Mumbai // Once widely associated with cash flows from the Indian mafia, Bollywood is shaking off this image as India's film industry continues to become an increasingly corporate affair.
Sacks of black money have been replaced with bank loans and private equity funding, as changes in regulations have allowed the industry to professionalise itself in recent years. New funds are launching in the market, as they look to tap investor interest in the sector, which is growing annually by more than 11 per cent.
The industry funded by the mafia is long over,” says Sandeep Bhargava, the chief investment adviser for Third Eye Cinema Fund, a 2 billion rupee (Dh123.5 million) Bollywood film investment fund which is being launched in India. “Today you’ve got corporates. Like in Hollywood you’ve got structured studios. In India today you have four or five big Indian players like Reliance, Viacom 18, Eros, listed companies, international players such as Warner, Sony, Fox.”
It was not until 2001 that the Indian government recognised film as an official industry, which was the first step towards organised funding. Before that, financial institutions were not allowed to lend money to finance films. Money to shoot a film had to be raised from friends and family, among other sources. This led to widespread speculation that Bollywood productions were funded by the criminal underworld and being used to launder money.
India’s film industry was worth 125.3bn rupees last year, up from 112.4bn rupees the previous year, according to a report by KPMG and the Federation of Indian Chambers of Commerce and Industry. The report projects continued growth in the sector over the coming years to reach 219.8bn rupees by 2018. The growth of multiplex cinemas in India and digital technology, which allows for cheaper and wider distribution of films, have been major factors in driving revenues for the industry.
“For a couple of years [after gaining industry status] there wasn’t much organised funding flowing into the industry, and that was largely due to the unorganised nature of the industry,” says Smita Jha, the leader of the entertainment and media practice at PwC. “When you have organised funding, the project has to be run in an organised manner — there has be a project plan, there has to be a budget, there has to be shooting schedule, there have to be contracts in place. The way you would typically run and organise a particular business which is seeking a loan or any debt. That’s starting to come in as the producers started approaching banks for debt. It took a while.”
But Ms Jha adds that while large Hollywood and Bollywood studios are funding a number of films in India, there is still a lot of unorganised funding in the industry.
“Debt funding from banks and financial institutions is not more than 20 to 30 per cent of the project size,” she says. “Seventy per cent of it is still from private sources. That is the opportunity which is getting captured by the cinema funds that have started. The logic and the reason why this is coming is because the industry still wants more of an equity participation. ”
Indian expats in particular are lured by opportunities to invest into sectors — such as the film industry — that potentially offer high returns.
“Alternate investment funds are coming up which are very popular because they offer the premise of a very high-risk, high-return philosophy,” says Ms Jha. “There are a lot of people — especially the NRI [non-resident Indians] community — who are interested in investing into these funds. A lot of the finance companies have started rolling out these funds. The real estate funds are like that, the film funds are like that, because there is an inherent risk in that particular business. The film industry as such — because it is a creative industry — has that inherent risk, whether it is the Indian film industry or any other country’s film industry.”
Third Eye Cinema Fund is forecasting annual returns of 25 per cent, as it aims to focus on producing mid-budget films, costing up to $4 million, which it says offer a potentially greater return on investment than a large-scale Bollywood star cast movie.
“If you see the evolution of the industry, Bollywood has gone through a lot of phases,” says Kewal Handa, the chief executive of Third Eye Cinema Fund, which has been approved by the Securities and Exchange Board of India. “It has professionalised itself. You have listed companies, so there is transparency on revenues. Earlier there was no transparency. Earlier there was no accountability. The business was more on cash rather than on cheques. Now that change has taken place because professionals and listed players have come into play. What we are really doing is corporatising Bollywood. It’s already practised in Hollywood and we’re just bringing it to Bollywood.”
This shift has also led to better business practices in Bollywood.
“Corporatisation is leading the industry to become more prudent in producing movies,” analysts wrote in the KPMG and Ficci report. “The preproduction phase of movies has become more structured with greater emphasis given to acquisition of script, planning, budgeting and financing activities.”
It explains that the overseas market is also boosting the Indian film sector, with revenues from screenings abroad growing 9.4 per cent to 8.3bn rupees last year from 7.6bn rupees the previous year.
“North America, UK and the Middle East are the key markets and together they contribute about 80 per cent to the total overseas revenues,” it said. “The Middle East market has showcased an impressive year-on-year growth of 30 per cent, while the US market grew at about 10-12 per cent. In the United Kingdom, the Indian movies are struggling to connect with the third generation of Indian diaspora, leading to a decline in collections from the region.”
Another film fund is being launched by the Singapore-based Indus Media Entertainment to invest in South Indian films, among other opportunities. Indus Media Capital, which is an offshore private equity fund, is being set up in Mauritius.
Venkat Devarajan, who is one of the film industry professionals behind the fund, says that South Indian films are “largely untapped”. It plans to raise $50 million and invest up to $1m in each project.
Most of the investor interest so far has come from Indian expats in Singapore and the Middle East, particularly the UAE, he says.
“With the current economic and political situation in the country today here in India, suddenly the investment climate has improved drastically,” Mr Devarajan says. “There’s a huge opportunity we can see here to capitalise on a growing sector, so we feel this could be the best time for us to get into India.”
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