All's not well with Bollywood. The film industry grossed a turnover of Rs 3,900 crore (Rs 39 billion) in 2002, 12 per cent lower than the previous year.

Mainstream Hindi cinema was the worse affected, losing about Rs 270 crore (Rs 2.70 billion) on gross revenues of Rs 1,650 crore (Rs 16.50 billion). But that's not the end of bad news.

Even more worrying is that, despite being granted industry status in 2000, film production companies in the country have yet to see any significant institutional investment.

Take the case of film production company, PLA Entertainment, known for films like Chashme Baddoor, Khatta Meetha and Jalwa, among others.

The company failed to get funding from the Industrial Development Bank of India for its Rs 5.5 crore (Rs 55 million) film Chupke Se. Says PLA producer Jayashree Makhija: "Finally, we had to manage on our own."

Many other producers agree but refuse to be identified. Says one: "We've not been able to raise money from banks or financial institutions probably because we've yet to establish ourselves or because we do not have stars in our films."

Consider some numbers on organised investment in films. Institutional funding (including an initial public offering) for nearly 75 mainstream and crossover films was a meagre Rs 50-60 crore (Rs 500-600 million).

This is about five per cent of the total cost of production of these films.

Needless to say, that most of the money to make films is still coming from a combination of sources: the producer's capital and equity/debt financing from non-institutional sources.

Film industry experts say that there are several reasons for organised investors to stay away from financing film companies.

These include absence of transparency, poor management and returns, and lack of exit options for investors, the last being the biggest dampener.

However, they feel financing a single film ensures relatively fixed investment period and quick paybacks.

Says Mahesh Murthy, chief executive officer, PassionFund.com, "VC investment in the Indian film and entertainment companies is not an exciting idea."

However, investment in individual film projects may work, as such a vehicle clearly defines the exit route and timing for investors."

In his latest report on the film industry, Investment Bank Rabo India's head - media & entertainment, Sunir Kheterpal, says that project specific investment proposals and structures will emerge as the optimal vehicle for private equity (institutional and individuals) investments in the film production space.

However, he suggests that collaboration of skills and delegation of work can result in higher efficiencies in the business, facilitating better returns and hence evince stronger investor interest.

Though finance experts believe that individual project specific funding reduces management risks, it has its drawbacks too, the foremost being the absence of risk diversification.

But experts point out that risk can be reduced by forming special purpose vehicles comprising multiple projects or 'slate' of films.

While single projects can seek investments from small investors, big producers could go to institutional investors.

Rajesh Jog, managing director of Way Gate Capital, a technology, media and entertainment led investment bank, says that though project specific investment will have an edge but investing in slates or multiple projects will be a better option to achieve risk diversification.

Industry experts argue that this sort of investment vehicle goes against the traditional definition of 'venture capital' and 'private equity capital' as the investment is limited to financial participation and does not bring forth management participation from such funds.

But Kheterpal's report says that project specific SPV "will also be accompanied by financial acumen of investors, who will facilitate financial control in the project."

The Korean way

In 1999, South Korea's KDB Capital made its first investment in the filmed entertainment space and invested $333,000 in a spy thriller, Shiri.

The investment generated a 300 per cent return for KDB Capital. In 2001, eight per cent of KDB Capital's $380 million fund was earmarked for investment in film production space.

The Rabo India report says that led by KDB Capital, venture capital in the Korean film industry increased from $5 million to more than $150 million by the end of 2001.

The major advantage for investing in film production space was the short turnaround time of one year.