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Group 2
 Flow of Presentation…
• Facts & Acts
• Art Industry
• Why Invest in Art
• Costs in Art Investment
• Risks in Art Investment
• Participants
• Art Valuation and Appraisal
• Art Indices and Funds
• Taxes and Insurance
• Tips for Art Investment
 World Wealth Report 2010
- By Merrill Lynch and Cap Gemini

• T h e tw o c a te g o rie s th a t w e re m o s t
a ttra c tiv e to “ in v e s to r -
c o lle c to rs ” ( H N W I) w e re A rt a n d
O th e r C o lle c tib le s ( coins ,
a n tiq u e s , w in e s , e tc . )
• L u x u r y C o l l e c t i b l e s ( e . g . , luxury
automobiles, yachts, jets, etc.)
continued to account for the
largest portion of HNWIs’
investments of passion – 30%
• Overall, 22% of HNWIs’ investments
of passion were held in Art at
the end of 2009, However, interest
in Art is clearly picking up
again in 2010.
• Art primarily as a financial
World Wealth Report 2010
- By Merrill Lynch and Cap Gemini

* Does not Real Estate which is

included in the total estimated US$
39 trillion
 Karvy Private Wealth’s:
India Wealth Report
• Global wealth in financial
assets with High Net Worth
Individuals (HNIs) 1 at the
end of December 2009 was
US$ 39 trillion
• Total wealth in India held by
individuals is estimated to
be Rs.73 lac crores
1. investable asset of US$ 1 million or more
 Individual Wealth
Forecast
in (Rs Crores) 2010-11 2011-12 2012-13

Individual Wealth-Beginning of the year 73,07,878 91,60,011 1,14,95,116

Return Generated on Invested Wealth 8,03,032 10,36,658 13,39,928

Financial Household Saving to be invested 10,49,101 12,98,448 16,05,490

Total Individual Wealth-End of Year 91,60,011 1,14,95,116 1,44,40,534

CAGR of 25 . 4 %
Wealth Allocation 2009-
10
India Vs Global

Source: World Wealth Report 2010 and Karvy’s India Wealth

Report
 Masterpieces & Museum Quality
Series VI- ET Intelligence
 Top 10 Results For Indian Contemporary Paintings,
Drawings & Books Auctions-2006
Artist/Author Title Price (Rs.)
Sher-Gil, Amrita Village Scene 69,000,
Gaitonde, V.S. Untitled 48,875,
Varma, Raja Ravi Adaptation of the poem 'Veena nu Mrug'28,750,
Souza, F.N. Nude 23,000,
Padamsee, Akbar Nude in Grey 20,700,
Swaminathan, J. Mountain & Bird Series 17,250,
Husain, M.F. Subhe Banaras 16,100,
Souza, F.N. Couple 16,100,
Ramkumar Banaras Series 16,100,
Dodiya, Atul Welcome 9,775,
 The Antiquities And Art
Treasures Act, 1972
• Sec 2(1) ‘Antiquities’ - which have
been in existence for not less than
100 years Viz.,
– Sculptures in stone, terracotta,
metals, ivory.
– Painting in paper, wood, cloth, skin
etc
– Manuscripts


• Sec 2(2)“Art treasure” means any

human work of art, not being an
antiquity, declared by the Central
Government by notification in the
Official Gazette, to be an art
treasure for the purposes of this Act
having regard to its artistic or
• Sec 3: It is unlawful for any person,
other than the Central
Government or any authority
authorized by Central Government
to export antiquity or art
treasure.
• Sec 5: Antiquities to be sold only
under a licence.
• Sec 14: Any person who owns
controls or is in possession of any
antiquity shall register the same
before the registering officer and
should obtain a certificate.
• Sec 25 : If any person exports or
attempts to export any antiquity
 Art Industry
• The global art market is estimated
at $23.5 billion, and more than
half of it is in the US, considered
the most-developed art market.
• The Indian art industry is estimated
at about Rs 250 crore, and is
expected to grow at 35per cent a
year.
• Price increases of between two
times and eight times in just the
last three years for the works of
artists like M.F. Husain, V.S.
Gaitonde, Satish Gujral and Tyeb
Mehta .
 Indian Art
• With a 5000-year-old culture,
Indian Art is rich in its
tapestry of ancient heritage,
medieval times, Mughal rule,
British rule, Progressive art
and now contemporary art
• Indian artists relied heavily on
religious scriptures to draw
inspiration
• Water colors, charcoal,
vegetable dyes were popular
methods of painting
• Stone and marble were also
 Indian Art: History
• 2 nd century BC: Ajanta ad
Ellora Caves (Maharashtra)
• Mughal Art: bought the
Persian influence in their
artwork.
• Rajputana Art: Lord Krishna is
depicted in many Rajputana
paintings. The miniature
paintings from the
Rajputanas flourished
 Indian Art
• Modern Indian Art: Rabindranath
Tagore, MF Hussain Raja Ravi
Verma.
• Theme changed to Nature,
portraits, were some of the
themes artist chose.
• As artists started to express
themselves, art galleries were
needed to display their works. Art
galleries appeared in Delhi and
Mumbai only in the post sixties.
The face of Indian Art was
changing with times.
 Why Art?
• To diversify your investment
portfolio.
• High volatility of equity markets
• Art has attracted a lot of
attention after the year 2000.
• Indian art is growing
tremendously and breaking
new trends of unprecedented
appreciation due to excess
liquidity in the economy
• It's not as volatile as stocks,
gold and property, and is not
affected as much by economic
Collectables
 What are Collectables?
• Stamps B a g s
• Coins A n tiq u e
• Wine W eapons
• Face Lift U te n s ils
• Candle Stand P e rfu m e s
• Handicrafts F u rn itu re
• Vintage Cars M u s ic
• In s tru m e n ts
E s ta te Je w e lry
 Why Collectables
JH o b b y ( S e lf F u lfillm e n t)
JL o n g te rm A p p re c ia tio n
JP ro te c tio n fro m In fla tio n
J
LBut, Unlike Art, No Regular Income
LIlliquid market
LDifficult to determine True Value
LNot for Pure Investment
Types of cost in Art
Investment
Risk Pyramid
Where does Art lie?
Which is Most Risky?
Risk Pyramid
 Risks/ Drawbacks
• Art is far less liquid than
stocks: One can't simply
push a button and sell a
Picasso tomorrow: Illiquid
Market
• The Indian art market is
especially shallow, with
relatively few buyers
• High Transaction Cost
• High Valuation cost and
 Risks/ Drawbacks
• High Maintenance cost leading
to negative Income if not
lent to galleries
• Galleries provide income but
at cost of losing benefit of
enjoying the art
• Price is dependent upon Bid of
1 or 2 bidders
• Art Index though proved
returns of Art at par with
P a rtic ip a n ts in A rt
 Art market

• Primary Market • Secondary market

• where new art comes • existing art that
to the market for has been sold at
the first time least once before
• Valuing will be • Valuing will be
more difficult less difficult
here
 Art Valuation

Art valuation, an art-specific subset

of financial valuation, is the process
of estimating the potential market
value of works of art and as such is a
financial rather than an aesthetic
concern. Art valuation involves
comparing data from multiple sources
such as art auction houses, private and
corporate collectors, curators, and
specialized analysts to arrive at a
value.
Factors affecting Pricing of
artwork
 You purchase a work of fine art
from a gallery The owner assured
you that the price you paid was
based on an appraisal provided by
the manager of the gallery. You go
home feeling comfortable that the
price you paid was accurate since
it was based on the appraisal
provided by the gallery.
Is this comfort justified?
 Appraisal
A proper appraisal of artwork
means :
üA signed written report
üRegarding a clearly identified piece
of art,
üPrepared by a person with the
necessary training and experience
üWho is impartial and disinterested,
üStating an opinion as to the market
value as of a given date, and
üSetting forth the facts and analysis
supporting the opinion
 Purpose of Appraisal
Ø To determine a purchase or sales price
Ø For tax purposes(charitable deduction,
gift tax)
Ø For insurance purposes(premiums are
usually set and claims paid based on
replacement value)
Ø To obtain a loan secured by artwork
Ø To satisfy the curiosity of the owner
Ø
 Difficulties in
Appraising Artwork
Ø Original artwork is one of the most
difficult things to value
Ø Value depends on external factors
that are difficult to quantify.
Ø Appraisals are only as good as the
time period in which they are
presented
Ø No cash flows as in other asset
classes
Basic Appraisal Methods
Market Comparison
Approach
 Cost Approach
Ø Not applicable to all artworks like
in painting.
Ø Applicable where say the value of an
artwork made of precious metals or
gems depends largely on the raw
materials or in the case of
decorative arts where the cost of
manufacturer is the main factor in
determining its value
 Income Approach

Ø Where the artwork produces income,

such as artwork in the stock of
someone in the business of renting
out artwork or a master image used to
produce signed and numbered prints or
commercial products such as posters
and t-shirts.
Ø
Ø Under this method the stream of
income is capitalized and used as the
basis for estimating value.
 Intuitive Approach

This approach is not officially

recognized by any of the major
appraisal organizations or the IRS, but
it is commonly used in the art world.
Replacement Value
Approach
 Art Index
• Equity: NIFTY/SENSEX/Others
• Real Estate : RESSEX
• Inflation: CPI
• Commodity Price Indexes
• Diamond : IDEX Diamond Price
Index
• Why is an Index reqd?


•
 ET Art Index
• ET and Osian’s – Connoisseurs of Art
– world’s premier Archive on the Indian
contemporary fine and popular arts
• For the fund managers and insurance
companies, but also for investors (HNIs)
• Uses the transactions of artworks
belonging to India’s leading 51
contemporary artists
– M.F. Husain, F.N..Souza, Tyeb Mehta,
Akbar Padamsee, Ganesh Pyne, J.
Swaminathan, J. Sultan Ali, 3 Tagores
– transaction value of these 51 artists
comprise 88% of the total organized
Indian art market
• Calculated on the basis of the average
Square Inch Rate (S.I.R) of works
• The Liquidity and Historical Significance
weights have been considered so as to
 ET Art Index

• ET Art Index gave a return of 47.8%

since it’s inception in January 1,
1998. From a level of 100 on
December 31, 1997 the index
 ET Art Index

• ET Art Index gave a return of 47.8% since

it’s inception in
 January 1, 1998. From a level of 100 on
 Mei Moses Fine Art
Index
• Michael Moses and Jiangping
Mei (New York University's
Stern School of Business,)
• They take the original sales
price and then subtract it
from the most recent sales
price at Christie's and
Sotheby's in New York
• Most recent update shows,
over the last 50 years, the
Mei Mosses – Art Index
Art Funds: Alternative to
Art Investment
• People who are keen on
investing in art can make their
investments through Art
Funds.
• These art funds in India
basically operate like mutual
funds, with people investing
money in them and the fund
manager purchasing art with
the collected money.
• These art works are bought
through exhibitions or directly
The following are some of the


major art funds currently

operating in India:
•  Osian’s Art Fund
• Crayon Capital Art Fund
• Yatra Art Fund
• Copal Art Fund
• The latest entrant, the Indian
Fine Art Fund which is a $25
million fund, has invited
investments starting from
 Wealth Management
Services * for Art

* OSIAN ’ s Wealth Management and Deutsche Bank Private Wealth Manageme

 Tax
• At what stages Tax is
attracted?
 Tax on Purchase
• Art purchased in India
– Sales Tax(VAT) 12.5%
–
• Art purchased from outside
India
– Import duty 14.712%
– Sales Tax(VAT) 12.5%

 Pay for being Rich:
Wealth Tax
At Present April 2012 onwards

Scope Paintings, drawings, Paintings, drawings,

sculptures not under sculptures under
wealth tax ambit wealth tax ambit
Wealth Tax Limit Net wealth exceeding Net wealth exceeding
Rs 30 lakhs Rs 1 crore

Wealth Tax Rate 1% of taxable net 1% of taxable net

wealth wealth
Tax on Income from Art
• Any income earned from
work of art such as
– rent for allowing it to be
displayed in an
exhibition,
– Fee for allowing it to be
reprinted in a book


• Taxed as normal income

 Tax on Art as Gift
• Gift received during the year:
paintings, sculptures or
other works of art
• Aggregate value: exceeds Rs.
50,000
• Also Includes any concession
on Art exceeding Rs. 50,000.
( Deemed Gift)
• Subject to: Income tax
• Rate: Applicable tax slab
 Tax on Sale
• Finance Bill 2007 amended scope
of “capital assets”
• After 2007, “capital assets” also
include
– Archaeological collections,
Drawings,
– Paintings,
– Sculptures,
– Any work of art



 Tax on Sale
• If held for 3 years or more
– LTCG Tax @20%
– Benefit of Indexation
– Base year April 1988
–
• If held for Less than 3 years,
– STCG Tax @ relevant tax slab
–
• Cost of Improvement, Cost of
restoration allowed as
deductions. But Cost of
storage is not allowed for
Art vs. Capital Market
Art Insurance
 What is insured
• Collection of:
– drawings
– paintings
– Sculptures
– any work of art

 Insurance
• Title Insurance
– Defective or lack of title


• Property Insurance
– Loss
– Fire damage
– Water damage
– Restoration cost on damage
– Theft


–
 Title Insurance
• Need: lack of transparency
– Confidentiality of buyers and
sellers
– No central registry for art
transactions


–
 Real Life Case
Steven Spielberg, the movie
producer and art collector,
wanted a Norman Rockwell painting.

He called the
gallery he usually purchased art from

and was told that a

Rockwell was available. He
purchased it for $700,000,
took it home. Sometime later
Spielberg was sued by the
previous owner who claimed that the

gallery was not at

liberty to sell the work because it
lacked the proper
 $700,000

Norman Rockwell painting

Co
Legal u rt
charges: ca
se
$50,000
 Cost vs. Benefits

• Cost
– Premium: 3%-7% of value of
work
– One time cost


• Benefit
– Insured for defending against
defective title in courtroom
– Insured the value of the work

 Cost Vs Benefits
• Had Mr. Spielberg taken the
insurance


• Cost: 7% of $700,000=
$49,000


• Benefit: Insured for $750,000

– Value of the painting i.e.,
$700,000
– Defending charges i.e.,
 Property Insurance
• Special attention to be paid on
– Risks to be covered: loss, theft,
damage or destruction(due to
fire, flood etc)
– Valuation clause of the policy:
agreed upon value or market
value in case of loss or theft
– A right of first refusal to
repurchase the recovered
artwork from the insurance
company at a pre-negotiated
price (i.e. the original value of
the claim)
– Arbitration clause to adjudicate
any disagreement on valuation
 Property Insurance
• Premium depends upon
– Geography: For e.g. Mumbai is
more prone to floods than
Delhi is. So more premium in
Mumbai for insurance against
floods
– Neighbourhood where the
building is located
– The security and construction
of the building where the
artwork is stored
 Exclusion
• The following may or may not be
covered under property
insurance
– Wear and Tear
– Inherent defect and breakdown
– Gradual deterioration
– Loss by insects or vermin
– Damage by atmospheric
conditions
– Confiscation and War
– Breakage and non violent theft
while home is being lent, let or
sub let
– Radioactive contamination
Tips for Art Investment
• Buy the Art which you like.
– Having emotional Connect
would mean less loss even in
case if value falls
• Buy Lower priced Art( more
room for growth) instead of
Million Dollar Masterpieces
• Consider Growth
Shares( Young Artists) along
with Blue Chip ( Famous
Artists)
Tips for Art Investment
• Know thy artist - Art buyers
should know the history of the
artist's work apart from the
quality. Also check the
provenance, condition and
period in which it was painted
before investing.
• Have a clear idea about the time
horizon and gestation period
for a particular work to
appreciate in value.
• Last but not the least, buy art
only if you like the quality of
work and not just the artist.
Thank You!