High net-worth individuals (HNIs) so far have been punting in Indian art but now prices have risen very sharply. Analysts say that the art market in India might have actually outperformed the stock market or any other market by a long margin.
OSIAN has launched an art fund worth Rs 100 crore (Rs 1 billion). It is a close-ended fund with a lock-in period of 36 months. Purchase price per unit is at Rs 100, while minimum investment will be to the tune of Rs 10 lakh (Rs 1 million).
The fund has opened on June 7 and expects to give investors an annual return of 35%.
Neville Tuli, chairman of Osian, says that it is a private placed fund and it will reach out to around 1500 of the world's top buyers. This fund is specifically for Indian residents, he says.
Excerpts from CNBC-TV18's exclusive interview with Neville Tuli:
Could you explain to us what this product is all about and how it will work?
Basically it is an art fund. We have an intention that over the next 3-4 years, we will be able to create a mutual fund industry, bring in the middle classes, 300 - 400 million Indians to take a stake in the cultural heritage of our country. Given the legal framework today, the fund under the Indian Trust Act is the most efficient institutional platform we can create. It is a private placed fund and we reach out to around 1500 of the top buyers around the world.
This fund is specifically for Indian residents. Hopefully it will show the country that art is not just an aesthetic and historical object, but it also has a financial and developmental role. It is one of the greatest sustainable, credible assets of every country across time and now this institutionalisation process has taken it a step forward.
Where do you find art prices now?
People have been talking about bubbles for 100 years. When the price was Rs 1 lakh (Rs 100,000) it was a bubble, when it is Rs 10 lakh it is still a bubble. That simply shows the ignorance and lack of historical perspective. Indian art is still at ground level one. Its infrastructure is at a very nascent stage.
If one compares the basic knowledge, institutional framework, legal framework and the knowledge-nurturing framework with the west, we are around 20-30 years behind. We have a long way to go before we could actually turn and stabilize at that 12-15% per annum rate, which the west is achieving.
It is just because most of the learning curve for most of the audience is still at ground zero, and 100 years of neglect has been focused into about 8-10 years of selling, and of course the media hype that people feel everything has moved very quickly.
But the infrastructure and the knowledge base, which supports any great market, is still at ground zero. There are 101 indicators to show how nascent the market is. For instance, take the number of leading artists, the kind of museum archival library infrastructure, the legal framework, and a host of other factors.
In my perspective there is a long way to go and there is great wealth to be created not just for the individual and the institution but also for the public. For that we have to change certain framework and that is a 3-5-year journey, at least.
What has been the experience from abroad for a fund like this, both in terms of interest and performance?
International funds by and large have failed because they broke the cardinal rule about art funds; that it should not be a financial institution that starts an art fund but an arts institution.
Finance institution will never understand aesthetics and history. It is aesthetics and history, which gives value to art. . . finance, wealth is a by-product.
If one sees the international funds, which were set up by financial institutions rather than great knowledge driven art institutions, the performance will be 10-12-15 % per annum.
People in the West are happy
So by and large the west is now much happier with art funds, pension funds and railway funds. They still have very little understanding of what a great art fund is capable of doing. Hopefully India will show them the way.
What might be the benefits of investing in a fund like this?
If an individual goes out to buy a piece of art, he has to pay 15-20 % commission. If there is no VAT registration, he will lose 12. 5% VAT when dealing with a registered dealer. When it is sold another 15-20% commission must be paid.
Then if it is sold in less than three years, 33.8% short- term capital gains must be paid. If it is sold after three years 20% capital gains must be paid. That means one has to make 65-70% before making the first 1%.
Yes, there is capital appreciation on paper but when it comes to actually transforming that into cash returns, it's just a myth. Now with the whole market reaching a certain maturity you need an institutional platform, which can exploit the economic gain for the individual investors and slowly for the public at large.
What would be a rational expectation from such a fund over a three-year period since that is the lock-in and people have been a little taken away by the kind of returns some of these artists might have provided in the last 12-18 months?
Price appreciation is totally different from the rate of return you could expect from your investment but art is a new asset, it is an asset in the making. It has to show a certain performance to the financial world before it can be taken seriously and if we cannot outperform all existing asset basis, there would be something fundamentally wrong with the whole concept.
So if one's opportunity cost in the market today would be 20-25%, obviously one cannot guarantee anything. That is not in anyway the intention, but I would be disappointed if any art fund that knows its subject well, earns less that 30-35% per annum tax free for its clients.
You said that there is very low co-relation between equities and art, has there been any fall out in the art market because of the correction in the stock market in India?
No, not at all. Although obviously there is a linkage as a country's confidence and economic growth changes but those are long-term macro factors and the India story is still a very positive one across the world. The volatility and corrections we have seen in the stock market do not really affect art prices.
If one sees the ET-ART Index, which comes out in Tuesday's newspapers, there is a very small change; the art prices have still risen over 140% per annum and we are not affected by those short-term little ups and downs in our equity market.
Art is determined by very long-term aesthetic and historical factors and those are the things in which, greater the knowledge base and dissemination of information, deeper and stronger the market, especially in times of downturns.
The fund has already opened, what sort of response have you seen?
It has had a great response and we will easily raise what we had targeted. The responsibility of our fund is to go into the middle of the public accountability, get yourself scrutinized, educate the public, excite them, ask questions and open up a whole process by which you raise and create wealth.
Many people who call themselves fund raisers, raise money and then quietly go away and no one knows what is happening. That is not the purpose of our fund. Obviously, we have to carry a whole host of institutions; individuals and it will succeed in a positive manner.
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