By Neeraj Jha
The Indian film industry is turning more optimistic. It is looking at touching new horizons and scale new heights. Most players are aiming at widening their operations and straddling across the entire value chain. Such intents of expansion manifests in many forms. For veteran film maker Yash Chopra, it could mean making more films in a year. For Subhash Ghai's Mukta Arts, it could mean setting up an integrated studio complex-cum-training centre, upgrading its studio Adeus, implementing its portal and webcasting plans and setting up overseas distribution networks.

Fine. All these grandiose plans require money and muscle. Where does the moolah come from? Had it been the old studio system, finance would not have been a problem. Internal generation would have sufficed. With production, distribution and exhibition under one umbrella, the system allowed ploughing back of money generated by the captive distribution units into production and related activities.

However, in the new film industry economy that emerged after the collapse of the studio system, such funding failed to work to perfection. So, the inevitable happened. Financiers, who understood the dynamics of the industry, sprang up in scores. And they charged a premium for that. Says noted film maker Mahesh Bhat: "The Sindhi and Marwari financiers had a field day because they had the ability to understand and negotiate the chaos of the industry, which the guys wearing ties in the bank could not."

Therein lies an irony. Such financing has worked quite well despite the usurious interest rates of the lenders. Says R Ravimohan, managing director of the Mumbai-based Credit Rating and Information Services of India (Crisil): "People have paid such a price and have still survived because the speculative nature of the business needed such people who could put up capital up-front."

All this is changing now. The Indian film industry is biting the bait of corporatisation and attempting to professionalise itself. Says Ravimohan of Crisil: "Globalisation is one major trend the Indian film industry has to contend with today. It is both a necessity and an opportunity."

To be sure, the Indian film industry has responded by beginning to corporatise itself. There is greater recognition of the need to corporatise to be able to streamline operations and be an entity everybody would like to do business with, including the financial institutions and capital markets. Growing opportunities, including overseas audience, needs to be tapped. All these imperatives are placing fresh financial demands on Indian film companies.

Financing options
How to meet these financial demands? The moolah has to come from formal sources. The informal channels of finance, including the underworld, which the industry has relied on ever since the collapse of the old studio system, would continue to be far too expensive. And inconvenient too.

Technically, film and entertainment companies have now quite a few financing options available to them: equity (selling stock to financial and non-financial institutions), debt, venture capital funds and foreign funds, among others.

Companies such as Mukta Arts have already gone public with initial public offering (IPO). Says Crisil's Ravimohan: "The fact that these companies are going public proves that there is a certain section of the investing public which is interested in putting their money into these ventures." But this interest might wane. Says Mohan Nagrajan, chief economist with CARE: "For equity to become a steady source of finance for the film industry, the issuers will have to deliver good returns."

Consider an interesting American example. The David Bowie Bond was a huge success in USA. The issue was positioned as a royalty bond and was oversubscribed. Why can't we have similar bonds here in India too? Fine. Large mutual funds took exposures in Shri Adhikari Brothers (SAB). Notwithstanding the fact that the company's fortunes are dependent on the viewership that its programmes generate.

A movie-making company is a riskier proposition from a debt perspective. There is a mismatch here: a certain part of the borrowed money has to be paid back on a definite date, but neither the quantum not the time of the cash flow is certain. Uncertainty reigns at various levels, at the distributor's, at the exhibitor's and everywhere. Says Ravimohan of Crisil: "A typical film-making company, which is going from one project to another, does not lend itself to the traditional ways of trend analysis or track record. There is an element of uncertainty associated with the success of a particular project.

There is no scientific method of evaluating either the quantum nor the timing of cash flows." Yes, the project may be a great success in terms of overall cash flow it generates, but even the promoter is in no position to tell up-front what will his monthly cash flow be. Says Nagarajan of CARE, who too does not see film companies effectively tapping the debt route: "The conventional financing principles such as what exposures to have and what debt-equity ratio to have do not apply to film companies. You need to develop principles of financing film companies."

Venture capital
At the same time, studios outside India have been able to raise debt because they are corporations and have steady cash flow streams from projects, properties and several other ventures. So, the solution for the stand-alone Indian film companies with stand-alone projects (read films) lies in diversifying their activities across the value chain, having a base cash flow and tangible assets, and so on. If one goes by its offer document, Mukta Arts is trying to do exactly that. By raising equity funds from public, it is trying to boost its net worth and thus offer a margin of safety to institutional lenders.

Corporates such as Zee Telefilms are better equipped to raise debt if they are to get into film production. "They have the equity, the net worth, tangible assets, advertisement support, the base cash flow and the necessary width of activities to cover the risk," says CARE's Nagarajan. However, what needs to be looked at is this: whether such steady cash flows are adequate to cover debt-servicing. For, there might be some doubts over project-related debt, which is not dependent on the overall cash flows.

Now, more hope is on the horizon. Optimists see the Indian film industry getting venture capital funds soon. "Venture capitalists have been lending to risky businesses only. If they can support the dot-coms, why not films?" is the oft-heard refrain. That might be bit over-ambitious. Says Pravin Gandhi, a venture capitalist and the managing director of the Mumbai-based Infinity Technology Investments: "That is because I understand only the information technology industry. The technology, sales and marketing involved, the value chain and so on. I do not see myself adding value to the film industry. Some venture capitalists might perhaps take a punt if they understand the business."

Does that mean understanding the parallel economy, the star system and the styles of personalised management? Says noted film maker Prakash Jha: "Venture capitalists will come forward to support the brand formed by four to five established film makers who can come together."

However, one is not sure whether the growth in the film business is good enough and sustainable to the satisfaction of venture capitalists.

Overseas experience
How are films financed elsewhere in the world? Most large US entertainment houses are part of huge conglomerates that offer everything from movies to theme parks. Over there, traditional entertainment companies are increasingly investing in expansion projects, in new initiatives such as Internet-related ventures and even in acquisitions. Most of these activities are part of publicly-owned companies. These companies have sold their stocks to raise funds for expansion and reducing their debt levels. Going public has also allowed them to cash in on their entrepreneurial efforts and diversify their assets.

Not all would like to go public though...

Look at the funding strategy of some of the unlisted music companies. As they were not publicly-held corporates, they could cross-finance their film production activities with music revenues. Clearly, they would not like to go public and become responsible to the shareholders.

The RPG Group-controlled Gramophone company of India (GCI), which is a listed company, has no such freedom. It knows it cannot do this and is looking at setting up a separate vehicle for carrying on its film business. Fearing a slump in stock quotes, the Zee group is not directly financing its film and related activities. For multiplexes, it has E-Citi, a relatively unknown group company, doing the job. Says a Mumbai-based fund manager with a top-notch public sector bank-promoted mutual fund: "I will sell Zee Telefilms if it gets into film production and related activities such as multiplexes."

Direct financing apart, the Indian film industry needs a national film finance corporation whose equity is jointly controlled by financial institutions. Such a corporation can go public and get itself listed on the nation's bourses.