The move of the securities market regulator to bring art funds within the ambit of the securities law regulatory framework is incorrect. In essence, the press release dated February 13, 2008 asserts that 'art funds' are "collective investment schemes".
Collective investment schemes are required to register themselves with the Securities and Exchange Board of India Act under the SEBI (Collective Investment Scheme), 1999 ("the Regulations"). In effect, the press release would imply that registration with SEBI would be required for any entity to launch or float art funds. The press release further states that launching and floating art funds without obtaining a certificate of registration under the Regulations would amount to a violation of the SEBI Act and the Regulations framed, thereby attracting civil and criminal action under the SEBI Act for non-compliance.
It is important to understand what these art funds entail to inspire attention from the regulator, bringing them within the ambit of the regulator's jurisdiction. To put it simply, art funds operate by mobilizing funds from select investors and use it to buy art objects that have huge appreciation potential. With the kind of economic growth that India is experiencing and the escalation of individual wealth, numerous art funds have cropped up over the past two or three years. Though the intention of SEBI in regularizing the art funds can be understood, a number of legal and factual aspects seem to have been completely disregarded by SEBI.
Some of these funds have been set up in the form of private trusts, for the benefit of a select and clearly identifiable group of beneficiaries rather than as funds that raise money from the general public, a fact that has been ignored by SEBI while bringing all art funds within its purview.
Further the act of SEBI would seem to amount to exercise of jurisdiction not vested in it, in light of the objects of the SEBI Act and the purpose for which SEBI was constituted. The preamble to the SEBI Act provides that, it is an Act to provide for the protection of the interest of investors in securities and for regulating the securities market.
In other words, SEBI has been constituted to protect the interests of investors in the securities market and to promote the development of the securities market. The definition of 'securities' is as defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956. In case of certain art funds, neither any security nor any units or other instrument under a collective investment scheme as defined under the SEBI Act are being issued.
The decision of SEBI, a securities market regulator, to regulate all art funds, regardless of whether securities are being issued by such funds, thus seems questionable. A writ court is quite likely to strike down the circular as being excessive and in excess of jurisdiction vested in SEBI.
It is also pertinent to note that SEBI is silent as to whether the requirement of registration is merely for art funds floated and launched after the publication of the clarification or whether it intends to bring existing art funds too within the regulatory ambit. The press release merely records that art funds have been floated without obtaining registration. It is not expressly clear whether all the existing art funds would require to register themselves with SEBI or if art funds that conduct themselves in any particular manner would fall within the ambit and scope of SEBI's jurisdiction. This is not a light matter since failure to register entails civil and criminal liability. In fact SEBI has started issuing show cause notices to various art funds inter alia requiring them to refund the moneys collected by these art funds in case of their failure to satisfy SEBI on the requirement of registration.
It is imperative that any statutory authority acts within the scope of the jurisdiction vested in it under a parent Act. This is even more important in a case where a particular authority is burdened with the twin object of legislating and also performing quasi judicial function. It is only when this mandate is exceeded that it leads to legal intricacies which are unwarranted.
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