Art mart catches up at Dalal Street by Rajesh Unnikrishnan & Preeti R Iyer

Source: Economic Times

MUMBAI: When financial markets are choppy, where do you turn? Art. That's the story leading banks and securities houses on Dalal Street are trying to sell to the rich. Private banking groups such as ICICI, Kotak, Deutsche and HSBC, as well as stock brokerages such as ASK, Edelweiss and DSP Merrill Lynch, are joining hands with art funds to market a new asset class that may be less affected by the volatile stock market.

It's an option for the patient investor, they say. In fact, the trend picked up few years ago. Edelweiss raised Rs 12 crore and Rs 22 crore in 2005 and 2006 in funds christened Yatra I and Yatra II respectively.

While banks do advise rich customers to invest in art to diversify their portfolio, some are put off by the unregulated nature of the art market. With markets unlikely to deliver stunning returns this year, chances are some HNIs will earmark more investment to art. Last year, Kotak had marketed the India Art fund which raised Rs 25 crore while, recently, Religare raised Rs 20 crore.

"In the last few years, the domestic art market has drawn such wide interest that today, wealthy investors, even those without a passion for collecting, now see paintings, drawings and sculptures as visible vehicles for diversifying their portfolios, given the loose correlation between art prices and the market cyclicality of stocks, bonds and real estate.

Art as an asset class has come down from the super-HNI segment to the HNI segment, and may soon become an investment destination for the high-end middle class," says Rishiraj Sethi, chief strategist at Aura Art Fund, which has tied up with WealthFirst, a wealth management firm.

ASK Wealth Advisors product manager (alternate investments) Zulker-nain Dholkawala says, "We have a purely advisory model for art investments. Before telling investors where to put their money, we carry out a thorough due diligence on the artist. As of now, we do not have portfolio management services for art. Once we offer advise to the client, it is purely his or her discretion whether to invest, but we are seeing increasing willingness to explore the works of unknown artists."

Capgemini-Merrill Lynch's recent world wealth report says that while an HNI's personal wealth has increased, so has the interest of HNIs in fine art. Many Western collectors are favouring art from emerging markets such as India, Russia, Poland, Cuba and China. These pieces do not have the same export restrictions which some countries place on more historic pieces.

"We are in tie-ups with various banks and institutions offering art as an investment option. Art funds are identifying the artist and pre-financing them and purchasing the final product from the artist. It's auctioned at a later stage and the margin is the premium for art funds," said Ajay Seth, chief mentor at Copal Art, which is closing a Rs 150-crore art fund. He said that foreign banks, which are offering art products in the international market, are also investing in Indian art funds.

However, bankers state there is no standard definition of art to help it qualify as a security. The basic issue still hovers on whether art can be considered an investment. The originality of an art work is authenticated through an independent certification while the ownership is transferable.

ICICI Bank also raised $25-million art fund from investors in west Asia in association with Crayon. Says a private banking head of a multinational bank in India, "If a client wants to build an art portfolio, we outsource the advisory role to an independent firm or consultant. In case our clients wish to invest in art funds, we perform the due diligence ourselves and allow the client to go ahead. We do a thorough check on the credentials of the fund manager, the promoters and the advisory board of the fund."

Most of the nouveau riche are typically lured by the names of top artists and, forced by the snob effect, do not mind digging deep into their pockets to buy a painting of a well-known artist, whose work is known to don the walls of the who's who in town. However, art consultants are moving towards promoting the newer entrants into art. According to a wealth adviser, it is advisable to have a 70:30 or an 80:20 mix between the works of established artists and the upcoming names.

There has been resistance towards exposures to the art industry due to tax issues, given that people have come across instances where art was used as a conduit to hide undisclosed money. Tax authorities have even pulled up art galleries in the past for flouting tax norms.

A senior banker pointed out there should be regulatory guidelines or, better still, an institutional framework for the art industry. This space would then definitely see heightened activity with banks showing greater willingness to advise on art investments.

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