59. Regulation 2(1)(u) of the AIF Regulations states -– “social venture fund” means a trust, society or company or venture capital undertaking or limited liability partnership formed with the purpose of promoting social welfare or solving social problems or providing social benefits and includes - i. public charitable trusts registered with Charity Commissioner;
ii. societies registered for charitable purposes or for promotion of science, literature, or fine arts; iii. company registered under Section 25 of the Companies Act, 1956;
Provided upon request only
￭ Allowed to receive grants (in so far as they conform to the above investment restriction) and provide grants. Relevant disclosure in the placement memorandum of the fund will have to be provided if the social venture fund is considering providing grants as well;
￭ Allowed to receive muted returns.
II. Media Funds
A. Media Funds – An Introduction
A media fund seeks to provide select sophisticated investors with an opportunity to participate in the financing of a portfolio of content e.g. motion pictures and televisions serials.
In current times when demand for high quality films and media products has increased, such pooling platforms play the role of providing organized financing to various independent projects or work alongside studios and production houses. A unique feature is the multiple roles and level of involvement that the fund manager can undertake for the fund and its various projects.
B. Media Funding Models
Most film funds take a ‘slate financing’ approach wherein the investment is made in a portfolio of films/ media projects, as opposed to a specific project. However, as a variation, investors can even be introduced at the project specific level i.e. for a single production only.
In terms of risk mitigation, the slate financing model works better than a specific project model owing to risk-diversification achieved for the investor. Apart from typical equity investments, film funds may additionally also seek debt financing pursuant to credit facilities subject to compliance with local laws. E.g. in Indian context, debt financing by offshore funds may not work.
C. Risks and Mitigating Factors
Film fund investors should take note of media industry specific risks such as - risk of abandonment of the project (execution risks), failure to obtain distributors for a particular project, increased dependence on key artists, increasing marketing
costs, oversupply of similar products in the market, piracy, etc.
To mitigate such risks, diversification of the projects could be observed. Additionally, a strong and reliable green lighting mechanism could also put in place whereby the key management of the fund decides the projects that should be green lit – based on factors such as budgeted costs, available distributorship arrangements, sales estimates and so on.
D. Life cycle of a Film Fund
The life of a film in term of economic performance is generally in the range of eight to ten years depending upon the sources of revenue. Typically, sources of revenue of a film are –
i. Domestic and international theatrical release of the film;
ii. Domestic and international television markets; and
iii. Merchandizing of film related products, sound track releases, home video releases, releasing the film on mobile platforms, and other such online platforms.
Generally, a major portion of income from a film project is expected to be earned at the time of theatrical release of the film, or prior to release (through pre-sales). Consequently, the timing of revenue is generally fixed or more easily determinable in case of film investments, as compared to other asset classes.
The box office proceeds of a film typically tend to be the highest source of revenue and also a key indicator of expected revenue from other streams. Thus, keeping the timing of revenue flows in mind, film funds are often structured as close ended funds having a limited fund life of seven to nine years. The term may vary depending on the number of projects intended to be green lit or the slate of motion pictures or other media projects intended to be produced.
Typically, after the end of the life of the fund, all rights connected with the movie (including derivative rights) are sold or alternatively transferred to the service company or the fund manager on an arm’s length basis. Derivative rights including rights in and to prequels, sequels, remakes, live stage productions, television programs may also be retained by the investment manager (also possibly playing the role of the producer). Such transfer or
assignment of residual rights is of course subject to the nature of and the extent of the right possessed by the fund or the concerned project specific SPV. Sources of income of a film fund and tax treatment:
i. Distributorship Arrangements
The fund or the project specific SPV, as the case may be, may license each project to major distributors across territories in accordance with distribution agreements. Pursuant to such distribution agreements, the fund could expect to receive net receipts earned from the distributions less a distribution fee payable to the distributor (which typically consists of distribution costs and a percentage of net receipts). Income of this nature should generally be regarded as royalty income. If the distributor is in a different jurisdiction, there is generally a withholding tax at the distributor level. The rate of tax depends on the tax treaty between the countries where distributor is located, and where the fund / its project specific SPV is located.