FINANCIAL SECTOR… 2
3. FINANCIAL PLANNERSValue unlocking for investors
Regulation for Art funds
In a growing economy, art prices are normally on the rise and funds can pay to investors. But problemsmay arise when the economy becomes sluggish or slips into a recession. In such cases, redemption pressure on the funds is not difficult to envisage and a regulatory framework is expected to guard investors to some extent from dips in the art market.
Regulation of art funds seems to be on the cards. With the Sebi recently taking a stand that art funds,which are dealing in public money, should be registered, it appears that a regulatory framework couldtranspire soon. The Indian market regulator Sebi said an analysis of the characteristics of the art fundsshows that they are collective investment schemes as defined under section 11AA (2) of the Sebi Act,1992. Since the art and equity markets are different, their performance parameters will vary.According to section 12 (1B) of the Sebi Act, no person can sponsor without obtaining a certificate of registration from the market regulator. Launching/floating art funds or schemes without obtainingregistration from Sebi amounts to violation of the Sebi Act and appropriate actions, civil and criminal,under the Sebi Act may be taken against such funds/companies. For a collective investment scheme toraise money from the public, it is prerequisite that the entity must (a) be a company and (b) registeredwith Sebi as a collective investment management company.
Regulating Venture capital funds
Only professionals are likely to be allowed to float venture capital funds (VCF) in future. In what could be a major change in India’s venture capital regulations, no business house, and financial service groupor big corporate would be allowed to set up a VCF.
The capital market regulator has veered around to this view, possibly driven by instances where largegroups have used funds sponsored by them to invest in companies where they have strategic or businessinterests. Since VCFs operate under a special regime in relation to taxation, foreign capital and investmentlock-in, and are meant to encourage new entrepreneurs, the vehicle should not be misused by established players.While no formal guidelines have been issued, the change in regulatory stance on VCFs follows viewsexpressed by an informal panel to look into regulations for venture capital. Existing VCFs set up by business houses and banking groups will not be affected. Internationally, there is no special classification, primarily because in most countries VCFs are not regulated entities. It would be interesting to see how theregulations are tweaked in India to ensure that only professionals can come together to sponsor a fund. Inthis case, it would be important how a professional is defined.