Unpredictable revenue streams leave Indian film producers vulnerable to funding disputes

Pen India had advanced ₹20 crore to Reliance under a security deposit agreement which Reliance Entertainment argued did not constitute a money-lending arrangement. The company also contended that its liability had been extinguished under a contractual provision that required repayment through a third-party satellite or digital rights provider.

“Film financing is unusual because repayment is often commercially connected to an inherently unpredictable asset, which is the film itself,” said Aishwarya Kaushiq, a partner at BTG Advaya, a law firm. “Money may be expected to come from theatrical collections, satellite or digital rights, distribution revenues or a combination of these. The problem arises when expected revenues do not materialize. The legal question then becomes very simple: who agreed to carry that risk?”

Calling this a repayment dispute, not a creative or rights quarrel, Shivam Sinha, a partner at Sagus Legal, said Pen India put ₹20 crore into the film’s release as a security deposit, carrying 21% interest compounded monthly. Roughly ₹15 crore was repaid through Friday Filmworks, one of the film's producers, leaving ₹4.49 crore in principal and ₹7.44 crore in interest still due.

New development

The tribunal treated the money as borrowing in substance and admitted the matter to insolvency. While money disputes of this kind are routine in the trade, taking them to the insolvency tribunal rather than a civil court is the new development, Sinha added.

Earlier such instances include the Eros dispute arising from the NH10 co-production, where the claim was held not to be recoverable debt at all, and the breakdown between KriArj Entertainment and its partners over Parmanu: The Story of Pokhran and Kedarnath in 2018.

The extremely volatile nature of the movie business is the major cause of such funding-related disputes, according to Shama Mahajan, an assistant professor of law at BITS Law School. When funding arrangements are co-dependent and every party involved is at a loss owing to low business, such disputes are likely.

Absolute or contingent?

Box-office performance is inherently unpredictable, while OTT and television valuations have also become more conservative. Disputes can therefore arise over whether repayment is absolute or contingent on exploitation of rights, who bears the commercial risk, and how revenues are to be shared, Jain added.

The remedial measures, though, are neither complex nor costly. Where the commercial arrangement is one of lending, it ought to be documented as such, with a defined repayment schedule, an enforceable event of default, a defensible rate of interest, and a charge registered with the Registrar of Companies, according to Sonam Chandwani, managing partner of KS Legal & Associates.

“The answer is better structured financing and sharper contracts. Agreements must clearly define the nature of the funding, repayment triggers, revenue waterfall, treatment of OTT or satellite rights, security and, most importantly, who bears the downside if revenues fall short,” said Dikshat Mehra, a partner at Rajani Associates. “The industry is becoming more institutionalized, but the documentation must keep pace. A film's commercial risk cannot be eliminated; contractual uncertainty about who bears that risk can.”

Lata Jha

Lata writes about the media and entertainment industry for Mint, focusing on everything from traditional film and TV to newer areas like video and audio streaming, including the business and regulatory aspects of both. A journalist for over a decade, she has extensively covered relatively underexplored aspects of what is seen as a glamorous business—from the death of single-screen cinemas in small towns to unreasonable star fees and demands eating into film production budgets and eventually inflating ticket rates. She was early to spot what are now established and ongoing trends such as the slowdown in the OTT business and the surge in the popularity of southern movies, which she continues to spotlight. A regular writer of in-depth, long-form features, her best-read work ranges from critical profiles of companies like Netflix, JioHotstar and Prime Video to takes on sexual harassment and mental health in the entertainment industry. She spends a lot of time watching content, particularly the old-school way in movie theatres, to make sure her writing is embedded in on-ground experience, since she believes the best stories often come from the travesties of directly engaging with and paying for the content that she writes on, and not from celebrity tweets, company releases or listings. A graduate of the Columbia School of Journalism, she has also authored a book on the business of entertainment.