Thursday, April 18, 2013

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.

1 comment:

RGK said...

The SAT has apparently admitted an appeal against the SEBI Order (BS, April 30, 2013 - http://www.business-standard.com/article/markets/sat-admits-osian-s-art-fund-appeal-against-sebi-order-113043001062_1.html).

Given the detailed (and correct) analysis in the SEBI Order as to why an "Art Fund" would be a CIS,the applicability of the CIS regulations and the definition of 'securities' it will be interesting to see SAT's final verdict on this.