A ballpark figure of Rs 1,761 million spread over 33 film projects is said to have been invested in the film financing sector in 2003 as compared to Rs 556 million spread over 11 films projects in 2002 and Rs 430 million in 2001. This increase in film financing from organized sources has been led by Media & Entertainment (M&E) companies that have raised funds through IPOs over the last few years and new entrants comprising of high net worth individuals (HNI) & companies, who were traditionally not engaged in the M&E business. This has resulted in the players reducing their funding from traditional unorganized sector debt financiers by a subsequent amount

This represents the first definitive (and meaningful due to number & quantum of films involved) shift in the growth of organized film financing for the Hindi film industry, a trend which is likely to sustain & grow over the coming years.

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The past five years witnessed several Indian companies engage in diverse business segments across the Media & Entertainment (M&E) space have raised money through initial public offerings (IPOs) and private equity placements over the past five years. The first company to tap public money through an IPO was the C&S TV broadcaster, Zee Telefilms Limited, in 1992-93. The big push in fund raising came in 1999 as investor appetite for M&E companies increased due to global recognition in the potential of M&E companies.

Business Segment	Name of Companies Advertisement
TV Broadcasting & Software Production	Zee Telefilms, ETC Networks, SONY Entertainment Television, TV Today, NDTV, Balaji Telefilms, Bag Films, Creative Eye, Cinevistaas, Padmalaya Telefilms, Sri Adhikari Brothers Network, TV 18, Miditech, UTV, Nimbus Communications
Film Production, Distribution & Exhibition Advertisement	Adlabs Films, PVR, Mukta Arts, Shringar Films, Pritish Nandy Communications, Galaxy Entertainment, Kaleidoscope Entertainment
Music Content & Distribution	Tips Industries, Saregama Advertisement
Print Media	Mid-Day Multimedia, Hindustan Times
Radio Broadcasting Advertisement	Entertainment Network of India
Animation	Crest Communications, DQ Entertainment Advertisement

In addition to foreign direct investment (Star TV, SONY, Discovery Communications, Time Warner, etc;) & foreign portfolio investors (who have picked up stakes in some of the above mentioned companies through IPOs and / or secondary market), several international venture capital & private equity investors have also bought into the Indian M&E companies. Some of such global financial investors include GW Capital, ICICI Ventures (indirect route), Warburg Pincus, CDP Capital, The Chaterjee Group and Transatlantic Ventures. 

While the TV Software and Music Software & Distribution attracted majority of external funding till 2001, the Filmed Entertainment space (comprising Film Production, Distribution & Exhibition) and niche TV channels (News & Current Affairs) are the current favorites of investors due to favorable industry dynamics & potential growth opportunities.

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.

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Mode of Funding	Remarks
Private Financiers Advertisement	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.
Promoter?s Equity	The second most popular source of funding. Advertisement
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 Advertisement	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. Advertisement
IPO	Hangover of poor returns earned by investors from prior IPOs. Difficult but possible for business with diversified operations.
Venture Capital / Private Equity (Company level) Advertisement	Not forthcoming for plain vanilla film production companies due to concerns of transparency & higher risks. Low institutional activity due to lack of good, diversified investment opportunities.
Venture Capital / Private Equity (Project & Slate Specific)	Mitigates most of the critical risks associated with company level funding. Funding from corporates & individuals is growing rapidly through plain vanilla financing and / or co- productions. Advertisement

The inferences that can be drawn is as follows:

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.

• It will be appropriate to infer that ongoing growth in multiplexes especially in metro towns and larger cities is promoting production of niche films (which, in turn are being financed by private investors), which till about 2-3 years back were unviable due to non-availability of exhibitor screens for showcasing to the target viewer segment.

 Concluding Remarks / Emerging Trends 

?  Private investment from non-institutional sources will continue to grow in 2004 & beyond. Initially, such investments will come from high net worth individuals or through companies promoted by them in the capacity of venture capitalist for producing films with metro-centric multiplex themes or globally aligned subjects. As & 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 / exhibitor segments of the film value chain will become more organized & transparent over time.

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?  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. Similarly, onset of the PPV market with the advent of DTH broadcasting in India could contribute significantly (revenues could increase by as much as 10%) to the revenue generating potential of Hindi films.????????

? Going forward, it is expected that equity investment in film projects will be more forthcoming from high net worth private investors and debt financing will be led by private sector unorganized financiers, IDBI and banking institutions. Gradually, institutional venture capitalists & private equity investors will also come forth to take equity stakes in film projects. But they may do so through special purpose investment vehicles (funds) structured suitably to fund films through debt and / or equity.?????

?  The industry may also witness emergence of newer financing structures & options, which will provide completion financing & P&A (Prints & Advertising) financing for films. These type of financing options are likely to emerge in structures, which will be associated with a strong film distributor to ensure optimal recoupment? of funds in the LIFO (Last In First Out) format. Similarly, some of the enterprising investors and companies are also likely to start providing development funding to filmmakers especially for projects (both live action & animation projects) aimed at global audiences.????

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? Whenever (if at all) tax incentives are provided to investors investing in filmed entertainment space (basically content production on the lines of incentives available in Australia, UK, Luxembourg, Netherlands, France, Ireland, etc;), it will lead to a surge in private sector investments in the film production business, both from institutions as well as individuals.

?Newer players entering into the film financing business may also start lending like private financiers in addition to taking equity stakes in specific projects.

?There will be sustained growth in co-production activity within the domestic film industry (for risk sharing & optimal utilization of specific resources) as well as between Indian & overseas producers (for making films with an Indian link into the project or for benefiting from lower cost of production in India).???

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?Companies engaged in other M&E business segments like Broadcasting, Print Media, TV Content Production, Film Distributors & Exhibitors will diversify into film production business with different objectives. While Broadcasters & Film Distributors / Exhibitors will aim to generate supply for their respective networks, TV Software producers will aim to provide growth to their existing businesses.

?Some players especially in the print media space will be interested in this space as a plain vanilla diversification exercise and such a move may be charted through an entry via film financing route rather than hands on production route, which will be taken by TV software producers.

• Please note this report cannot be published or reworked without the written consent of Rabo India Finance
• The author is Rabo India Finance corporate and investment banking head – Media & Entertainment. He can be contacted at sunir@hotmail.com.