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The unique analytical framework comprehensively assesses all the
risks pertinent to these two segments. Crisil believes that an objective
and independent opinion on the risks involved would help both lenders
and producers.
Lenders, comprising banks, financial institutions and intermediaries,
Crisl and CII say, could avail of the service in pricing their products
and determining their exposure levels to entities in the entertainment
industry. As for producers, they have hitherto been borrowing funds
at exorbitant interest rates from the informal market and this service
would act as a key facilitator in accessing institutional funds.
"Crisil's risk evaluation service could well become the third
important milestone in the entertainment industry's evolution into
a transparent and mature sector," says Crisil CEO and MD R
Ravimohan and CII Entertainment committee chairman (Western region)
Biren Ghose in a joint statement.
The Crisil report states that the Indian film industry, which dominates
the domestic entertainment industry, is one of the largest and vibrant
ones in the world but minuscule in terms of revenues. It adds that
Indian films have been making their presence felt in the international
arena in recent times.
The report adds that the two important milestones have laid the
foundation for the process of corporatisation: the I&B ministry
accorded industry status to the film industry in May 1998 and the
finance ministry announced that the entertainment industry would
be recognised as an approved activity under the industrial concerns
section of the IDBI Act, 1964.
The Crisil report also mentions that the other recent trends in
the industry include access to institutional funding and the institution
of risk mitigants such as insurance covers. But such efforts are
few and far between. It is estimated that currently, annual film
production costs in India are in the region of Rs 25 billion and
these have been growing at 15 per cent a year.
While the Industrial Development Bank of India (IDBI) started financing
films in April 2001 and the Reserve Bank of India (RBI) also issued
broad guidelines to commercial banks regarding bank finance for
film production in May 2001, the total institutional funding to
the Indian film industry is still estimated to be only around Rs
1 billion.
The Crisil report adds that a film financier is exposed to the following
risks spite of the existence of the tripartite agreement,
* Ability of the producer to complete the film (completion risk)
* Ability to obtain the Central Board of Film Certification's (CBFC)
approval for screening (regulatory risk)
* Ability of the producer to sell the rights (marketing risk)
* Ability of the producer to collect the money from distributors
(counter-party risk)
The Crisil report also states that the present system has several
drawbacks.
Drawbacks of the current funding mechanism: One of the main
disadvantages of the current funding mechanism is the high cost
of funding. Private financiers charge exorbitant interest rates,
which range even up to 40-50 per cent per annum.
Professionals and other senior members in the industry have been
working towards extricating themselves from the clutches of private
financiers with a view to not only reducing their funding costs
but also to enhance the industry's credibility.
While movies are a great source of entertainment and have been witnessing
reasonable overseas demand, factors such as low entry barriers,
lack of transparency, piracy, high delinquency and the like have
been affecting the industry.
Recent trends in the industry include efforts at corporatisation,
institution of risk mitigants such as insurance covers and access
to institutional funds.
Corporatisation: A number of individual and partnership firms
have converted themselves into corporate entities and such efforts
have enabled the flow of funds from the capital market to the film
industry. For instance, eight companies went public and mobilised
about Rs 4.5 billion (including premium) by way of initial public
offerings (IPO) in calendar 2000.
Insurance cover: In the recent past, a few producers had
taken comprehensive insurance cover to mitigate some of the risks
associated with film production. The insurance cover is an umbrella
policy covering human lives (star cast, directors, cameramen, crew)
against personal accident, damage to fixed assets (sets, cameras,
wardrobe, lighting equipment, film negatives) against fire and allied
peril, damage to third party, money in transit and the like.
The overall insurance cost is about 0.7-1.0 per cent of the project's
total cost and actually depends on the kind and quantum of insurance
sought as premium rates vary for each component under the umbrella
cover.
Internationally, film industries follow the concept of a completion
bond, which provides a high degree of comfort to financiers. A completion
bond is a written contract that ensures that a film will be finished
and delivered on time and within the stipulated budget.
In general, a completion bond assures the bank or the financial
intermediary that the producer will complete and deliver the film
in accordance with the screenplay, budget and production schedule
that the bank or the intermediary had approved. In case the production
is abandoned, the guarantor will fully repay all sums that the bank
or the intermediary had invested in the film.
The concept of a completion bond does not, however, exist in India
today, and the Indian insurance market has to evolve further to
offer such sophisticated products.
Institutional funding: The industry status granted to the
film industry and the recognition of filmmaking as an industrial
activity has enabled producers to access formal sources of funding.
IDBI has taken the lead among institutions in providing finance
to various film producers. Besides, some banks have evinced an interest
in financing film producers and television software producers. The
financial support that has flown to the industry, though minuscule
as of now, has helped some producers to minimise their production
costs.
Scope
Given the unique characteristics of the entertainment industry
and the legal structure of most of the entities in this industry,
Crisil's risk assessment service focuses on a one-time assessment
of the risk profile of the entity or the project being assessed.
The risk evaluation service would provide an independent assessment
of the ability of the film or television software producer to complete
the project(s) without significant time and cost overruns. The risk
evaluation service would capture all the risks faced by an entity
in a well-defined, comprehensive framework.
However, this risk evaluation service is not a credit rating or
an opinion on the commercial success of a film project being assessed.
Risk Evaluation Framework
The overall analytical approach includes an assessment of the
business risk, financial risk and management capabilities. The significance
of this framework emanates from its focus on issues unique to the
entertainment industry.
Besides, the framework derives its robustness from the level of
detail in incorporating entertainment industry-specific factors
for evaluation.
The broad risk categories and risk parameters for assessing film
producers and television software producers are given in the Crisil
report.
In addition, Crisil would look at the key factors that affect each
of the above parameters. To illustrate, while evaluating the completion
risk of a project, the analysis would capture and deliberate on
factors such as measures to mitigate project abandonment by analyzing
covenants that have been put in place.
It would also analyse the kind and type of contractual agreements
with various counterparties such as directors, artistes, technicians
and studios to assess the risk of time overruns. Similarly, the
availability and adequacy of insurance covers would be examined
to estimate the possibility of cost overruns.
Evaluation Process
Crisil would undertake the evaluation on the request of either
the lending institution or the borrower. A team of qualified analysts
would interact with the company's management and analyse information
that is confidential as well as in the public domain.
Crisil strongly believes that a direct dialogue with the management
provides insights and clarity to arrive at an informed opinion.
Crisil employs a thorough, objective and transparent decision-making
process as part of the evaluation service. Each assignment is typically
completed within three to four weeks from receiving the mandate.
Television software producers can take recourse to this to get themselves
rated and in the process be eligible to take loans. That is if their
promoters are visionaries and have a dream to catpult themselves
using the lever of insititutional credit.
Deliverables
The key deliverable of the risk evaluation service would be
a detailed report providing an analysis of the critical risks and
conclusions. Crisil would submit the report to the entity from which
it received the mandate. Crisil would keep the report confidential
and not use the information received for any other purpose without
the explicit consent of the parties concerned.
TV ad spends - 39 per cent
of ad pie in 2001-2, says Crisil
Crisil risk evaluation
service - important milestone
High cost of funding
mars film industry growth, says Crisil
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