thousands of investors subscribing to the idea.

Some data
which was available publically, showed the funds progressing well with robust
appreciation on the NAV’s and all seemed to be going well. Alas, all this was
put to nought with the global economic crisis in 2008. This happened at just
about the time when some of these funds were maturing and in the process of
liquidating the accumulated artworks in order pay back the investors.

Overnight
the hype took a colossal hit with the art market liquidity drying up, leaving
the funds in a tight situation with the exit options shutting down. Financial
markets across the globe were feeling the downward pressure for over a year,
bottoming out somewhere in early 2009. Then there was a recovery period to just
about touch the pre-crash levels by around late 2010.  However since then it has been largely a
sideways or even downward trend till date.

In
comparison, the art markets, which are very much unstructured relatively,
especially so in India, really never recovered in line with the financial market.
The number of trades and liquidity has remained shallow, not allowing enough
exit options for the art funds which continue to languish today.

However there
are a number of positives which have come about as a result of going through
this turmoil. This should, in turn help the Indian art market to emerge as a
much more mature, knowledgeable and learned market. The best thing to have
happened is that with all said and done, the Indian art market was operating
around a relatively select audience and stakeholders, while the negatives have
played out.

This has
restricted the fallout to a limited and confined segment of the Indian
diaspora. The interest that is now re-emerging is of a very different scale.
Apart from the record prices at auctions one can see the participation levels
from public at large, towards appreciating art, is growing rapidly. One strong
pointer comes from the statistics for the Indian Art Summit which was launched
in 2008. In its first year the fair saw participation from about 34 galleries
and around ten thousand visitors. This year, in January 2011 close to 85
galleries participated and the number of visitors has grown by a stupendous 13
times. These are significant moves and highlight the widening interest, very
clearly boding well for the times to come.

 However the most significant change which may
come about is on the regulatory side. SEBI (Securities Exchange Board of
India), which is the regulator for financial markets in India, has recognized
the need for reforms and is in the process of setting up regulatory mechanisms
for alternative asset classes. A draft paper on the subject was circulated
recently and hopefully sooner than later a set of regulations may be announced
under which Art Funds could be structured. If this happens in a conducive
manner, it could be the biggest game changer. A regulatory framework would
bring in an environment that would ensure credibility to the masses as also
usher in a level of transparency and accountability.

Most
importantly it would ensure that only committed professional asset managers
with the right set of credentials and expertise are allowed to come in and
develop the space in a constructive manner. This path, ultimately will allow
asset managers to launch funds of a size which make the funds commercially
viable keeping investor interest upfront. Of course in the short term the
overall market size and depth would stay a constraint. However the development
of the art market and size could be actually go onto a path being of
institutionally driven rather than an individual collector driven market unlike
elsewhere across the globe. This will define art truly as an asset class, which
will have a widely positive impact on all stakeholders connected to the
spectrum whether it be artists, galleries or collectors.

This could
very well happen during the next phase over the coming decade and will be the
way for Indian art market to catch up with the rest of the world and gain its
rightful position and respect on a global platform.