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May 13, 2004

Lights, camera, inaction: the story of VC investments in Indian films

At a time when Vivek Wadhwa, Founder & Chairman of US-based enterprise software firm Relativity Technologies, is generating a lot of publicity for the Hindi film he's producing via his
BusinessWeek column, India's answer to BusinessWeek - Businessworld - has published an indepth article exploring the roadblocks facing private equity investments in the Indian film industry.

The article points out that the spurt of private equity investments that happened when the sector received industry status in 1998, has now fizzled out. The prominent investments so far include the $5 million raised by Shringar Films from GW Capital, the $8.5 million (Rs.38 crore) that PVR Cinema raised from ICICI Venture, and the angel investment raised by Bobby Bedi's Kaleidoscope Entertainment from Silicon Valley veteran Kanwal Rekhi and Infinity Venture co-founders Saurabh Srivastava, and Pravin Gandhi.

One of the main roadblocks is the lack of transparency in film distribution. "Bank usually loan money or VCs invest it against agreements signed with film distributors. However India has thousands of distributors who do not have a corporate structure or a balance sheet, which makes lending impossible. To top it, they routinely under-declare revenues, especially in the interior (areas of the country)," the article says.

According to the BW article, the fact that a typical Indian film requires only Rs.25-30 crore to make is a deterrent to foreign investors who "would typically want to come in with a $100-million fund (Rs 450 crore) at least". The Indian securities regulator SEBI currently bars VCs and films funds from invest in one-off projects directly. And setting up a special purpose vehicle to finance one-off projects creates tax-related complications.

A government-appointed committee headed by N.K. Singh is looking into the various roadblocks facing institutional film financing. Meanwhile, the article says, Indian filmmakers have come up with an ingenious tool called "co-productions" -- in which each film is treated as a separate venture - that is serving as an effective stop-gap solution.