The Securities and Exchange Board of India (SEBI) on Monday proposed allowing road-focused Infrastructure Investment Trusts (InvITs) to add back debt-funded major maintenance expenses while calculating cash available for distribution to investors for ease of doing business.
Under the proposal, payments made towards major maintenance of road projects, to the extent funded through external borrowings, can be added back while computing Net Distributable Cash Flow (NDCF), the metric that determines the amount available for distribution to unitholders.
At present, InvITs are barred from distributing cash flows generated through external debt. In addition, major maintenance expenses are treated as operating costs under accounting rules and are deducted from operating cash flows while calculating NDCF. This reduces distributable cash even when such expenses are financed through borrowings.
SEBI said the proposal has been made after representations from the Bharat InvITs Association and recommendations from the Hybrid Securities Advisory Committee.
Concession obligations
Major maintenance refers to non-routine expenditure incurred to maintain road assets in line with obligations specified under concession agreements.
“Major Maintenance expenses are treated as operating expenses, although the quantum of such expenses over the life of the project is generally significant and such expenses are necessary to maintain the life of road assets and to meet the specifications of the concession agreement,” SEBI said in a draft paper seeking public comments until June 22.
The relaxation would apply only to projects classified under the roads and bridges infrastructure sub-sector. However, InvITs would need prior approval from unitholders before raising debt for such expenses. The approval may be obtained either for the entire project life cycle or for specific maintenance programmes.
Disclosure norms
SEBI has also proposed extensive disclosure requirements, including project-wise maintenance estimates, the impact of maintenance-related borrowing on future growth and distributions, and alternative funding options if debt is unavailable. Statutory auditors will be required to certify that the expenditure qualifies as major maintenance and has been funded through external borrowing.
InvITs will additionally have to disclose maintenance-related borrowings in debt maturity profiles, leverage ratios and NDCF statements