This mechanism should be applicable only to the ‘Road and Bridge’ sector and requires strict approval of the unit holder.
The proposal came after the Securities and Exchange Board of India (SEBI) received a representation from the India INVIT Association (BIA) on the treatment of debt incurred by InvITs for major maintenance costs of road projects while calculating the NDCF.
The industry association highlighted that although major maintenance (MM) costs extend the life of the road and increase its quality, they cannot be capitalized under generally accepted accounting principles because they do not generate future economic benefits, such as extended concession periods or increased toll revenue.
Since InvITs (Infrastructure Investment Trusts) with road projects cannot capitalize these MM expenditure under the current NDCF structure, any MM expenditure incurred to raise debt is compulsorily deducted from operational cash flow, reducing the NDCF, the industry body added.
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Accordingly, in its consultation paper, SEBI proposed that “payments made for the purpose of MM expenditure for road projects of InvITs to the extent funded by external debt for the purpose of NDCF calculation shall be allowed to factor”.
Regarding unitholders’ approval, SEBI suggested that where the votes cast in favor of the resolution should be at least 60 per cent of the total votes cast, the payments made for major maintenance costs for road projects to the extent funded by external debt should be added back.
Approval can be obtained on a one-time basis covering the entire project life cycle or for specific MM expenditure, but prior approval of the unitholder is required for any deviation requiring additional borrowing.
While seeking unitholder approval, the explanatory statement accompanying the notice of unitholding meeting should disclose the names and details of the projects/SPVs (Special Purpose Vehicles)/Holdcos (Holding Companies) for which MM debt is proposed or has already been raised, Sebi suggested.
Other required disclosures include whether MM debt can be raised at trust level or SPV/HoldCo level; A range of all costs considered as MM costs; Year-wise and project-wise estimates of MM expenditure for which debt has been raised or is proposed to be raised, based on the latest available valuation reports; and the potential impact on InvIT’s future growth potential due to using debt to fund MM costs.
“Payment of major maintenance expenditure, which is funded through external borrowing, as certified by INVIT’s statutory auditor, will be allowed to be added back for the purpose of NDCF calculation,” Sebi said.
Earlier, SEBI had laid down a standard framework for calculation of NDCF for InvITs, which prohibited the use of borrowed money for distribution to unitholders.
SEBI has sought public feedback on the proposal till June 22.
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