MUMBAI: Credit Rating Information Services of India Ltd (Crisil) Crisil has been working on drawing up a risk evaluation model for the Indian entertainment industry, along with the CII (Confederation of Indian Industry), for sometime now. In fact, the duo had announced that they had succeeded in coming up with a model that works in October last year.
Indiantelevision.com therefore decided to take a closer look at what it is all about and excerpt from the Crisil report the background of the entire film and television software industry. Crisil for its part believes that its risk evaluation model is likely to play a catalytic role in channelising institutional funding to the entertainment industry as the Crisil framework helps in analysis of both film and television software producers.
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.
