The Indian film industry is booming like never before, with foreign investors vying for some of the action. Ajit Mishra reports

The movie industry is one of the exciting and fastest growing businesses in the world. Revenue of a single film can approach US$1bn and worldwide gross revenues are now over US$40bn annually. Movies are not only the world’s most popular form of entertainment, but the film business is now becoming recognised as a highly lucrative and profitable investment sector. The Indian film industry has finally uncovered its latent and multifarious potential on the global stage after years of toiling in the competitive movie industry worldwide. The world has accepted India as the next film destination whose time has come. With the stellar performance of Slumdog Millionaire worldwide and Oscars for Indian music composer AR Rahman and sound designer Resul Pookutty, the Indian film industry has made a significant mark on the world map and forced industry experts to acknowledge its technical sophistication and excellence.

The subcontinent has become the latest hotspot for nternational filmmakers with burgeoning foreign investments in the movie sector. Hollywood studios, filmmakers and international production houses are vying for a slice of the exhilarating prospects on offer by the Indian movie Industry. The private equity players have also entered into the business in a big way by setting up funds in joint collaboration. Three Indian film companies, Eros, UTV, and TV18’s IFC are listed at the Alternative Investment Market (AIM) of the LSE in London and are doing very well.

The immense growth projections of the Indian film industry have attracted numerous foreign production houses. Fox, Viacom, Walt Disney and Sony are just a few major players to have signed co-production agreements with Indian entities. The reciprocal investment options for Indian production houses to establish a base in the international movie market also promises tremendous growth opportunities. The unveiling of the venture between Reliance ADAG and Steven Spielberg with a deal size of US$500m-US$600m may only be a presage of the thrilling times ahead.

Individual Hollywood stars like Will Smith, George Clooney and Brad Pit are also signed up to make co-productions with Indian film companies. Also, the British film industry has already established a sound relationship with their Indian counterpart by signing a UK-India film co-production treaty in 2008. Such arrangements speak volumes about the intensified growth activity in India’s film industry.

Why invest?

High Potential Returns: The movie business is highly lucrative and potentially very profitable. The objective is to work with producers to finance quality and profitable movies to maximise the potential returns available from the movie business. Accelerated Industry Growth: The motion picture industry has nearly tripled its income in the last 10 years. It is becoming an increasingly international market with over 50% of total box-office revenue now coming from overseas markets, underlining the fact that the industry is experiencing phenomenal growth.Multiple Revenue Opportunities: Movies earn revenue not only in theatres in every corner of the world but in many different ways. The ability to promote a movie in many markets diminishes investment risk and increases earnings potential. Ancillary channels such as video/DVD sales and rentals, merchandising, music soundtracks and sequels add to potential revenue.

A Natural Hedge: In recent years, even as global stock markets have slumped, more people than ever have been going to the movies. Since the financial performance of movie investments does not correlate to movements in conventional stock markets, VP projects create a natural hedge for any investor portfolio.

Stardust in Your Portfolio: In addition to the potential for significant profits VP projects will enable investors to actively participate in the excitement and glamour of the movie business through opportunities such as access to the set of film productions and invitations to movie premieres.


The Indian film industry is highly regionalised with the largest language groups supporting major regional industries. In fact regional (especially southern) films command almost 60% of the total Indian film market with the rest being commanded by Hindi films. Bollywood commonly considered the biggest film industry in India, but it’s actually the south Indian movie industry that bites a bigger chunk of the market. The Hindi film industry in Mumbai accounts for only about a quarter of the 1,000 or so movies produced in India annually.

Out of the 415 languages spoken throughout India, movies are regularly made in 30 languages including major local languages such as Kannada, Tamil, Telugu, Malayalam, Bengali and Marathi. These regional movies attract as big an audience as Bollywood.

 Usman Fayaz, CEO Martin Group and an early investor in digital cinema companies considers the south Indian film business to be a gold mine. The first Oscar award won by any Indian for lifetime contribution to cinema was by Satyajit Ray, a stalwart of the Bengali film industry. These movies are also very popular in countries like Sri Lanka, Singapore, Japan, Malaysia, the United Kingdom, Canada, South Africa and the United States.

Warner Brothers Pictures India, a subsidiary of US-based Time Warner is set to invest Rs.200crore in Indian films. It will be making 11 movies in 2009 including six in various south Indian languages. The tie-up with Soundarya Rajinikant’s Ocher Studios addresses the four south Indian languages – Tamil, Telugu, Kannada and Malayalam.

The art of films

Over the last few years, India’s film industry has mushroomed into a multi-faceted sector with its concentration on varying modes of entertainment. The influx of foreign investment is not only restricted to film making/producing but also extends to animation movies. The animation sector attained a new milestone by reaching around US$460m in 2008 and is projected to grow at a compound annual growth rate of 27% to reach US$1.16bn by 2012. The total market for animation includes animation entertainment (US$120m), animation education (US$53m) and custom content development (US$187m) and multimedia/Web design (US$100m). A quick glance over the US$45m deal between Pritish Nandy Communications Ltd (PNC) and DQ Entertainment (DQE), to make six animation movies including a five-movie deal between PNC and Motion Pixel Corporation (MPC), a Florida-based animation company, is evidence of industry’s strong growth potential.

These narrate the film industry’s success story, standing aloof in the face of current economic slowdown. It has emerged as one of the most vibrant sectors of the Indian economy attracting huge international investments promising highest growth capability and offering multiple options. Nonetheless, the route to massive foreign investments was not stable in the beginning and suffered its share of ups and down. Up until the last decade or so, a major chunk of finance for the film industry was routed through unorganised sources. Nevertheless, the movie Industry went through a paradigm shift after the government declared it an industry in 2001.

The grant of industry status and the de-regulation of the sector led to the beginning of an unprecedented growth in the sector, ensuing in a free flow of foreign investments. It paved the way for options like institutional financing and other organised structures for funding, which are currently popular with the film making community.

Future opportunities

The experts in London recently expressed the view that the Indian film Industry needs to be organised on a corporate basis before it can attract foreign investors. The corporatisation of the movie industry has resulted in different financing structures/models available to the industry. The popular arrangements include co-production agreements, pre-sale of rights, overseas listing of offshore entities and engaging line producers in India. However, the venture capital funds and debt/equity arrangements still remains the most preferred mode for financing. Two such funds that plan to raise a collective corpus of over US$2bn have been announced and are already investing in projects.

Cinema Capital Venture Fund (CCVF) and the Vistaar Religare Film Fund (VRFF) have been registered with the regulator Securities and Exchange Board of India (SEBI). Such venture capitalist funds lend plurality of options, including:

·         Entering into an agreement with the producer by investing in a Special Purpose Vehicle (SPV) launched for a particular film

·         Co-produce the film by entering into a joint venture with the filmmaker

·         Pick up a stake in an existing film company like a private equity player

The foreign venture capitalists registered with SEBI are afforded a general permission from the exchange control angle for inflow and outflow of funds, which does not require any prior approval for pricing by the Reserve Bank of India. However, there would be an ex-post reporting requirement for the amount transacted.

A UK fund called the Bollywood Investment Fund has also been formed, which will give the British an opportunity to invest in Bollywood. The Bollywood investment fund aims to exploit interest in India’s industry and will operate in a similar way to a unit trust and allow people to invest in a portfolio selected from more than 800 productions each year. It is an open-ended investment fund for the accumulation of capital growth. The fund will adopt a methodology that minimises risk by spreading the underlying assets into a basket of film projects, which comprise small, medium and blockbuster budget movies. All productions will be backed either by completion guarantee bonds or bank guarantees.

Another way to foray into the India’s film industry would be through the private equity mode such as PVR Pictures by ICICI Ventures and JP Morgan. Another innovative method for raising finances hugely popular among foreign investors is the pre-sale of movie and ancillary rights. Following this route, the producer can generate finances by transfer of IPRs prior to film production by executing pre-sale agreements. However, due care must be exercised by any prospective investor in regard to the terms and conditions envisaged under the Indian exchange control regulations, as it may trigger a capital account transaction necessitating specific approvals from Reserve Bank of India.

An alternate funding source uncovered in the recent past has been through listing on overseas capital markets, such as Alternative Investment Market (AIM). Three Indian film companies are already listed at the AIM, London Stock Exchange – Eros, UTV and TV18’s IFC – and are doing exceptionally well, while Prime Focus and K Sera Sera have turned to the Indian stock markets for cash.

The Indian Film Company (IFC) is registered as a close-ended investment fund and is the first publicly traded film company specifically created to make investments in a portfolio of Indian films and films targeted at primarily Indian audience of varying language, genre and budget. It operates as an externally managed India focused motion picture company with outsourced production and distribution functions. The group’s investment manager will seek to capture opportunities in the entire value chain of film creation by sourcing and evaluating prospective film projects through a research-led investment process and managing and structuring the production and distribution of such film projects.

Amid above options, a relatively unexplored option for raising finances for film production is by raising debt through external commercial borrowings (ECBs). The reason it is scarcely used is because of lack of clarity whether new films conform as ’new’ projects and/or film funding is analogous to working capital under ECB guidelines. A clear explanation in this regard from the regulatory authorities would lend great support in developing ECB as another mode of raising finances for film production.

Rules and Procedures

India’s government has granted automatic approval for Foreign Direct Investment (FDI) in the film industry (i.e. film financing, production, distribution, exhibition, marketing and associated activities relating to film industry) of up to 100%, subject to the following requirements:

·         Companies with an established track record in films, TV, music, finance and insurance would be permitted

·         The company should have a minimum paid up capital of US$10m if it is the single largest equity shareholder and at least US$5 in other cases

·         Minimum level of foreign equity investment would be US$2.5m for the single largest equity shareholder and US$1m in other cases

·         Debt equity ratio of not more than 1:1, i.e., domestic borrowings shall not exceed equity

Moreover, the foreign investor/partner must conform to the exchange control regulations and the guidelines issued by the Ministry of Information and Broadcasting applicable to foreigners who want to shoot in India. The movies in India are sanctioned for public exhibition subject to grant of certificate by Central Board of Film certification (CBFC), a body constituted by Central Government under the Cinematograph Act, 1952. Tax incentives to multiplexes have aided the multiplex boom in India.

Revenue sources

The major impetus behind this stupendous growth is the vast cinema-going Indian public. The CBFC cites that every three months an audience as large as India’s billion-strong population visits cinema halls. The sheer number of movie fanatics in India has alerted the world to India as the next mine of opportunities.

The mere fact that the India’s film industry is the largest in the world in terms of ticket sales and number of films produced, accounts for the fact that the revenue generated by the box office translates as the industry’s biggest source for revenue. The deep penetration of the internet facilities and modernisation of the Indian economy has generated new revenue streams beyond the traditional box office mode. These new revenue streams have made film-making extremely lucrative for foreign investors and Hollywood studios by cutting out the risks and wiping out the insecurities of losses to a large extent. These new revenue streams include home video rights, television rights, re-make rights, movie merchandise, internet rights etc. Further opportunities exist in the form of multiplex cinema design, construction and management, the provision of telecommunication and broadcasting equipment, film studio management and pre-post production facilities.

The Indian film industry has established its credibility among investors with private equity capital markets and even global players. With the film accorded industry status by the government making it easier to obtain funds from banks and other financial institutions, and a 100% allowance of foreign direct investment, have proved to be a great help to producers. Also, with the introduction of insurance covers and completion guarantee bonds for Indian films, investors and financiers are protected with a level of assurance that films will be delivered on schedule and within budget.

The average investment returns a Bollywood movie makes is between 40% and 50% a year. Sanjiv Goenka, President of the Confederation of Indian Industry states that: “The industry has been growing at the rate of 30% every year, one of the fastest in the country, and even globally.” The main issue however is to give the right exposure to the Indian films and tap the growing market for Indian films abroad. The non-resident Indians have become an important audience for the Hindi film industry, with many films made with this international audience in mind.

The development of new multiplexes and megaplexes, entertainment theme parks and foreign companies seeking to outsource their production to Indian film, are just a few examples of the major transformation that the industry will undergo. There are also foreign movies that are brought to India for processing and editing. Plus as expertise is fine-tuned, the next few years can see India emerge as the major hub of back operations destination for special effects and animations. Thus, with the immense diversity in content the Indian film industry presents itself as a natural developer of business opportunities.

Additional reporting by Puneet Bhardwaj and Shwetha Shanmukhappa