New Delhi/Mumbai: In the wake of the bust in the Indian art market, some of the art funds that proliferated during the boom have been unable to meet investors’ expectations. Copal Art Pvt. Ltd, promoted by PET-bottler-turned- billionaire art dealer Ajay Seth, is the latest to come up short, following close on the heels of the troubled Rs100 crore Osian’s Art Fund.

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Copal’s Art Fund had promised to be different. Its delivery-linked model allowed investors to take home artworks that were sold at a per sq. ft price. But Seth’s fund lacks transparency and investors now allege he is guilty of less than fair practices in the procurement, pricing and delivery of artworks.

Puzzling inconsistencies: Ajay Seth faces allegations of less than fair practices in procurement, pricing and delivery of artworks by investors.Ramesh Pathania/Mint

In May 2007, Seth announced the launch of a Rs150 crore art fund for which he wanted to diversify into Gujarat. As of December, the fund has only achieved 50% of its target. Despite this, Seth told Mint that he was planning to launch another $250 million (Rs1,170 crore) international art fund in 2010.

Investors in Copal’s Rs150 crore art fund claim they were sold paintings of lesser known artists at exorbitant prices, which made it impossible for them to make a meaningful exit. Some investors claim not to have received paintings even two years after issuing cheques.

Hemant Patel, managing director of Vadodara-based Uma Laboratories Pvt. Ltd, issued a cheque of Rs7 lakh on 7 May 2007 in favour of Copal Art. A month later he wrote another one for Rs3 lakh. “Till date, I have neither received the promised painting nor has Copal given me a refund," Patel alleges.

After repeated requests, in June 2009, Copal sent him a cheque dated June 2008. Later, Seth said it was an oversight. Patel did not hear from him until two days ago, when Mint got in touch with Seth for this story. “Seth called me on Tuesday and requested me to keep off media and promised to settle all dues by Monday," Patel said, adding, “But unless he pays me Rs10 lakh with interest and settles all my dues I am not going to be convinced."

Such cases may have been the result of Seth’s hurry to sell as much as he could while the boom lasted.

Seema Qadir, former head of operations at Copal Art, resigned in September 2008 because she was not comfortable with Seth’s “opaque way of working".

“He had sold too fast. There were times when he had sold a Kishore Shinde and Kishore Shinde tayyar hoke aaya nahi thaa (his paintings hadn’t arrived)," Qadir said. “There were times when he had to deliver and the artist would not oblige because he was busy with exhibitions. Sometimes, he even had disputes with them over money."

When contacted by Mint, artist Siraj Saxena said he did not want to go on record about financial disputes with Copal. Since 2005, Saxena has sold 60 paintings through Copal, who he calls his “primary buyer".

Copal’s per sq. ft methodology of valuing paintings is in itself dubious.

Arvind Vijaymohan, who heads Indian arts advisory Japa Arts Pvt. Ltd, says that the method is inappropriate.

“The values derived using the PSI (per sq. inch) formula standardizes all works to a single suggested ball park," Vijaymohan said. “Art is not wall-to-wall carpeting. You have to consider each work independently, based on its own merit."

Furthermore, Copal periodically communicated price appreciation to investors based on obscure methodology. A Vadodara-based investor, who did not want to be named, received a letter that stated his Shinde painting had appreciated in value to Rs23 lakh (from Rs10 lakh) within a year. He wanted to exit at this point. But on calling galleries and making independent inquiries, he was told that Rs23 lakh was nowhere near the market price.

Copal had said that its objective was to inculcate beginners into the “smart intelligent way to wealth creation and aesthetic pleasure". But many investors, especially those from Gujarat, were only used to investing in gold and were uninformed about the peculiarities of investing in an illiquid asset such as art. They were not high networth individuals—to whom art funds are typically sold as a diversification. Neither were they well-versed with artists and the art market. Artists Shinde, Saxena and T. Vaikuntam, relatively unknown when Copal arrived on the scene, were sold at prices as high as Rs7 lakh per sq. ft.

Broker troubles

Patel’s is not an isolated case, says Sachin Keluskar, who sold him the art fund. Keluskar is a partner at Investment Idea Financial Services, an investment advisory that started distributing Copal’s art fund in January 2007. He was prompted by superlative media reports and Copal’s success in its first two funds. “Other large art funds such as Osian’s and Crayon were exclusively marketed by big banks like ABN Amro and BNP Paribas, but Copal was open to smaller distributors," says Keluskar, who claims to have brought around 13 of his own clients and introduced six sub-brokers to give Copal a total business of Rs3 crore. According to him, the total number of investors in Surat, Junagadh and Rajkot would exceed 100. (Keluskar does not distribute Copal’s art fund any more.)

Seth denies having misrepresented the nature of the fund to investors, saying that the guidelines were clear and that educational materials had been sent out to all distributors and investors on a regular basis. “All distributors were given about 20 formal training sessions on the nature of art investments, but the fund was sold by distributors like Keluskar to wrong clients," Seth says. Keluskar, however, says he received no formal training.

Vijay Patel, a chemical trader from Surat who invested Rs1 lakh, says Copal’s selling process is full of complicated legalities while buying involved a single signature on a photocopied sheet of paper. “I was told that this is an open-ended investment and that I could exit at any point. Now I’m being told that I should hold it for five years for appreciation," says Patel, admitting that he has no knowledge of the art market.

Shweta Jain from International Money Matters Pvt. Ltd, a Bangalore-based distributor of Copal that has sold the fund to around 40 clients, says there is an issue of transparency in the art market and more regulation could be a solution. “Art is an unregulated market and hence there will be a lot of scepticism. We are strongly in favour of this becoming a regulated market so that there is transparency and confidence in the product," she says.

Art funds have been facing regulatory strictures for their opaque functioning. In February 2008, market regulator Securities and Exchange Board of India made it clear that art funds floated by various entities are “collective investment schemes" that need a certificate of registration.

Seth claims to have a bank from which Copal helps investors buy and sell art. “Clearly we do not come under the collective investment scheme, which first collects the money from the investors, buys the painting and then sells."