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INDEX
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History
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Changing Scenario
4-5
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Issues
6-7
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R ecent
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Advances Satellite R ights Music R ights Featur e Film production Gr ants.
Concluding R emarks / Emer ging Tr ends
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History The two important milestones that have laid the f oundation f or the process of cor por atisation of the Indian f ilm industry ar e: The Inf or mation & Broadcasting Ministry accor ding ³industry´ status to the f ilm industry in May 1998 and the Finance Ministry announcing that the entertainment industry would be r ecognis ed as an a pproved acti vity under the industrial concer ns section of the Industrial Develo pment Bank of India Act 1964. Since then, the Gover nment of India has tak en sever al initiatives to li ber alize the exchange control r egulations in f ilm production and f inancing. The pr esent article will discuss a short history of the f ilm f inancing that was pr evalent in the Indian f ilm industry and the way it has changed over the years. The Indian f ilm industry was dominat ed until the 1960s by the f ilm-making companies many of whom also owned studios (k nown as ³studio system´). They either employed or contr acted on long-ter m basis the artist es and technicians. The f ilm producers would get loans f rom f ilm distri butors against a minimum guar antee that the f ilm was scr eened in cinemas f or a f ixed minimum period with no f urther lia bility of the pro ducer or even sharing of prof it or loss. This system start ed changing when most per f or mers started going the f r eelance way since 1960s which r esulted to the inception of the ³star syst em´ and huge escalations in f ilm production costs. In this changed syst em, distri butors started paying 50% of the f ilm-making cost leaving the r est to the pro ducer who used other sour ces including conventional moneylenders, cor por ate r esour ces, and promissory note syst em or Hundi. The star system emer ged when the studio syst em colla psed and f r eelance per f or mers emer ged impacting the f inancing patter n. In the star syst em, actors and actr esses ceased to have long-ter m contr actual o bligations towar ds any studio or f ilm pro duction f ir m r ather , they began to o per ate as f r eelancers comman ding fees in pro p ortion to the box off ice per f or mance of their r ecent f ilms. In 1975, National Film Devel o pment Cor por ation Ltd., (³NFDC´), a Gover nment of India Ent er prise, was esta blished with a view to pro moting and or ganizing an integr ated devel o pment of the Indian Film Industry, to f oster excellence in cinema and to encour age the good cinema movement in the country. T he pri mary goal of the NFDC was to plan, promote and or ganize an integr ated and eff icient develo pment of the Indian f ilm industry and f oster excellence in cinema. Over the years NFDC has pro vided a wide r ange of ser vices essential to the growth of Indian cinema. T he NFDC (and its pr edecessor the Film Finance por ation) has so f ar f unded/produced over 300 f ilms. Cor In December 2000, a Joint Institutional Committee on Financing Entertainment Industry headed by the Depart ment of Banking-Ministry of Finance, had Industrial Finance por ation of India and Industrial Devel o pment Bank of I ndia as its members was cr eat ed. Cor It su bmitted an interi m r eport that laid down certain nor ms f or offering f inancial assistance to the f ilm industry:
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1. Institutions should ext end f inances only to cor por ate entities. 2. Besides negati ves, music rights, satellite TV rights and overs eas rights must also be consider ed as security. 3. Insur ance companies must extend insur ance cover f or f ilms and devel o p mor e pro ducts f or the industry. 4. When f inancing a single f ilm, the dur ation of advance may be r estricted to between 6 and 18 months. 5. Banks and FIs should work together with pro ducers to evolve standar ds f or f inancing and insuring f ilms. 6. Cr eating a f ilm industry-r ating agency by pooling peo ple f rom banks/FIs, eminent f ilmmak ers and experts in the media sector to judge a f ilmmak er's cr edentials.
With the f ilm production companies ado pting cor por at e pr acti ces, the tr ans par ency gr ew and led to an environment of trust. This trust ena bled the banks/FIs/insur ers to deal with the f ilm industry lik e never bef or e. With the growth of f ilm industry, the f ilm sof twar e soon beca me a $ 1 billion industry by 2005, empl oying around 10 million peo ple. With time the ancillary industries lik e du bbing, editing, sound r ecor ding, web designing, web-casting, mer chandising and pro motion also started flourishing. With tr ans par ent accounting pr actices and assur ed adher ence to tar gets and ti me-schedules, a buoyant and flourishing f ilm insur ance industry in the country seemed all set to become a r eality.
Changing Scenario Film
f inancing in India is f inally coming of age. As the f ilm industry r epositions itself f rom being a private community dominated by a privileged few to an or ganised and cor por atiz ed industry with entry barri ers lower ed, it is r ealising that a chang e in its manner of o per ations is essential. St epped u p exposur e to various or ganised f inance players such as banks, f ilm f unds, private equity and ca pital mark ets (inclu ding f or eign stock exchange listings) ar e causing a lar ge number of industry players to r estructur e thems elves and migr ate f rom a f a mily-run concer n to a cor por at e player. These devel o pments have paved the way f or independent f inanciers to mak e their mark in the Indian f ilm industry. Glo bally, f ilm f unds ar e a ma jor sour ce of f unding f ilms with various investment models to invest in a f ilm pro ject.
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In India, the advent of f ilm f unds is very r ecent and has potential to benef it all the stak eholders and the f unds act as an attr active alter nati ve asset class. Curr ently, ther e ar e two onshor e ventur e f unds: Cinema Ca pital Ventur e Fund and Vistaar R eligar e Film Fund, which ar e r egister ed with the Securities and Exchange Boar d of India as domesti c ventur e ca pital f unds. Together , they have a cor pus of a bout R s 3,500 million. While these f unds have been set u p r ecently, they have indicat ed a potential r etur n in the r ange of 25% to 35% to the investors. From
f ilm producers¶ pers pecti ve, the f ilm f unds offer the f r eedom to f ocus on the cr eative process, including identi f ying the best talent (i.e., dir ectors, scri ptwriters and actors), without being tied down to a lar ge f ilm production house or carrying the bur den of f inancial and business -r elat ed as pects. All in all, the players who ar e not looking at aligning themselves to esta blished studios, the f ilm f unds offer an attr active alter nate pro position² intelligent money. S ince the f or mal µindustry¶ status was accor ded, the banks have been ext ending su pport to this sector. They have stringent nor ms f or lending and as a r esult s mall players and independent f ilmmak ers ty pically do not get access to bank f inance. In such a scenario, the entry of dedicated f ilm f unds is expected to be a boon f or production of quality independent f ilms in India. Film
f unds ar e gr adually gaining po pularity both as an alter native mode of f unding f or f ilms as well as an alter native invest ment o ption. Invest ment in f ilm ass ets continu es to be per ceived as a high risk invest ment, lar gely on account of the under develo ped and nascent state of the f ilm f inance industry. Once the investors have some a mount of experi ence with thes e f unds, f ilm f unds ar e lik ely to gain po pularity as an attr acti ve investment o ption. If we look at Holl ywood, today, the pro jects f or incr easing 3D and digital scr eens ar e being partly f inanced by f unds r aised f or this pur pose. In the Indian context, wher e the growth in ter ms of occu pancy an d ti ck et size is going to be signif icant, sever al o pportunities would emer ge. Let¶s look at f ilm f inance in a slightly differ ent cont ext now: the single most important as pect that will r eally tr ansf or m the way f ilm industry works is µplanning¶. Unlik e our wester n counter part, we ar e not as or ganised ² we mak e u p f or our planning and or ganisational skills by putting chea p la bour to work. However , as India moves u p the pros perity chain and the costs -benef its start neutr alising, the industry players will r ealise that planning² which will bring along the much-needed µf inancial planning and disci pline¶ ² will be the most important asset in the ar moury of a quality production house. Besides cost eff iciencies and savings, planning at an ear ly stage could bring along non-tr aditional means of f inance in the f or m of f ilm incentives, br and f inance, pr e-sale based bridge f inance, etc, in addition to structur ed f inance o ptions. Lastly, the su pport of the state gover nment is much desir ed. Mumbai ² the land wher e dr eam mer chants r eside ² is loved by the f ilm f r ater nity because they love the s pirit of Mumbai. Des pite the inf r astructur e and o per ational diff iculties that the f ilm f r ater nity f aces, they yet r emain loyal to this swa pna nagari. It is time that the state gover nment took cue f rom the steps tak en by the feder al/stat e gover nments across the wor ld ² MDA in Singa por e, State of Calif or nia, to name a few ²and work towar ds incenti vising the f ilm industry through a welldef ined plan that will r eally help industry par allel its wester n count er part and showcase Indian cr eative talents to the wor ld.
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Issues The f ilm f inancing mark et in India comprises pro ducers (pro prietorshi ps, partnershi ps, private limited & pu blic limited companies), private f inanciers (tr aditional f inanciers & new players) and banks & f inancial institutions. Indian f ilms can theor etically r aise production f inancing f rom multi ple sour ces as ta bulated below. However , f unding f rom most of thes e sour ces is not f orthcoming pr esently due to r easons mentioned alongside. Mode of Funding Private Financiers
Promoter¶s Equity
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.
Larger Producers (in lieu of Not too popular as all big producers do not have distribution rights & profit sharing) 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 f ilms f inanced f ro m or ganized sour ces incr eased f rom 4 in 2001, to 11 in 2002 to 33 in 2003 r epr es enting an a pproximate incr ease of 200% year on year f or the last thr ee years.
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Total f unding f or f ilms f rom or ganized sour ces have also incr eased f rom a pproximately R s 430 mn in 2001 to R s 575 mn in 2002 to R s 1760 mn in 2003 r epr es enting an incr ease of mor e than 200% in 2003 over the last year.
R ecent
Advances
Satellite R ights: Today, the industry¶s dependence on theatrical r evenues has almost halved. Even a f ilm with a moder ate per f or man ce at the box off ice manages to r ecover its costs to a gr eat ext ent. Almost 35-40% of the r evenue comes f ro m sat ellite rights alone, which, in most cas es, ar e pr e-sold to a TV channel even bef or e the f ilm hits the production floor. Thus, even if a f ilm tur ns out to be a dud, the producers ar e prot ected to a gr eat extent. Lik e Anjaana Anjaani (Priyank a Cho pr a and R an bir K a poor), an Eros pro duction, made a R s 16 cror e prof it des pite getting a tepid r es ponse at the box off ice. The f ilm had a budget of R s 50 cror e and the studio made R s 22 cror e by pr e-selling the satellit e rights. Another R s 9 cror e came f rom music, while distri bution ear ned it another R s 35 cror e r evenue. This tr end of having multi ple r evenue str eams is a welcome change f or Indian f ilm-mak ers. In the old days, 90% of a f ilm¶s success depended on box- off ice r ecei pts.
Studio: Viacom 18 Cost: R s 18 cror e Box Office Revenue: R s 10 cror e Satellite Revenue: R s 15 cror e
Studio: Eros Inter national
Cost: 55 Cror e Box Off ice R evenue: R s 80 Cror e Satellite R evenue: R s 35 Cror e 7
Studio: Yashr a j Films Cost: R s 12 cror e Box Office Revenue: R s 12 cror e Satellite Revenue: R s 11 cror e
Studio: R elian ce Entertainment Cost: R s 50 Cror e Box Off ice R evenue: R s 35 cror e Satellite R evenue: R s 22 cror e
Music R ights: Music
sales add to the r evenue of f ilms, in some cases bringing in almost a thir d of the budget.
If you ar e making a big-budget f ilm lik e Z indagi Na Milegi Dobara, Ra.One or Krrish2, you can be assur ed that at least 15% of your budget will come f rom the sale of music rights (See the ta ble). ³For a f ilm with a budget of R s 12 cror e, music can bring in as much as 35%, while f or a f ilm with R s 60 cror e budget, that number could well be 25% Contr ary to po pular per ception, the f ilm music business in India is alive and thriving. What¶s r eally helped is the u biquity of the mo bile phone an d the digital r evolution that¶s come alive through DTH, r adio an d the slew of music channels. Today, music r eaches the end user in various f or ms, with physical (older f or mats lik e CDs and cassettes come her e) now a poor second to digital. For 2010, accor ding to a KPMG r eport, digital brought in R s 420 cror e, while physical contri buted R s 320 cror e of a total industry size of R s 850 cror e. By contr ast, in 2007, digital accounted f or R s 140 cror e, while physical was R s 560 cror e.
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Featur e-f ilm
Production Gr ants:
Glo bal Film Initiati ve production gr ants ar e awar ded twice a year , in wint er and su mmer , to f ilmmak ers whose work exhi bits artistic excellence, authentic s elf-r epr es entation and accomplished storyt elling. The gr anting progr a m f urthers the Initiative's mission of contri buting to the devel o pment of local f ilm industries while offering audiences a variety of cultur al pers pectives on daily life around the wor ld. Money
r eceived through the Initiative's gr anting progr am ar e used to su pport completion of f ilm production, and to su bsidize post-production costs, such as la bor atory and sound mixing fees an d access to moder n editing syst ems.
This year , the Glo bal Film Initiative will awar d production gr ants of u p to $10,000 each to select a pplicants during its Summer gr anting cycle. The Glo bal Film Initiative accepts gr ant a pplications f rom countries in the f ollowing r egions: Af rica, Asia (excl uding Ja pan, Singa por e, South K or ea and Taiwan), the Cari bbean (excluding Cu ba), Centr al and Easter n Euro pe (excluding Euro pean Union), Latin America, the Middle East (exclu ding Ir an) and Oceania (excluding Austr alia and New Zealand).
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Concluding R emarks / Emer ging Tr ends Private invest ment f rom non-institutional sour ces will continue to grow. Initially, such investments will come f ro m high net worth individuals or through companies pro mot ed by them. When the distri bution sector becomes mor e or ganized, flow of ca pital will also begin f rom institutional sour ces f or taking equity stak es in f ilm pro jects. This may tak e some ti me as the distri bution of the f ilm will become mor e or ganized and tr ans par ent over time. Anything leading to higher r evenue gener ation f or f ilms will act as catalyst f or attr acting private sector invest ment in the f ilm f inancing business. Pr esently, Hindi f ilms gener ate less than 5% r evenue f ro m home video business as compar ed to 35-40% f or US f ilms. Similar ly, overseas r evenues constitute less than 15% f or ma jority of Hindi f ilms as compar ed to a pproximately 25% f or US f ilms. Domestic theatrical r evenue constitutes almost 50% of a ty pical Hindi f ilm as compar ed to around 20-25% f or a ty pical Hollywood f ilm. Ther ef or e, suita ble measur es which lead to incr ease in r evenue f ro m Home Vi deo segment (lead will have to be tak en by r eduction of pir acy), overs eas mark et (newer r evenue ar eas in the theatrical, Pay TV & home video segment) and domestic theatrical cir cuit (higher r evenue gener ation can be brought out by growth of digital distri bution & exhi bition in s maller towns) will induce incr eased invest ment queries f rom private investors f or f unding f ilms through the equity route and incr ease comf ort of debt investors.
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