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The Indian film industry has long suffered from the tag of being non-transparent when it comes to its funds scenario. There have been reports of underworld involvement in film funding and cash transactions have been the norm in many cases.

But this scenario is slowly witnessing a major overhaul. A number of national and international players have found their way into the lucrative Indian film market through film funds. These are basically film VC funding, where most payments are made by checks and the entire funding is transparent and on record.

The market is clearly ripe for VCs to invest in films, both Hindi as well as regional cinema. From the Shahid Kapur-starrer Mausam to the Kay Kay Menon-Deepti Naval starrer Bhindi Bazaar, a large number of films today have VC funding.

The market is enticing and lucrative
Surveys and reports further support the opportunities that are wide open for entrepreneurs who wish to jump into the Bollywood bandwagon. According to the FICCI-KPMG report on India media and entertainment sector 2010, the growth potential of this sector stays strong, with it expected to witness 13 percent CAGR to grow to Rs.1,10,000 crore by 2014. Yo-yoing between 15 percent CAGR between 2006-’08 and the de-growing by 14 percent in 2009 (multiplex tussle and other corrective measures), the Indian film industry is expected to sustain 8.9 percent CAGR growth to reach Rs.13,670 crore by 2014.

These figures look promising and helped pave the way for the big guns of the VC world to enter the Indian film market. One of the main reasons behind why VCs are keen on investing in the Indian film industry today is that Bollywood has become much more organized and also because it has proved that it is recession-proof.

According to reports in leading business dailies, during the recent economic slump, its box-office collections were higher than ever. Again, the slowdown pushed down production costs, making the valuations more viable for VC funding.

Slew of funds
Two film funds were approved by SEBI in August 2008. One of these was Cinema Capital, promoted by Samir Gupta, Sanjay Bhattacharji and others. With a target fund size of Rs.750 crore through domestic and offshore fund raising, the fund raised commitments of Rs.110 crore from about 1,500 retail investors. Key investment made included Ajay Devgn’s All the Best, while the firm has already taken equity stake in Vipul Shah’s Energetic Films. Its primary investment model is equity participation (PE).

Vistaar Religare, on the other hand, is promoted by Sheetal Talwar (Vistaar) and Religare Enterprises Limited. This has a target fund size of Rs.200 crore and has already raised commitments of Rs.45 crore from retail and institutional investors. It has invested in around 11 films, including Pankaj Kapur’s directorial debut, Mausam. It invests in project-specific SPVs.

Kay Kay Menon takes a breather during the shooting of the film.

The Mumbai-based Vistaar Religare Film Fund (VRFF) backed five films that were released in 2009, including the Harman Baweja-starrer Victory and Kay Kay Menon-starrer The Stoneman Murders, as well as the South African English movie Finding Lenny. Its investments were used for making the movie prints and advertising the films. “We went in with the P and A option (print and advertising), which meant that we were last in and first out. This is a good way for a VC to fund cinema, because his/her fund is financially protected,” explains a senior official of VRFF. The fund has invested in about 10 other films, including Ram Gopal Varma’s Rann, starring Amitabh Bachchan, Riteish Deshmukh and Paresh Rawal.

DAR Capital Group, which operates out of a number of countries, has also forayed into the Indian film funds market. Explains an official spokesperson of the group, “We are primarily looking at an average of below Rs.10 crore-Rs.15 core for a Hindi project and below Rs.1.5 crore-Rs.2 crore for regional films. Having said that, if there is a very interesting project that we really like and feel has good commercial value then we won’t shy away from investing in higher budgets if required.”

Another group that has tapped into the lucrative market is High Ground Enterprise (HGEL), the brainchild of London-based entrepreneur Karan Arora. It is a conglomerate of six companies specializing in the media and entertainment domain.

According to Arora, Founder and Group CEO, HGEL, “We are running it as a media fund. A group of high-networth individuals got together to create this fund. We have received some funding from VCs in U.K., but about half the total amount of the first phase of the fund, Rs.163 crore, has come from our own pockets. We are heading the fund in India. In the second and third phase, we intend to deploy our funds for bigger projects,” explains Arora.

Shooting in progress for Bhindi Bazaar.

The film fund’s first Hindi film is Bhindi Bazaar, which is expected to be released during October-November. It might have a world premiere at the London Film Festival and a showcasing at the Venice Film Festival. Arora is very clear that his fund has not entered the market just for the sake of one or two films, but is here for the long run.

DAR feels that the Indian film industry has always been infamous for the absolute lack of transparency when it came to matters of budgets, recovery and funding. “However, in the last couple of years, with the entry of bank finance, corporate houses, film insurance and film funds, things have changed considerably. Today, all accounts are transparent and even audited, with most payments being made by checks. For our last project, we made almost all our payments, including F&B and daily costs via check, except for a few incidental expenses that had to be done in cash,” explains the spokesperson.

Payback terms
Funding movies can be as risky as any other VC investment. But it is possible for VCs to put a cap on how much they want to invest in a project, limiting their exposure. Typically, a VC fund would not invest more than 65 percent of the total cost of a film.

On an average, across the portfolio, entertainment investors expect an internal rate of return, or IRR, of 30 percent. VC investments typically have a horizon of five-seven years, while films offer what investors call an “18-18 model”. It takes about 18 months to identify a project and release it, and another 18 months to monetize it. “(The) life cycle of a film investment is two-three years,” says the Vistaar spokesperson. “Films don’t lose money if they are not a high-cost model.”

For DAR, the payback terms are slightly different. “By and large, film financing is a business deal between the parties involved. Having said that the general trend in the case of film financing is a 50 percent equity for 100 percent finance in addition to cost of finance of 20 percent being paid to the financier. However, DAR Motion Pictures is not into the same space of a pure film financier. We are a full-fledged production house and are involved in all aspects of film-making, be it pre-production, production or post-production and marketing. Hence, we work on a completely different structure where we take up complete ownership and are responsible for the whole project albeit with, in most cases, special provisions being made for the director and/or key talent/HOD’s in the profit pool in lieu of their important contribution(s) to the success of the movie,” says the DAR spokesperson.

“We are focused on good quality cinema that is commercial and should at the least break-even if not make a decent profit. Regarding RoI, the general industry timeframe for the same is 3-5 years per project but given the rapidly changing film exploitation environment, for all our projects we aim for at least 70 percent recovery within the first six months,” he adds.

Criterion while selecting a film
DAR’s primary criterion while selecting a script is strong quality content, followed by budget. “Most Bollywood movies fail not because the content is bad, but because they are exorbitantly priced, making them grossly unviable even before they take off. Actors come into the picture only after these two criteria are satisfied,” says DAR’s spokesperson. Arora also stresses the importance of the script, followed by the team and the budget allocation. VRFF, too, follows a similar criterion pattern.

Films till date
One of the companies under the HGEL umbrella is Walter Andersen Films, a U.K.-based film production company, which had Tera Kya Hoga Jhony starring Neil Nitin Mukesh as its first investment as a co-production in India. With an official screening in London Film Festival (2010), it was slated for a release in India by May 2010. Guns & Heroes (under production), a movie project with an international cinematic appeal, which is being shot in the glacial regions of Siachen, Ladakh and Austria.

Another arm of HGEL, Picture Thoughts Productions, is a Mumbai-based film and TV production company behind the forthcoming films Bhindi Bazaar (under production) and Padosee, an ironic emotional comedy set in 1948 scheduled to go on the floors soon.

Director Mahesh Manjrekar shoots for Lalbaug Parel, a film from the DAR Capital Group.

DAR is a young firm and has, till date, released a bilingual directed by Mahesh Manjrekar that boasts of two completely independent negatives shot simultaneously. While the Marathi version was titled Lalbaug Parel, the Hindi version was titled City of Gold.

The group has committed to directly release another 9-10 film projects by the end of 2012. “We have already commissioned our second Marathi movie and are at very advanced stages of signing contracts for another Marathi movie and a full-fledged Hindi movie which we hope should go to floor before the end of this year,” says the DAR spokesperson.

Midas Experiences P&A Fund, promoted by Karana Verma, with a target fund size of Rs.20 crore, invested in Mudassar Aziz’s recent film Dulha Mil Gaya, starring Sushmita Sen, Fardeen Khan and Shah Rukh Khan.

Do’s and don’ts for an aspiring filmmaker
• A new filmmaker should do his full homework on the project.
• He/she should have a complete project presentation including the bound and registered script, treatment note, indicative budget with timelines as well as proposed cast.
• It may be argued that this is the producer’s prerogative, which is true. However, if the new filmmaker comes completely prepared it only enhances the producer’s confidence in him/her and gives a clear insight into his/her understanding of the subject and vision for the project.
• Another key factor is a show reel or short film executed by the filmmaker as this would also give the producer an idea of his/her filmmaking abilities.

Karan Arora on why film funds work:
• Funds bring transparency
• More due diligence possible
• Daily production and cost report
• Tracking each day of production
• This helps in taking corrective steps if budget overshoots
• Completion guaranteed

©Entrepreneur August 2010

Tags:
Bollywood, film industry, films, funding, VC