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.