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Film Financing in Bollywood

Scripting a New Saga, Screening an Extravaganza
Gaurav R Wankhade
Bollywood is now witnessing a sea change, into its every aspect of functioning, be it film making or Film Financing. The article explains the concept of film financing in the context of Bollywood, and related structures, patterns, formats of film financing. It also offers brief comparison with Hollywoods film financing to further understand a variety of issues lying unresolved right from the beginning. The penultimate section takes into account the future prospects by detailing the level of professionalism, corporatisation and investment coming from various sources, before drawing conclusion.

ow accurately someone has depicted the place and importance of Money in our life, (see box in next page) showing its different facets and the greediness of all of us for it. Whatever we may say or feel, the truth is undisputable and i.e., the world cannot move without money (gravity is just another thing). Money is that magnet around which today every thing revolves. Our Bollywood (the enchanting glamour world located in the Mumbai) has always showcased different stories related to Money.
The Icfai University Press. All rights reserved.

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Na biwi na bachcha, na baap bada na maiyya, the whole thing is that ke bhaiyya Sabse Bada Rupaiya (Movie: Sabse Bada Rupaiya [1976], Singer: Mehmood)

Source: http://en.wikipedia.org/wiki/Image:Sabse_Bada_Rupaiya1976.jpg

Bollywood dreams, attracts, ponders, and delivers money (in addition to popularity). They are not only the dream merchants but the dream sellers and money makers. Have you not applauded the Gabbar Singh of Sholay, Vijay Dinannath Chauhan of Agnipath, Prem (Salman), Raj (Shahrukh) of their most of the movies, Dhak Dhak girl Madhuri or Mahatma Gandhi and Munnabhais Gandhigiri in Lagey Raho Munnabhai. But hey! Bollywood too has, greed and requires money since it is a universal law that Money Creates Money. Obviously to craft such spectacular, entertaining and larger than life characters, stories and make them real on reel (onscreen), money is essential. So the first and foremost question that comes to mind is from where does Bollywood generate required finance? The amount of money Bollywood requires for a grand project runs into some crores. And it delivers many number of such extravagant projects, simultaneously. So there must be some method, technique or set of methodologies through which it acquires the required budgeted amount of finance. Since it is now operating as an industry, it has to function as any other industry. Further success and failures are integral parts of business. But most of the time failures overshadow success in the case of Bollywood. So from where does the industry get its momentum in such a situation? And what is the exact nature of film financing in Bollywood?

Film Financing in Bollywood: Scripting a New Saga, Screening an Extravaganza 149

This article is an attempt to find out answers to the above stated questions and set of many other relative queries, in addition to the gamut of issues, problems arising in this typical filmy environment characterised by sharp up and downs. Let us first understand the basics of Hindi Film Industry. The industry is broadly classified into four segments software (films, music and programs), hardware (studios and other infrastructure services that support the creation of entertainment software) and services (distribution, exhibition, film procurement and banking services) and the front-end media segment (film magazines, video cassettes and promotional tools)1. This classification is incomplete without the human factor involved into it, since it is rare to find a Commercial and mainstream Bollywood movie without Lead Actor (Hero: Male Protagonist), Actress (Heroine: Female Protagonists) and Villain (Antagonist). They play onscreen. There are other workings behind the veil (screen) and the most important ones of them are Producer, Writer, Director, Music Director, Cinematographer and so on.

Film Financing
Film Financing in Bollywood is very different than what has been practiced in other Film Industries all over the world. Though the process of movie-making is similar in general, the difference lies in its overall nature which is highly risk oriented, disorganised, disintegrated, and highly unprofessional. There is no particular methodology or process format regarding film-making, neither any obligation on anybody except the producer to complete the project in time. Though probable time period for completion of a project is pre-planned in some cases, most of the time it overruns one and a half time or simply double the pre-planned time. Many of the times Star-actors non available of date, or lack of cast and crew management are the reasons or unavailability of creative material (Script, Screenplay etc.) or unavailability of funds are put forward as the reasons for delay. Because of these reasons the whole process gets too much delayed as compared to the previously planned schedule. Average time-frame for the completion of a big-budget film is 15-18 months in Bollywood2, but very less number of film projects get completed in the given time. This again leads to diluting image (whatever the brand image bollywood has awarded earlier). This is the first and foremost reason why Bollywood lacks in competing on International level, particularly when compared to Hollywood. Before going further, it is necessary to understand the different aspects of film making with respect to a typical Bollywood Film. The necessity arises from the fact

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that whatever budget allocated to an entire film gets distributed amongst the sub-processes according to their preference and importance (perceived) as there is no written rules or norms. So in order to understand the structure of film financing it is essential to have brief about film-making process. The making of a Hindi movie can be broadly divided into the following Parts: Development Pre-production Production Post-Production Distribution and Export Marketing and Promotion. In the Development stage an idea is nurtured into a concept and the concept is nourished further to create a storyline, which then will be transformed into a bound script. A script is a collection of characters, situations and events tightly connected forming a chronology of screenplay shots. A considerable amount of money, time and skills are devoted to this phase through proper market analysis and research to test the overall feasibility of the project. This is the most crucial phase of film crafting according to world standards, but mostly neglected in the bollywood. The stage after this is of Pre-production, during which cast, crew, locations and shooting schedules will be decided. During this phase the producers get an overall idea of the required budget for the film. Also to complete the films in time to save the extra cost, one or two provisional screenplays and replacements for general staff is also being put in place. The next step is that of Production, which is the actual making stage for a movie. The stage following production is Post-production stage during which the entire shooting material (Film) will be processed, edited and prepared after which the film is ready to release in the form of print. But before releasing a film the final product has to pass through further two stages. The first of this is Distribution of prints to the screening theatres. Though the Marketing and Promotion stage comes after distribution, producer can start marketing his project from the time the prints get ready, as its very, very important to promote the film to attract the pre-decided target audience.

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Now, from start to finish of this process, producer requires a pre-planned budgeted amount of finance to assure smooth functioning of sub processes so that the dream which some peoples together have seen and many more people have actually fostered it through their hard work, determination, and perseverance should see the light of the day. But providing finance is not the only task before the producer but to manage, allocate and distribute those funds is the key to the success of the project. The entire budget is divided and allocated to the stages accordingly discussed above. The increase or reduction in allocated budget can be managed through time and project management. Below given is the basic understanding of budget allocation and the time frame of respective stages of film-making in Bollywood.
Film Making Phases Development Pre-production (+Actors Cost) Production Post-production Distribution (Domestic & Overseas) Marketing & Promotion Total Budget Allocation 1% 32% (30%)* 38%* 7%* 16% 6% 100% Time Frame (in months) 6-8* 6-8* 18-24* 1-2* 0.5-1 2-3 40

*Source: KPMG Research, Indian Entertainment Industry Focus 2010: Dreams to Reality A CII KPMG Report, 2005.

We can infer from the above table that, the development stage, which is the most crucial phase of film-making is totally neglected in bollywood as only 1% of the entire budget and 13% of the total spent time gets allocated to this phase. In many cases the allocated money and time are as negligible as one can think. As the nature of Bollywood is unorganised and unprofessional, the skilled resources required for development stage (idea generators, screenplay and script writers and researchers) are scarce. Those who are available are mostly self-made, self-trained and whatever they are today is because of the experience they have acquired throughout the life-time they have spent mastering their art and still are under-paid or in many cases are un-paid. As compared to such peoples and other cast and crew of the film the amount of money paid to star actors or actresses and star directors are in multiples of crores (20 crore paid to Akshay Kumar and Aamir Khan for the upcoming flicks Chandni Chowk to China and Ghajini (Remake of a hit telugu movie) respectively and 2 deals of 6 crore by Katrina Kaif for 2 movies by Indian Films (A TV18 Associate)

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each), which eventually took out bulk amount out of the entire budget. Again the expenses on post-production are very low forcing one to think of the quality of technique and technology that got involved into post-production work. Comparing it to the production share, which is nearly around 40% which in turn is very high compared to the international standards, what we come to know is the level of technology involved. Since the post-production is a highly technology-driven process, but doesnt get its due credit investment share and thus low quality of final output. The distribution part which gets 16% of the film budget is solely managed by a distributor who pays lump sums in advance to the producer for the territory-wise distribution right of the respective film project. The distributor also have to manage its marketing and promotion which account for nearly 6-8% of the cost incurred. Thus in effect distributor shells out around 22% i.e., 1/4th of the cost incurred in the project. And if one project fails, he has no money left to go for another one.

Sources of Funding
From the above discussion it is more or less clear that the whole and sole in acquiring finance and managing, allocating and distributing the acquired funds in addition to the entire project management load, is the producer. A producer is the person who carries all the responsibilities from start to finish during the film-making process and looks after the entire functioning. The simple question that may arise at this time is from where the producer arranges the finances required for a typical big-budget mainstream Hindi movie, which ranges between $5 million to $10 million i.e. on an average INR 20-25 crore. Let us take a look at the available funding sources to the producer. There are multiple sources of funding which might be available on paper to film producers in bollywood, but how many are really there, can be a matter of debate. The share of each source varies on case to case basis. But the most prominent sources of financing in general are producer (Self ), private financer (Charging different interest rate to different borrowers), promoters equity, music & home entertainment rights and distributors (Is available presently in limited quantum, only for big banner films with reputed producers, directors and star cast [Sunil Kheterpal, 2004]). After being awarded the status of an Industry by the Government of India, the options available to producers increased tenfold. The options include banks and institutional financing, venture capital funding, IPOs, insurance companies, and international studios.

Film Financing in Bollywood: Scripting a New Saga, Screening an Extravaganza 153

Diagram I: Available Sources of Funding for a Film Producer

Commercial BigCommercial Big-Budget Budget Mainstream Mainstream Hindi Hindi Film Project Film Project Private Financers Private Financers Producer Producer Music and Home Music and Home Entertainments Entertainments Rights (in advance) (in Rights advance)
Studios Studios (Domestic and (Domestic and International)/ International) Large Producers Producer Producer (Self) (Self) Banks Banks and and Institutional Institutional F di Venture Capital Venture Capital (Corporate level/ (Corporate level/ Project level / State Project level/State) L l Branding Branding & and Merchandising Merchandising

Promoters Equity Promoters Equity

Distributors Distributors (Domestic and (Domestic and Overseas) Overseas)

IPOs IPOs (Public (Public Finance) Fi )

Insurance Insurance Providers Providers

The banks which now provide Hindi Film Project Finance include IDBI, EXIM Bank and Bank of Baroda etc. The Industrial Development Bank of India (IDBI), which started off by investing Rs.70 million in the industry, is seen as the leader in this sector and has decided to double its investments to the tune of Rs.2 billion3. This also prompted large non-banking institutions and corporate entities in the form of private equity funds to make a foray into Hindi Film Financing. Some of the big studios now operating in this sector are Yash Raj Films (YRF), Mukta Arts (Subhash Ghai Productions), Dharma Production (Karan Johar), UTV Motion Pictures (Ronnie Screwvala), Adlabs (Dhirubhai Ambani), Eros International (Kishor Lulla), Sahara One Entertainment etc. Then there are companies that have gone public, 12 since 2000, which have raised another Rs.1,000-odd crores through their IPOs4. Between them, Eros, United Television (UTV) and Indian Films, an affiliate of TV18, have raised $45 million, $70 million and $110 million, respectively, from the Alternative Investment Market (AIM) in London.5 A shift from Unorganised to Organised financing has definitely served various benefits, decreased average production cost per film being one of the most prominent of these benefits. Other benefits include more lucid financing patterns, enhanced transparency in the financial transactions

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and accounting (with corporates insisting on electronic ticketing in even territories such as north Bihar now), greater quality of technology (Special Effects for Love Story 2050 are being executed by 4 international firms, of which two special effects housesWeta Workshop (New Zealand) and John Cox (Brisbane, Australia)have already won an Academy Award for their work on international projects), reduced time-frames because of the corporate interventions etc. A Scene from Raja Harishchandra

Source: http://arts.guardian.co.uk/image/0,,1857620,00.html

Trends in Film Financing

Financing films in India is still a risky preposition. The whole concept has undergone a dramatic change from the beginning in 1913 with a silent mythological film named Raja Harishchandra made by Dadasaheb Phalke (Kohinoor Imperial Production) with maybe a miniscule budget. Nowadays, Hindi films are made on a much higher budget ranging from $0.1 million and scaling up to $15 million. An average Bollywood film is budgeted at $1.3 million. Monsoon Wedding (2002) by Meera Nair was made with a budget of $0.16 million6 and Jodha Akbar (2008) by Ashutosh Gowarikar was made with a budget of $15 million7. More ambitious projects are reportedly planned, the most expensive of which is an epic film Mahabharata, by Ravi Chopra, estimated to cost upto $30 million8. Almost after ninety years, the Mainstream Hindi film industry irksomely termed as Bollywood was awarded its due status i.e., of an industry in the new millennia of 21st century i.e., in the year

Film Financing in Bollywood: Scripting a New Saga, Screening an Extravaganza 155

2003. This was a late act from the Government, which had a maligned and murky image of this art-form. Obviously, it is only during the last eight years that organised financing from banks, financial institutions, corporates and venture funds became possible9. Till 2000, films were mostly financed through private sources, since commercial lending agencies considered the industry to be a risky and low-priority sector10. The two major sources for finance were11: Distributors and music companies, who would pay advances to established film-makers and films with reputed star casts to acquire the theatrical/music rights. Financiers (High-net worth individuals). The trends in Hindi film financing can be well understood if we divide history. By 1920, film making had taken the shape of an industry12, but still in its infancy and under the direct control of colonial rule (The British Raj) faced severe issues in financing. Mostly dependent on external support and under colonialism financing films remained a problem state funding, except for propaganda films, was nonexistent and the substantial black money became available only after the second world wari. Then came the period of large studios (many of which were owned by large Film Producing Company) pursuing Hollywoods format, dominating the market of those times. This trend lasted for a decade until the 1960s. These studios used to employ highly skilled artistes and technicians (writers, directors, and music directors) on a salary basis for their projects. Some of them were also contracted on long-term basis i.e., for 4 to 5 years allowing production houses to work on various projects simultaneously. However, most performers went the freelance way, resulting in the star system and huge escalations in film production costs13. Financing deals in the industry also started becoming murkier since then14. The drift from legal to illegal (illicit) business activities within the Hindi film industry may have started in the late 60s. Until the 1960s, film producers would get loans from film distributors against a minimum guarantee: (this meant that the distributors had to ensure that the film was screened in cinemas for a fixed minimum period)15. If this minimum guarantee was fulfilled, the producers had no further liability and profit or loss, whatever the case would be the destiny of the distributors16.
i

Article, Indian Cinema and the Bourgeois Nation State, Anirudh Deshpande, Economic & Political Weekly, Dec 15, 2007, page 95-103.

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The cost of film production has risen tremendously since the financing trend which up to mid 70s was totally relying on finance from distributor collapsed, giving away a new pattern i.e., the so called Star System; In this system actors and actresses ceased to have long-term contractual obligations towards any studio or film production firm (such as the now defunct Bombay Talkies, New Theatres and Prabhat Studios)17: Since they began to function independently, and because of their excellent past track record and the popularity they enjoyed among the Indian audience, these star actors/ actresses started asking for more and more money from the producers. This subsequently resulted in shooting up of the overall film budgets to some crores. But again the major contributor to the entire budget remains the distributor i.e., raising half of the production budget has become distributors responsibility; and remaining amount is the task of producer. Now though distributor has to arrange the said share on his own with other option availability being negligible, the case was different with the producer as there were many options available to him for raising capital. The other sources thus available to the producer were18: Conventional moneylenders (who lend at an interest rate of 36-40 percent annually); Non-conventional but corporate resources, Promissory note system (locally called hundi system): this was the most widely prevalent source, and Underworld money: about 5 percent of the movies were suspected to be financed by these sources in the initial period of 90s. Thus what could be a point of notice is that film financing in those days was completely unorganised and disintegrated, in most of the cases unethical. The industry structure also was totally unregulated lacking any type of vertical or horizontal integration in the value chain. The value chain in respect to the bollywood can be defined as a link of film making stages (development, pre-post production and distribution, marketing and exhibition) through which a product is constantly developed and furnished, until it reaches to the ultimate customer (Audiences). In such disorganised, unhealthy environment with overall negligence from the respective Government, it was but obvious that there could be no presence of transparency. It leads to the higher and higher risk involvement. There are many cases where producers or distributors at that time have raised collateral by practically selling out all of their

Film Financing in Bollywood: Scripting a New Saga, Screening an Extravaganza 157

property and earnings for a film project and many have gone bankrupt. (Indias most celebrated film-maker, the late Satyajit Ray, is known to have pawned his wifes jewellery to part-finance his first film19).Over the years, the studio system and subsequent star system gradually gave way to a new system i.e., independen producers20. Earlier, as finances were not regulated, some funding used to come from illegitimate sources, such as the Mumbai underworld. Also before the reform, the filmmakers were hugely dependent on diamond merchants and underworld for finances21. In the 90s, criminal sources financed an estimated 40% of film production (Kripalani and Grover, 2002). Slowly this trend has minimised but has not completely vanished. Today, tax evasion practice is still widespread among film producers and star actors and it is even estimated that below 10% of film finance is illegal (Kripalani and Grover, 2002). May be it will diminish with the time as the Government has taken prominent actions in this regards.

Changing Norms in Financing of Hindi Movies

Change is concurrent to the time. Everything keeps changing so also the Bollywood and its film financing pattern. It has thrown away its old stuff in many ways and trying to shade apart its tag of unprofessionalism. Financing patterns are slowly transforming into Organised Financing System thus giving a fresh breeze of legitimate and corporatized functioning to the industry. However, the basic nature of business still looks riskier. Corporate and institutionalized financing option still comes with high interest rates tag, limiting the available options. Limited or non-recourse financing, akin to project financing, is not common22. A past trend in last 2-3 years has shown that business of Bollywood is favourable if managed professionally. If the said professionalism (completion of bonds, well-structured agreements, transactional transparency and a complete integration in value chain) is accepted by producers and absorbed correctly into the system, more sophisticated options like bank loans, non-banking institutional funds, insurance, well-defined deals, securitisation, credit enhancing bonds etc., will be definitely available. The production houses mutual understanding with corporate finance providers will determine the actual level of the investments and finances. With cheaper sources of financing becoming available from legitimate sources and the industry becoming more disciplined, the quantum of unorganised financing is expected to shrink23. In such a healthy and competitive scenario the unfeasible projects will be thrown away out of the race, leading to an increase in production of average number of

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mainstream films around 100 over the next few years, and increasing the average cost of production per film. This will comprise an increased spend on script development stage (research and analysis), pre-production, incubation of advanced technology, enhanced recovery procedures and better marketing and promotion and slower spent during actual production stage. It will also change the ratio of organised to unorganised financing in a positive way increasing the percentage of film produced through organised resource financing in the industry. Through a combination of private equity, IPOs and media-related corporate investments, a new breed of film companies are emerging as the future leaders of a transformed Indian content industry24. The major players are from old generation as well as new generation too, most of them functioning from ages in different aspect(s) of the film making profession. Having started their business with a typical traditional approach, but sensing the changing scenario of more technology driven mechanisms, increasing competitive market setups have changed their style to more professional one, through strategic investment methods over the past few years. In doing so, they have been leveraging new growth and helped lead the industry towards its much delayed (and much debated) corporatisation stage25.
The changing pattern of film financing

Number of films

INR million

Corporatised films

Other films

Average cost of a mainstream film

Source: KPMG Research.

Film Financing in Bollywood: Scripting a New Saga, Screening an Extravaganza 159

Currently, if we take a close look at the market size of bollywood around 30 percent of the films generate 90 percent of the industry revenues. It is because, around 50-60 percent films out of the 150-160 major (typical commercial and big-budget) films produced annually in the bollywood are overall unfeasible laggards who otherwise would be completely unacceptable in a highly professional set-up. To know the exact situation of film financing profile we have to go down deeper into categorization of films. Based on a research study conducted in 2005 by CII-KPMG, here is the classification of films from 2003 and 2004 into the following four categories based on cost, production value, artists and technicians, and content.
Categories AA A B C Lowest Cost (INR) 150,000,000 80,000,000 30,000,000 10,000,000 Highest Cost (INR) 300,000,000 150,000,000 80,000,000 30,000,000

* Gross collections include domestic and overseas theatrical receipts, domestic and overseas satellite and video rights, music rights and in-film advertising and merchandising revenues.
Source: KPMG Research (Indian Entertainment Industry Focus 2010: Dreams to Reality A CII-KPMG Report, 2005)

Category AA films are the big banner films having high level of technological integration. Up till now, the standard of technology involved was below average with some exceptions like Dhoom 2, Krrish etc., but now the situation is graduating. The most prominent feature of such films is the excellent past record and substantial experience of the respective production company or producer in producing blockbuster films. The budget for these types of films generally ranges between INR 150 to 300 million. Category A films have total amount of budget, which is assumed to be ranging between INR 80-150 million. The budget is inclusive of variables like type of shoot, locations, number of shifts, the type of agreements with artists, post-production costs, capitalised interest, and so on26. Third category i.e., Type B films are produced by relatively unknown and financially weaker producers. In many cases, the completion of the film gets delayed due to the lack of last-mile finance. Without their own source of finance, the producers of such films usually tap the market for funds. Often, these films are not completed due to lack of funds. Their budgets are assumed to range from INR 30-80 million. Category C films comprise of a heterogeneous mix of low budget,

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high quality content films at one end with a high profit potential, to still-born projects characterised by a lack of quality, content, and good artists fashioned on run-of-themill subjects, espousing mediocre music and virtually no market. Their costs are assumed to be between INR 10-30 million. All things changed except the way trade is conducted in Bollywood. Here, a producer starts a film, distributors from various territories like Mumbai, Overseas etc., join in and promises to pay a certain amount during the making of the film and a certain amount at the time of the delivery of the released prints27 . The distributors are joined in by financers (institutional and non-institutional), music companies, and home entertainment providers (to acquire satellite and TV, home video rights). These distributors then strike deals with exhibitors, who screen films, and receive certain sum of amount towards a deposit/advance, which they then pay to the film makers28, taking out their cut, if possible. This is the way Bollywood functions.

Comparison with Hollywood (International) Film Financing

From its beginning Bollywood has a strong affection towards it western counterpart Hollywood. The affection was inherent as films entered India in the pre-Independence era. Many films in Bollywood are either exact replica (for e.g., Kaante: Reservoir Dogs, My Best Friends Wedding: Mere Yaar ki Shaadi Hai etc.) or inspired (For e.g., Raaz, Zinda and so on) from Hollywood. But the one system they havent copied is their professionalism in doing business in its true sense. In fact for many decades it was another dirty business. The lack of professionalism can be found in film financing also. What dominates in Hollywood is the Studio System; [an integrated entity that oversees all aspects of the value chain (from production to distribution and at times, even exhibition)]. Due to this film making style, the project in the Hollywood has been tested before actually starting the project for its viability to target it appropriately since there are less numbers of options available within the value network to transfer whatever the risk arising at each stage. On the other hand, the scenario is different in Bollywood and the overall structure is such that there is general practice to avoid or deny and transfer the risk on to the subsequent levels functioning in the network. Also since there is neither type of integration present in its format, much higher portions of risk rests with small number of third parties. This risk increase tenfold with misallocation coupled with mismanagement of the money spent on the film-making. The lack of allocation of time and budget towards

Film Financing in Bollywood: Scripting a New Saga, Screening an Extravaganza 161

many primary and important things like script development and market research in the development stage and technology during the other stages, results in the overall unprofitability of the industry, despite its increasing budget and revenues with each passing year. Let us take a look at the type of allocation of expenditure and time during various stages across film industries.
1 4 8 2 54 21 7 8 5 5 3 2 1 2109876509376103980967644321 98 5 2 987654321 109876543210987654321098767644321 5 3 1 1098765432109876543210987654321
Marketing Hollywood Allocation of expenditure across film industries Bollywood Hollywood

Source: KPMG Research.

Time allocated various stages of production 3.5 3 2.5 2 1.5 1 0.5 0

Source: KPMG Research.

While comparing the stages of film-making in Bollywood with that of Hollywood there are some prominent differences to be noticed. There is a significant mismatch in each of the stages with reference to the time frame and with the allocated budget to each stage. The first stage of development is mostly dispensable in Bollywood having miniscule time and money spent. In many of the cases the first stage is totally absent, whereas more than 60% of time and 15-25% of money will be spent in Hollywood for a single project. The time and finance spent during pre-production work is also less in case of a Bollywood project. But during production stage the amount of time as well as budget spent is more. There are many reasons for this, but the most prominent ones are the easy availability of financial options (especially in

21 21 21

21 21

Development

Pre-production

Production

Post-production

Bollywood

21 1 2 21 1 2 21 21

321 321 21 321 21 321 21 321 321 321 321 321

21 21

0%

32121 32121 321

109876543210987654321
20%

40%

60%

80%

100%

21 21

21 21 21 21 21 21 21 21 21 21 21 21 21 21 21 21 21 21

Development Production

(Years)

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the case of 20-30% big budget, and 70-90% of small and medium budget film projects) and negligence on planning during developmental and pre-production stages leading to the cost overruns and decreasing the feasibility of project. One good example of this is the Movie Cash (Aug 2007) which was a huge commercial failure. Cash has gone over-budget and one of the two producers, Sohail Maklai, has mortgaged the negatives to a South African film processing lab29. The negatives of the film had been held up in South Africa for non-payment of dues. When the film prints were finally brought back to India Adlabs took over the film for distribution.30

Source: http://media.movietalkies.com/posters/bollywood/movies/2007/cash/cash-2007-1b.jpg

Also in the post-production stage relatively lesser amount of time and money has been spent because of the reasons stated above. In addition to these there is certain high amount of anxiety in releasing the film to recover the money in a hurry (Because of the pressure from financers and promoters), thus unfulfilling the basic post productions requirements. Another important difference between Bollywood and Hollywood is that the latter places considerable significant attention and funds to marketing of films31. On the other hand, in Bollywood there are distributors who make wrong notions from whatever short clips of the film they have. This may reduce the feasibility of project. These are the various areas where the cost distribution and resource allocation structure of Bollywood films can be managed more proficiently.

Film Financing in Bollywood: Scripting a New Saga, Screening an Extravaganza 163

The difference between Bollywood and Hollywood in different terms can be well understood from the chart given below.
Parameters No. of Films Produced Hit/Flop Ratio Total No. of Ticket Sold (Attendance) Revenue Share of International Market in the Revenue Annual Growth Rate Average Cost of Production/Film Share of Organised Financing Share of Unorganised Financing Compiled from Various Sources. Bollywood 244 (In 2007) (Avg.250-300)
32

Hollywood 607 (In 2006) (500 on an Average) 13:7 $ 1.7 Billion $ 26.7 Billion (In 2007) 50% 5-7% $ 60-80 million 95-97% 3-5%

5:19 $ 3.9 Billion $ 1.75 Billion (In 2006) 20% 16-18% $ 5-10 Million 5-10% 90-95%

From the above chart some points, which should be noticed are: The overall profitability of the Bollywood is carried on by a fraction of the total industry i.e., in one year Bollywood produces only 12-15 successful projects in terms of box office collection. Out of the other total failed projects most are either low budget or mediumbudget projects (Average Cost of Production is very less). Though the growth rate is 3 times for Bollywood and a good share of International audience what it lacks is professionalism and organised nature of industry. Yes, Bollywood got the status of an industry on the paper but in practice its still a highly risky business and hence lacks funding (Organised financing), thus it has to depend mostly upon unorganised and unauthorised (sometimes illegal) sources of money. Though the total revenue it collects is a mere fraction of what Hollywood collects annually, but the part of population it impacts upon (Attendance; Total No. of Ticket Sold) is double as compared to Hollywood. It means it has an underlying potential to get across the boundaries, but lacks that support which is much essential to any industry to prosper.

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Need Support but from whom? From Government, from the people earning their bread and butter from Bollywood and from those who really concerns about the industry.

Issues and Challenges

Other issues are also lurking there. Though GOI has promised a substantial support, and incorporated the policy changes on paper, many of the State Governments are not actually complying with the norms laid down by Central Government. For e.g., State Government of Maharashtra, after many request from Bollywood honchos, has asking for 40% entertainment tax (Many other state governments are asking for 60% entertainment tax) which pressurise the operators for discrepancy in their financial statements, thus decreasing the transparency in transactions. The Governments stance is that of a Protectionist Regulator by designing tight framework which is acting as a hindrance and limiting any kind of foreign direct investment into vital areas of the value chain further loosening its integrity. These restrictions have delayed necessary consolidation in the media industries, slowing down the formation of vertically and horizontally-integrated players with critical mass and strong market access. The next issue is of deficiencies in corporate governance and transparency much of the culture of media company management and the film industry in particular is in fact much obscure, lacking in core competencies to manage the internal processes effectively and controlling outwards market pressure efficiently. Thus, their inability to perform to their optimum level is very much high. Further involving profession with personal and family relationship takes the whole company towards unaccountability, which in effect reduces the transparency. Therefore banks and authorised financial institutions actually hesitate to provide financial support to the Industry. Again, one problem which is now an inherent characteristic of the industry is the lack of any kind of integration (vertical or horizontal) or very weak integration if present in the film producing entities. The vertical integration means link between various stages of film making i.e., development, production, distribution, marketing and exhibition, which if carried out by a single company in turn enhances the smooth functioning taking out the extra burden of costs. Horizontal integration exists when there are networks in between different production houses on the horizontal level i.e., if they are sharing their resources (of Cast and Crew) and using same links for

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production and promotional work. Both types of integration can be well understood from the following diagram. Vertical and Horizontal Integration
Theatrical Release Theatre Association

Exhibition

Marketing & Promotion Music, Satellite and Video rights Cast & Crew, Music Company Planning Cell

Media Agency Distributors (Local & International Processing Lab

Distribution

Production (Pre and Post)

Development

Market Research Agency

Production House (Studio)

Compiled by the Author.

In fact before independence the Hollywood model of vertical integration has also developed in the Indian film industry which we have already discussed (Studio System). But, over the time, their deployment into a worldwide distribution-driven model has secured the companies control over the talent and creative R&D through the control of the majority of revenue streams in all media33. On the other hand vertical integration in the Indian film industry has first vanished, giving birth to Star System and now is again gaining popularity with the corporatisation and increasing pressure of globalisation. Because of the complete absence of this system in middle age of Bollywood history, there remained few studios, which we can say are somewhat professional. Otherwise, most film companies, be they primarily in the production or distribution business are considered to be sub-scale and would require imaginative

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and bold consolidation strategies in order to attract more substantial and consistent interest from the private equity sector34. Also obtaining an accurate valuation for this most idiosyncratic sector (Bertrand Moullier, 2007) is a major hurdle in the path of a long-term relationship between film producing companies and investment houses. On one side, these companies argue that they need capital to support a move towards consolidation, become able to develop entire slates of films at a time, and control IP and returns along the value chain and on the other equity markets are waiting for scale players to appear before establishing an ongoing relationship with the sector and getting behind its growth35. Though, today, the link is missing in between Bollywood and Indian capital market (share, equity, stocks and PPP), but still there is a strong probability that a situation will arrive soon when wind will flow in the opposite direction. The situation is predictable because, even with overwhelming presence of liquidity in the markets like China, Japan, Europe and UK, the respective film industries are on a standstill with no further hope of growth. Thus there remains only one competitor to Bollywood and i.e., Hollywood. Indian economy is booming with a continuous growth rate of 9%+ for past 3 years. With two-digit annual growth set to continue across the media industry (Bertrand Moullier, 2007) also in the foreseeable future. Altogether, they promise the positive results of a decade-long learning curve during which the Indian film industry has re-invented itself, espoused new business models based on a more strategic approach to IP, professionalized its management and made full use of new audiovisual technologies36. The return on investment for IP holders in Indian films will be improved, and even the lower budget films will have more opportunities to find a wider market at a fraction of the old distribution costs.37 This is an achievement for the entire Indian Film Industry, but the share of Bollywood in this strategic investment in the form of revenues generated is prominent. And with overall improved functioning especially in the increased investment per project, content quality and global approach, success in important segments like marketing, promotion and distribution will establish even more accomplishment further in the value chain. Whatever be the past, the industry has taken its initial steps and is in the stage of transition from a disintegrated, unorganised and unprofessional framework to an

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integrated, organised and more commercialized structure. But the task has just begun. It has to further adapt and imbibe more such strategic business processes that would lay the foundation for that transmutation, which is the ultimate aim of any industry. Simultaneously, it needs to tap alternative investment streams and must have to adapt strategic revenue generating models. By investing in the advanced technologies, more lucid processes, and optimising resource utilisation it can sustain in such a dynamic and competitive scenario. It also depends upon the ability of the Bollywood fraternity to answer to the call of diversification, customisation, niche marketing and localisation. When it succeeds in making this transformation, it will compare favourably with the worlds most developed film industry, viz., Hollywood, in terms of functioning and earning potential38.

Future Prospects
So many storms (read trends) have come and gone. Every time Bollywood has raised on its own. Facing each situation and having passed many such tests it has just now entered into the era of globalisation with increasing demand of professionalism. Seeds of corporatisation have already been sown, black clouds of underworld; nasty air of clumsiness being fading away, there is surely a dawn of illuminity somewhere down the line. You can feel it from the current lingo of Bollywood, which has been spoken out by not only film fraternity but critics too. It seems theres a new dictionary of Bollywood (After receiving a place for itself in Oxford Dictionary) getting formed due to overwhelming attention it has been attracting from almost every corner of this Global village. Stars are called talent, movies are projects, selling films is de-risking and buying them is building intellectual property rights39. Listed companies and private producers have already pulled up the curtains with a promise to spend Rs.3,000 crore on making movies, in the coming future. Corporates also are pumping in more and more money. The leader is Reliance who alone has an intended fund of $1 billion (Rs 4,000 crore), of which it has committed Rs.500 crore40. From corporate in Hugo Boss suits to independent producers in Gucci T-shirts (Kaveri Bamzai, 2008), everybody is singing a new tune, and looks ready to screen an extravagant show. Definitely Bollywood is changing in a positive way. Here is the Big Picture of that change.

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Big Spenders
Who is investing how much in movies over the next 15 months Reliance Entertainment Indian Films YashRaj Films UTV Eros Rs.500 cr Rs.440 cr Rs.350 cr Rs.280 cr Rs.180 cr Shree Ashtavinayak Dharma Productions Mirchi Movies PNC PVR Rs.150 cr Rs.150 cr Rs.120 cr Rs.100 cr Rs.100 cr

Source: India Today, Issue April 14th 2008, Article Bollywood Extralarge.

In simple terms, Bollywood is scripting a new tale, with the first chapter of Corporatisation already been put on the board. Proclaimed film budgets from biggies as well as small ones are breaking limits with each passing day. For e.g., A small producer pair of Harry and Harmeet Baweja who were producing mid-scale films like Dilwale and Qayamat till recent past are now coming out with their most ambitious $15-$20 million (Pre-estimated budget) project called LoveStory 2050 with extravagant visual effects and actions choreographed by international studios. Since the film production is becoming more expensive, innovative forms of financing must have to creep in to make it available to a broad section of filmmakers41. And it is coming in a big way, which is clear from the above chart with each player investing $100+ crores in Bollywood. But in this hullaballoo about professionalism and technical supremacy, Bollywood should scrutinise the amount of money invested in Script development (research and writing), otherwise it will be a repetition of same old mistake i.e., Only Style no Substance. There is no doubt that Bollywood itself is very much eager to tackle the issues and challenges discussed above with a strong wit and will. The steep learning curve of the past decade is beginning to set off a critical mass of change in the industrys approach to the production risk as well as corporate models and practices42. It seems it has learnt and is learning continuously from the past mistakes, which is a good sign. The emergent new market leaders are applying a new set of skills to the business of film, approaching IP with a more strategic, long-term perspective and boldly embracing the full range of digital technology applications43. This is a transformational phase in the film financing patterns and the operating parameters on which Bollywood has relied for so long. All said aloud, Bollywood is evolving positively with time. Slowly but surely The Future is Coming.

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Source: http://en.wikipedia.org/wiki/Image:Lovest2003.jpg

Conclusion
Does it need a conclusion (The Article or the Story itself )? This is the new beginning to an exciting journey of an industry once neglected and felt ashamed of by many strata of Indian society. It is now witnessing a sea change, since its birth into its every aspect of film making as well as the other prominent ones like that of film financing, which forms the core of this article. Though there is a great deal of corporatisation and globalisation, there still remains room for enhancement and resolving lot of issues discussed earlier. Let the boundaries get shackled, new horizons get touched upon and many more shores of success get explored. Let us hope for a bigger, better and brighter Bollywood. (Gaurav R Wankhade, Research Associate, Icfai Research Center, Mumbai.)

Endnotes
1 2 3 4 5 6 7 www.icmrindia.org Indian Entertainment Industry Focus 2010: Dreams to Reality A CII-KPMG Report, 2005. http://www.bollywoodcountry.com/factoids.php Article, Bollywood Extra Large, Kaveree Bamzai, India Today, April 14, 2008. Ibid. Box Office History for India Movies, http://www.the-numbers.com/movies/series/ India.php, Tuesday, March 25, 2008. News Item, Aishwarya, Abhishek, Hrithik party as Jodha Akbar is finally complete Posted on Thursday, November 15, 2007 (EST), http://news.sawf.org/Bollywood/45097.aspx.

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8 9

Article Bollywood, http://en.wikipedia.org/wiki/Bollywood Indian Entertainment Industry Focus 2010: Dreams to Reality A CII-KPMG Report, 2005.

10 Ibid. 11 Ibid. 12 Article The Film Industry in India: An IndiaOneStop synopsis by www.indiaonestop.com 13 Ibid. 14 Ibid. 15 Ibid. 16 Ibid. 17 Ibid. 18 Ibid. 19 Ibid. 20 Ibid. 21 Ibid. 22 KPMG Research, Indian Entertainment Industry Focus 2010: Dreams to Reality A CII-KPMG Report, 2005. 23 Ibid. 24 Article, Whither Bollywood, Bertrand Moullier, Feb 2007. The George Washington University Law School. 25 Ibid. 26 KPMG Research, Indian Entertainment Industry Focus 2010: Dreams to Reality A CII KPMG Report, 2005. 27 Newsletter, A brilliant idea works, by Shyam Shroff, Sunday. DNA, Mumbai, 11th May, 2008. 28 Ibid. 29 Article,Cash trouble for novel experiment in filmmaking, http:// timesofindia.indiatimes.com/articleshow/968880.cms 30 Article, Adlabs took over Anubhav Sinhas Cash, http://indiafm.com/news/2007/01/29/ 8754/index.html

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31 Indian Entertainment Industry Focus 2010: Dreams to Reality A CII-KPMG Report, 2005. 32 33 34 35 36 37 38 39 40 41 42 43 http://lotusnova.blogspot.com/2008/03/bollywood-myths.html?showComment= 1206688080000 www.law.gwu.edu/Academics/research_centers/ciec/Documents/Notes%20on%20Creativity/ WhitherBollywood.pdf Article, Whither Bollywood, Bertrand Moullier, February 2007. The George Washington University Law School. Ibid. Ibid. http://www.law.gwu.edu/nr/rdonlyres/cb1c5fda-6333-49e2-879f-d941a59b5dd5/0/ ciecwhitherbollywood.pdf Ibid. Article, Bollywood Extra Large, India Today, April 14, 2008. Ibid. Indian Televisions Special Report, Bollywood banks on corporate route to the big league, by Sibabrata Das, 21st March 2006. Ibid. Ibid.