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INDEX
y History y Changing Scenario y Issues y Recent Advances  Satellite Rights  Music Rights  Feature Film production Grants. y Concluding Remarks / Emerging Trends 3-4 4-5 6-7 7-9

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History
The two important milestones that have laid the foundation for the process of corporatisation of the Indian film industry are: The Information & Broadcasting Ministry according industry status to the film industry in May 1998 and the Finance Ministry announcing that the entertainment industry would be recognised as an approved activity under the industrial concerns section of the Industrial Development Bank of India Act 1964. Since then, the Government of India has taken several initiatives to liberalize the exchange control regulations in film production and financing. The present article will discuss a short history of the film financing that was prevalent in the Indian film industry and the way it has changed over the years. The Indian film industry was dominated until the 1960s by the film-making companies many of whom also owned studios (known as studio system). They either employed or contracted on long-term basis the artistes and technicians. The film producers would get loans from film distributors against a minimum guarantee that the film was screened in cinemas for a fixed minimum period with no further liability of the producer or even sharing of profit or loss. This system started changing when most performers started going the freelance way since 1960s which resulted to the inception of the star system and huge escalations in film production costs. In this changed system, distributors started paying 50% of the film-making cost leaving the rest to the producer who used other sources including conventional moneylenders, corporate resources, and promissory note system or Hundi. The star system emerged when the studio system collapsed and freelance performers emerged impacting the financing pattern. In the star system, actors and actresses ceased to have long-term contractual obligations towards any studio or film production firm rather, they began to operate as freelancers commanding fees in proportion to the box office performance of their recent films. In 1975, National Film Development Corporation Ltd., (NFDC), a Government of India Enterprise, was established with a view to promoting and organizing an integrated development of the Indian Film Industry, to foster excellence in cinema and to encourage the good cinema movement in the country. The primary goal of the NFDC was to plan, promote and organize an integrated and efficient development of the Indian film industry and foster excellence in cinema. Over the years NFDC has provided a wide range of services essential to the growth of Indian cinema. The NFDC (and its predecessor the Film Finance Corporation) has so far funded/produced over 300 films. In December 2000, a Joint Institutional Committee on Financing Entertainment Industry headed by the Department of Banking-Ministry of Finance, had Industrial Finance Corporation of India and Industrial Development Bank of India as its members was created. It submitted an interim report that laid down certain norms for offering financial assistance to the film industry:

1. Institutions should extend finances only to corporate entities. 2. Besides negatives, music rights, satellite TV rights and overseas rights must also be considered as security. 3. Insurance companies must extend insurance cover for films and develop more products for the industry. 4. When financing a single film, the duration of advance may be restricted to between 6 and 18 months. 5. Banks and FIs should work together with producers to evolve standards for financing and insuring films. 6. Creating a film industry-rating agency by pooling people from banks/FIs, eminent filmmakers and experts in the media sector to judge a filmmaker's credentials.

With the film production companies adopting corporate practices, the transparency grew and led to an environment of trust. This trust enabled the banks/FIs/insurers to deal with the film industry like never before. With the growth of film industry, the film software soon became a $ 1 billion industry by 2005, employing around 10 million people. With time the ancillary industries like dubbing, editing, sound recording, web designing, web-casting, merchandising and promotion also started flourishing. With transparent accounting practices and assured adherence to targets and time-schedules, a buoyant and flourishing film insurance industry in the country seemed all set to become a reality.

Changing Scenario
Film financing in India is finally coming of age. As the film industry repositions itself from being a private community dominated by a privileged few to an organised and corporatized industry with entry barriers lowered, it is realising that a change in its manner of operations is essential. Stepped up exposure to various organised finance players such as banks, film funds, private equity and capital markets (including foreign stock exchange listings) are causing a large number of industry players to restructure themselves and migrate from a family-run concern to a corporate player. These developments have paved the way for independent financiers to make their mark in the Indian film industry. Globally, film funds are a major source of funding films with various investment models to invest in a film project.

In India, the advent of film funds is very recent and has potential to benefit all the stakeholders and the funds act as an attractive alternative asset class. Currently, there are two onshore venture funds: Cinema Capital Venture Fund and Vistaar Religare Film Fund, which are registered with the Securities and Exchange Board of India as domestic venture capital funds. Together, they have a corpus of about Rs 3,500 million. While these funds have been set up recently, they have indicated a potential return in the range of 25% to 35% to the investors. From film producers perspective, the film funds offer the freedom to focus on the creative process, including identifying the best talent (i.e., directors, scriptwriters and actors), without being tied down to a large film production house or carrying the burden of financial and business-related aspects. All in all, the players who are not looking at aligning themselves to established studios, the film funds offer an attractive alternate propositionintelligent money. Since the formal industry status was accorded, the banks have been extending support to this sector. They have stringent norms for lending and as a result small players and independent filmmakers typically do not get access to bank finance. In such a scenario, the entry of dedicated film funds is expected to be a boon for production of quality independent films in India. Film funds are gradually gaining popularity both as an alternative mode of funding for films as well as an alternative investment option. Investment in film assets continues to be perceived as a high risk investment, largely on account of the underdeveloped and nascent state of the film finance industry. Once the investors have some amount of experience with these funds, film funds are likely to gain popularity as an attractive investment option. If we look at Hollywood, today, the projects for increasing 3D and digital screens are being partly financed by funds raised for this purpose. In the Indian context, where the growth in terms of occupancy and ticket size is going to be significant, several opportunities would emerge. Lets look at film finance in a slightly different context now: the single most important aspect that will really transform the way film industry works is planning. Unlike our western counterpart, we are not as organisedwe make up for our planning and organisational skills by putting cheap labour to work. However, as India moves up the prosperity chain and the costs-benefits start neutralising, the industry players will realise that planningwhich will bring along the much-needed financial planning and disciplinewill be the most important asset in the armoury of a quality production house. Besides cost efficiencies and savings, planning at an early stage could bring along non-traditional means of finance in the form of film incentives, brand finance, pre-sale based bridge finance, etc, in addition to structured finance options. Lastly, the support of the state government is much desired. Mumbaithe land where dream merchants resideis loved by the film fraternity because they love the spirit of Mumbai. Despite the infrastructure and operational difficulties that the film fraternity faces, they yet remain loyal to this swapna nagari. It is time that the state government took cue from the steps taken by the federal/state governments across the worldMDA in Singapore, State of California, to name a fewand work towards incentivising the film industry through a welldefined plan that will really help industry parallel its western counterpart and showcase Indian creative talents to the world.

Issues
The film financing market in India comprises producers (proprietorships, partnerships, private limited & public limited companies), private financiers (traditional financiers & new players) and banks & financial institutions. Indian films can theoretically raise production financing from multiple sources as tabulated below. However, funding from most of these sources is not forthcoming presently due to reasons mentioned alongside.
Mode of Funding Private Financiers Remarks Most frequently used funding source. Interest rates differ for different borrowers. By and large, interest rates have become competitive with a macro level fall in interest rates. The second most popular source of funding.

Promoters Equity Larger Producers (in lieu of distribution rights & profit sharing)

Not too popular as all big producers do not have excess capital. Most of them shy away from this type of funding (equity investment for third party film projects) and concentrate on their own projects. Institutional Debt Most of the producers who can get sanctions do not need institutional debt funding while producers who need funding can not get sanctions due to conservative sanctioning approach (more so due to prudent credit policies) followed by lenders in order to protect themselves against distribution & completion risks. Distribution Financing Is available presently (in limited quantum) only for big banner films with reputed producers, directors and star cast. IPO Hangover of poor returns earned by investors from prior IPOs. Difficult but possible for business with diversified operations. Venture Capital / Private Equity Not forthcoming for plain vanilla film (Company level) production companies due to concerns of transparency & higher risks. Low institutional activity due to lack of good, diversified investment opportunities. Venture Capital / Private Equity Mitigates most of the critical risks associated (Project & Slate Specific) with company level funding. Funding from corporates & individuals is growing rapidly through plain vanilla financing and / or coproductions.

Number of films financed from organized sources increased from 4 in 2001, to 11 in 2002 to 33 in 2003 representing an approximate increase of 200% year on year for the last three years.

Total funding for films from organized sources have also increased from approximately Rs 430 mn in 2001 to Rs 575 mn in 2002 to Rs 1760 mn in 2003 representing an increase of more than 200% in 2003 over the last year.

Recent Advances
Satellite Rights:
Today, the industrys dependence on theatrical revenues has almost halved. Even a film with a moderate performance at the box office manages to recover its costs to a great extent. Almost 35-40% of the revenue comes from satellite rights alone, which, in most cases, are pre-sold to a TV channel even before the film hits the production floor. Thus, even if a film turns out to be a dud, the producers are protected to a great extent. Like Anjaana Anjaani (Priyanka Chopra and Ranbir Kapoor), an Eros production, made a Rs 16 crore profit despite getting a tepid response at the box office. The film had a budget of Rs 50 crore and the studio made Rs 22 crore by pre-selling the satellite rights. Another Rs 9 crore came from music, while distribution earned it another Rs 35 crore revenue. This trend of having multiple revenue streams is a welcome change for Indian film-makers. In the old days, 90% of a films success depended on box-office receipts.

Studio: Viacom 18 Cost: Rs 18 crore Box Office Revenue: Rs 10 crore Satellite Revenue: Rs 15 crore
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Studio: Eros International

Cost: 55 Crore Box Office Revenue: Rs 80 Crore Satellite Revenue: Rs 35 Crore

Studio: Yashraj Films Cost: Rs 12 crore Box Office Revenue: Rs 12 crore Satellite Revenue: Rs 11 crore

Studio: Reliance Entertainment Cost: Rs 50 Crore Box Office Revenue: Rs 35 crore Satellite Revenue: Rs 22 crore

Music Rights:
Music sales add to the revenue of films, in some cases bringing in almost a third of the budget. If you are making a big-budget film like Zindagi Na Milegi Dobara, Ra.One or Krrish2, you can be assured that at least 15% of your budget will come from the sale of music rights (See the table). For a film with a budget of Rs 12 crore, music can bring in as much as 35%, while for a film with Rs 60 crore budget, that number could well be 25% Contrary to popular perception, the film music business in India is alive and thriving. Whats really helped is the ubiquity of the mobile phone and the digital revolution thats come alive through DTH, radio and the slew of music channels. Today, music reaches the end user in various forms, with physical (older formats like CDs and cassettes come here) now a poor second to digital. For 2010, according to a KPMG report, digital brought in Rs 420 crore, while physical contributed Rs 320 crore of a total industry size of Rs 850 crore. By contrast, in 2007, digital accounted for Rs 140 crore, while physical was Rs 560 crore.

Feature-film Production Grants:

Global Film Initiative production grants are awarded twice a year, in winter and summer, to filmmakers whose work exhibits artistic excellence, authentic self-representation and accomplished storytelling. The granting program furthers the Initiative's mission of contributing to the development of local film industries while offering audiences a variety of cultural perspectives on daily life around the world. Money received through the Initiative's granting program are used to support completion of film production, and to subsidize post-production costs, such as laboratory and sound mixing fees and access to modern editing systems. This year, the Global Film Initiative will award production grants of up to $10,000 each to select applicants during its Summer granting cycle. The Global Film Initiative accepts grant applications from countries in the following regions: Africa, Asia (excluding Japan, Singapore, South Korea and Taiwan), the Caribbean (excluding Cuba), Central and Eastern Europe (excluding European Union), Latin America, the Middle East (excluding Iran) and Oceania (excluding Australia and New Zealand).

Concluding Remarks / Emerging Trends

Private investment from non-institutional sources will continue to grow. Initially, such investments will come from high net worth individuals or through companies promoted by them. When the distribution sector becomes more organized, flow of capital will also begin from institutional sources for taking equity stakes in film projects. This may take some time as the distribution of the film will become more organized and transparent over time. Anything leading to higher revenue generation for films will act as catalyst for attracting private sector investment in the film financing business. Presently, Hindi films generate less than 5% revenue from home video business as compared to 35-40% for US films. Similarly, overseas revenues constitute less than 15% for majority of Hindi films as compared to approximately 25% for US films. Domestic theatrical revenue constitutes almost 50% of a typical Hindi film as compared to around 20-25% for a typical Hollywood film. Therefore, suitable measures which lead to increase in revenue from Home Video segment (lead will have to be taken by reduction of piracy), overseas market (newer revenue areas in the theatrical, Pay TV & home video segment) and domestic theatrical circuit (higher revenue generation can be brought out by growth of digital distribution & exhibition in smaller towns) will induce increased investment queries from private investors for funding films through the equity route and increase comfort of debt investors.

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