SEBI Order in the Art Fund Case

Earlier
this week, SEBI passed an order
against Osian’s-Connoisseurs of Art Private Limited holding that the Osian Art
Fund falls within the purview of the SEBI Act and the SEBI (Collective
Investment Scheme) Regulations, 1999 (the CIS Regulations). Since the art fund
had raised investments without registering with SEBI, it was ordered to wind up
its scheme and refund monies collected by it and also prohibited from accessing
the capital markets.
The
Osian Art Fund was set up as a private trust with a trustee, and managed by an
investment management company. It had raised monies from investors whose monies
were pooled to acquire and manage art works (that were the underlying assets).
A few years ago, SEBI began investigation into the affairs of the art fund and
specifically on whether it violates the SEBI Act and the CIS Regulations. Osian
made several submissions and arguments, including on the interpretation of the
law on the issue, following which SEBI passed its order.
SEBI
was required to rule on 4 specific issues, which are dealt with separately. First, although the definition of a
collective investment scheme in section 11AA(2) of the SEBI Act refers to a
scheme or arrangement offered by any “company”, it cannot be read to mean that
only funds set up as companies fall within the purview of the legal regime. On
the other hand, the substantive provisions in section 12(1B) of the SEBI Act
and Reg. 3 of the CIS Regulations provide that no “person” shall carry out a
collective investment scheme without registration with SEBI. Adopting this
approach, only a company structure can be used to set up a collect investment
scheme, and that no other type of structure (including trust) is a permissible one.
Second, although the CIS Regulations
were promulgated in the late 1990s following the Dave Committee Report to deal with
fraudulent schemes involving plantation/agro companies, they are not limited to
that asset class. SEBI found that the Act and the CIS Regulations apply to any
asset class. What is important is the nature of the scheme and not the asset
class.
Third, while SEBI seemed to accept the
legal interpretation that the Act and the CIS Regulations apply only to a “public”
offering of securities by a collective investment scheme, on the facts of the
Osian case it was found that the units of the art fund were marketed
extensively. Relying upon the forceful precedent of the Supreme Court in the Sahara
case, SEBI found that the Osian fund was available to more than 50 offerees
(the limit stipulated for a public offering in section 67(3) of the Companies
Act, 1956). The fact that only sophisticated investors could subscribe to units
which had a minimum subscription amount and minimum investment lots would not
detract from the fact that this is a public offering.
Finally, SEBI found that the units of
the art fund were “securities” as that expression carries a wide connotation
under the SEBI Act and the Securities Contracts (Regulation) Act, 1956.

Overall, SEBI order is
convincing on all counts, and is supported by principles of interpretation and
jurisprudence with reference to securities regulation. The interpretation
indicates the fairly wide scope of the CIS Regulations, which serves as a
caution to entities that are establishing collective investment schemes
(especially those that wish to stay outside the purview of registration with
SEBI) and also a source of some comfort to the investors in such schemes.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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