Procuring Finance

Finances for a Bollywood film, as it stands presently, comes from the following sources:

(a) Private financiers

These people mostly comprise of diamond merchants, brokers and builders who have a lot of liquid cash they can spare. An established, well-known producer with a good track record can raise money at about 2% interest per month. For the less fortunate, interest rates could be as high as 4% per month.

(b) Pre-sales

Pre-sales are the advance sales of distribution rights in various media and territories. A pre-sale may take a variety of forms like theatrical, music or satellite rights, which are in turn given to distributors, record companies and satellite channels, respectively.

For the purposes of the distribution of the theatrical rights of an Indian film, the market is divided into different geographical territories (including the overseas market). The rights for each territory are normally sold separately. The producer usually gives the distribution rights of a particular territory for a particular period to the distributor upon receipt of an advance credit from the distributors. Generally, for well-known producers, distributors book films in advance. Under this system, the distributor pays the producer a portion of the cost up front (approximately 40%) and the balance (60%) upon receiving the final print.

(c) Self-Finance

Unlike Hollywood, where the producer seldom finances his own film, in Bollywood, it is not uncommon to find a producer financing his own film. This practice, however, is typical of large production houses. This method of finance enables such production houses to leverage and sell the rights in the film at a premium, just short of the film's release. However, in recent times, the practice of the producer investing his own money in a film is comparatively decreasing. Also, with bank finance being an option to raise funds, the producer usually prefers not to take the risk of investing a substantial amount of money in the film.

(d) Black Money

Leaving aside private financiers, who are an extremely costly option, funds are not easily available for producers and therefore, producers tend to fall prey to black money. A number of the payments made in the course of production of a film, including the payments to and from the financiers, transactions with the distributors, music companies, the star cast, etc., have an element of unaccounted money in them. Five years ago the Financial Times noted 'Bombay's thriving film industry has long had connection with organized crime, largely through the laundering of 'black' money used to finance many of the films.³⁸ However, due to the recent attacks on prominent Bollywood producers, and with the government's move to provide a boost to the Indian film industry, this mode of finance is becoming increasingly unpopular. Further, with the move towards the corporatization of Bollywood, other formal sources of financing are also opening up.

(e) Bank Finance/Corporate Finance

Pursuant to the film sector being accorded "industry" status, bank financing is now permitted in the film industry. The IDBI is the first bank that initiated the process of financing films. Similarly, the Bank of India also expressed its intention to follow suit. This source of finance is discussed in detail in Chapter III. Recently, the new trend that has emerged is the production and financing of films by corporate houses. Most of the well-known corporates like the Tatas, Birlas, and Reliance have set up separate divisions/companies and are investing in this space. Even though they may not know too much about films, they do know about professional management and processes, which is what Bollywood needs most today. Bankers, too, are getting into the film business. A classic example is that of Idream Production Private Limited, an offshoot of SSKI Finance. Idream has distributed cross-over films like Monsoon Wedding, Bend it Like Beckham and Bollywood Hollywood, creating an altogether new demand for this niche market of specialized films.

(a) Primary Sources of Finance

Finances for films in Hollywood comes from the following four main sources:

(i) Studio houses;
(ii) Joint Ventures;
(iii) Equity/Investor Financing; and
(iv) Loan Financing.

A completion guarantee and appropriate insurance are two of the most important requirements for the financier (whether private investor, distributor or bank) of a film (as described in Chapter III).

For a film financed by a studio, a typical agreement is the production-financing-distribution agreement ("PFD Agreement"). It addresses issues that relate to elements of both creativity and finance. The production company, in order to obtain the financing necessary to produce its film, either secures a direct monetary investment and assumes responsibility for all other production aspects, as well as negotiation of distribution arrangements. Or, it may negotiate an agreement with a studio or another production or distribution company to provide the financing, production facilities, and distribution arrangements.

If the production company has gathered the essential production elements, it may try to finance the picture through pre-sales. The production company may also go to various distributors for pre-production commitments to distribute the film after it is made. In order to work effectively, such commitments must include monetary advances, which may cover all or some of the production costs. The strength of the production company's reputation and the package of the director, performers and story determine whether the distributor's reluctance to take such risks will be overcome.

(b) Secondary Sources of Finance

Hollywood films are also funded to an extent through a secondary source of finance , also known as “support finance.” The various means of support finance are:

(i) Gap Financing;
(ii) Merchandising;
(iii) Corporate Endorsements / Product Placement; and
(iv)Facility Arrangements.

The aforementioned are discussed in greater detail in Chapter III.

In Hollywood too, although there are no statistics to back it up, there is a significant amount of unaccounted money that is pumped into the filmmaking process. This forms an unofficial source of finance and deserves a passing mention.

Apart from the above, there are many other ways Hollywood film makers fund their film, such as grants from foundations (especially for documentaries and educational films/videos), individual and/or corporate investors, and, very often, financing out of their own meager pockets.

(c) Security Lien

A film has various underlying intellectual property rights such as the film itself, musical works, sound recordings, artwork and still photography, all of which can be used as security to raise finance. As part of the process of acquiring a completed film, a Hollywood financier takes various precautions and employs certain procedures to ascertain the status of the production company's rights and its ability to confer distribution rights. The two most common forms of lien are the following:

(i) Lab Lien
All production companies make arrangements with a film-processing laboratory for film processing needs. A financier usually lends money to a producer upon obtaining a laboratory lien. This is dealt with under "Post Production" in Chapter II .

(ii) Bank Lien
It is normal for finances to be routed through a production bank account designated specifically for production. The production company is not permitted to withdraw funds from the production account except for the purpose of applying them towards the production of the film in accordance with the agreement. The financier will normally require a form of acknowledgment from the bank at which the production account is to be maintained. This ensures that the bank will not exercise any right of set-off it may have in respect of debts incurred by the production company in its own right against funds maintained in the production account.