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Show Me The Money!

frank-dsouza-1Frank D’Souza, Partner & Leader, entertainment & media, PwC India

 Film financing by banks

With the grant of industry status to the film sector in 1998, and the subsequent amendments to the IDBI Act, 1964, to recognise the film industry as an ‘industrial concern’, followed by guidelines issued by the RBI in 2001 to banks for financing film production, there was considerable expectation that filmmakers would find film financing through banking channels to be a viable and realistic option.

However, over the years, apart from IDBI and Exim Bank, and to some extent Yes Bank in the private sector, there hasn’t been significant uptake as far as bank financing to the film industry is concerned. In particular, IDBI was aggressive in financing films, with measures like lower interest rates for a considerable period of time, ever since it started financing films.

After initial financing by these banks, which ran from the period 2000–2008/10, film financing by the banking sector has been rather limited or non-existent. This sudden fall in film financing by banks was seen as a result of the failure of certain big-budget films, in which these banks had exposure. The change in the manner in which films were distributed (i.e. minimum guarantee arrangements replaced by revenue-sharing arrangements) has also contributed to increased risk and consequently reduced funding by banks. Though this lack of interest in funding by banks was across the industry, big production houses did not face a challenge while raising funds from banks at the corporate level.

As a matter of fact, if one had to look at global practices, the sector does not lend itself easily to the classical form of bank financing. The reasons are not too difficult to comprehend. First, bank financing, by its very nature, works on returns, which are coupon-based and subject to overall NPA thresholds. Films are naturally a high-risk proposition and do not easily lend themselves to the financing contours of a banking institution.

By some estimates, investments in this sector have been considered as being riskier to those even in the real estate sector. This could be primarily because of the absence of any tangible security to recover the dues in the case of a default. The high risk leads to high interest rates on borrowings, which makes financing from banks unviable for producers.  Also, film financing requires a good understanding of the film sector, and it is appropriate to reflect on whether banks are suitably skilled to analyse the purposes of evaluating and processing funding requests.

Potentially, two elements could to some extent alleviate the current lack of enthusiasm among banks to finance films. First, a separate threshold should be sought on Non-Performing Assets (NPAs) as far as lending to the film sector is concerned (where the RBI would have to step in and issue guidelines to banks on NPAs).

Second, the philosophy of financing should be relooked by engaging in slate financing rather than on a per film basis, so as to provide an enhanced ability to mitigate risk.  However, regardless of these elements, one needs to recognise that film financing by banks will not exceed a particular threshold given the very nature of the sector — and such thresholds naturally will not be very high.

Given this, it would be worthwhile to consider what would enable financing by the ‘right set’ of participants.  Let me explain this. Film finance, by its very nature, is privately driven and given its risk profile, lends itself more easily to financing by private players. This could be in the form of individuals, entities or film funds.

Many a time, current regulations, whether the Companies Act, NBFC regulations or foreign exchange laws, do not allow for the easy implementation of such funding models. There is a need to bring in enablers which will facilitate the easy deployment of such private funding. These would be (i) clarity on the classification of the nature of returns earned by the financiers, so as to provide certainty on taxation; (ii) laws permitting easy repatriation on cross-border transactions, including delimiting the quantum of return and declassifying such financing as debt. Admittedly, in such financing, the financiers do seek, in certain cases, ownership in the Intellectual Property — which needs to be considered.

Also, the industry will need to make space for enhanced adoption of professional practices, which will allow bonding companies to operate in this space in India. Bonding companies will go a long way in de risking at least one element of the film process, i.e. completion of the film. Internationally, this tends to be an important element to create a conducive environment for financing.

The risk associated with film production is not just limited to failure at the box office; factors such as piracy, legal suits and incapacitation of actors also increase the risk involved. However, insuring a film against these risks in the production phase is not a widespread practice in India. Insuring a film against unforeseen circumstances may give further comfort to the banks and other financiers while evaluating proposals to finance films in India.

Apart from traditional sources of revenue, such as sale of theatrical, satellite, merchandising and music rights, newer sources of revenue have emerged primarily in the digital/non-linear domain. In certain cases, these revenue sources perform independently of how the movie does at the box office. Producers should factor in these sources of revenue while preparing their proposal to seek funding from banks and other financiers. The financiers may seek lien on such revenue sources, which can limit their risk of recovery associated with the performance of the film.

Box Office India
Collection Chart
As on May 20th, 2017
FilmsWeekWeeklyTotal
Sarkar 31
7.82Cr
7.82Cr
Meri Pyaari Bindu
1
7.67Cr
7.67Cr
Chakallaspur1
10K
10K
Alien: Covenant**
1
3.00Cr
3.00Cr
Mantostaan295k7.34L
Mafia Bigg Boss210K30K
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