THE RECENT spate of initial public offerings by companies in the entertainment industry, indicates the trend towards greater organization of a hitherto disorganized sector.

The success of the public offerings, coupled with the debate for an 'industry' status for the film sector, have been positive developments towards greater corporatisation of the film sector.

Adding greater impetus to the debate are the recent reports about a notification passed under section 2(c)(vii) of the Industrial Development Bank of India Act, 1964 (IDBI Act), notifying entertainment as an 'industrial concern'.

The IDBI Act constitutes the IDBI as the principal financial institution for co-ordinating the working of institutions engaged in financing, promoting or developing industry, and engaged in the business of lending to businesses, in conformity with national priorities.

Under section 9 of the IDBI Act, IDBI can grant loans and advances to any industrial concern. The IDBI notification, on the face of it, does not mean that banks would now begin lending for film-making and other entertainment activities.

However, it recognises a new activity as an industrial concern that may be considered for financial support under the IDBI Act. To attract financiers, there is a need for ensuring that film-making meets certain basic banking norms and requisites, thus making it an activity capable of being funded by banks and financial institutions.

For this, there is a need for an overhaul of filmmaking into a corporate activity with transparent accounting practices, targets and time-schedules.

What banks look for: Financial health and soundness of a business, effective security created for securing the loans, efficiency and transparency of its cash management and planning practices are critical factors that determine funding decisions by banks and financial institutions.

Regular monitoring, financial follow-ups, and efficiency of capital, labour and fixed assets are other factors that banks often insist upon.

Based on these broad criteria, banks will have to develop a new set of definitive guiding parameters for investment in films. The Indian Banks Association drafted certain parameters for film financing in 1999.

However, the same reportedly failed to evoke much interest, even among the IBA members. There are unresolved issues relating to the nature of security for raising loans, and methods in which the high risks associated with film financing may be addressed.

Recent reports that the RBI is exploring bankable schemes for the entertainment industry and the options available for risk mitigation, is a welcome development in this regard.

Risks: Film-making requires large investments. However, the unpredictable nature of public taste is a root factor behind the high risks facing the business of film-making.

Uncertain schedules make it difficult to set a time frame within which the film should be completed. Another critical risk is the uncertainty related to the distribution and exhibition of the film.

Further, there is the challenge of identifying and creating adequate security against which banks can make loans. One of the biggest challenges to financing films,is the manner in which the high risks can be allocated, and the consequent costs controlled.

The manner in which these may be addressed to some extent is by ensuring that there is legal documentation that provides for enforceable rights at each stage of film making.

Legal arrangements would have a significant role to play in formalising and securing relationships between the various parties involved, safeguarding their interests, and ensuring a smooth development of the film, from the conceptualization of the story, to pre-production activities, production and then the distribution of the completed motion picture.

The various agreements can be best understood as falling into four broad categories:

Agreements concerning acquisition of rights in the underlying material which constitutes the story to be portrayed in the picture and its music;

Employment agreements which provide for the hiring of writers, performers, directors, producers, editors, in order to create the script and translate it from words on paper into a finished picture;

Production agreements, pertaining to the arrangements for financing and producing the picture;

And the final stage is that of preparing distribution agreements for distributing the film in various media, and territories and exhibition agreements that ensure the exhibition of the film to the public.

From the point of view of banks and financiers, it would be critical that each of the legal documents is finalized and concluded prior to financing itself to ensure a greater degree of certainty.

Further, each of these documents should be capable of being assigned to the bank in the event of default, so as to enable the banks to ensure completion of the film by engaging other persons, or transferring the movie to another producer.

Assignment of the revenue stream from the sale or exhibition of the motion picture, at the time of sale of the film to the distributor or the exhibitor (depending on the level of risks the bank is willing to undertake) would also be necessary.

Another impending development for the financing of motion pictures would be the development of consortium financing so that a single bank is not exposed to the entire risk of the project being financed.

Insurance: Presence of adequate insurance covers could be another factor that could determine the viability of film making projects.

There have been recent developments in this regard as well, and the United India Insurance Company's Cine Mukta Policy is an insurance cover especially geared for the film industry.

It necessitates, among other things, that an applicant for the insurance cover should give details of the budget for the film, the payments due to the various stars for whom the insurance cover is being sought, and the shooting schedule.

Norms for insurance could therefore also induce greater formalization of movie making itself.

The insurance covers cast insurance, accident, loss due to fire, riots and theft. The areas of insurance cover within the film industry is performance insurance against non-performance of stars, equipment insurance, and accident insurance.

There can also be assignment of insurance policies to banks and other financiers.

Tax Incentives: This could be a crucial manner in which investments for an entertainment project can be attracted. The Finance Act, 1999, introduced section 80HHF to the Income-Tax Act, 1961, providing deduction in respect of profits and gains from export or transfer of film software, television software, music software, television news software, including telecast rights.

There have been reports that concessions in income tax, customs and excise duties are also being sought. Apart from these, the areas where tax incentives could be evolved for the entertainment sector include tax incentives for construction of theatres.

There is also a need for rationalisation of existing taxation rates on various aspects of motion picture production, in order to maximize returns.

For instance, the state legislature has jurisdiction over levying taxes on entertainment and amusement. Theatre tax is levied by local municipal bodies. Differing authorities leads to differing rates.

While it may be ensured that the proceeds of tax on entertainment accrues to the state exchequer, a uniform tax and rationalized rate in all states may be of assistance in optimizing returns from the film-making activity.

Another source of financing motion pictures is venture capital funds. Registered venture capital funds get pass-through status for taxation purposes, meaning that a venture capital fund cannot be taxed in India on its income and this should encourage VC funding in films.

From the looks of it, even while the challenges for film financing are many, the opportunities and rewards are equally encouraging. The way forward, therefore, lies in setting up adequate structures to support and facilitate the same.