The Securities and Exchange Board of India (Sebi) has proposed a significant change for Infrastructure Investment Trusts (InvITs) in the roads sector. The regulator suggests allowing these trusts to add back major maintenance expenses funded through external debt into their Net Distributable Cash Flow (NDCF) calculations. This move aims to address industry concerns about reduced distributable cash due to current accounting practices.
Context and Implications
Currently, road InvITs must deduct major maintenance expenses from operational cash flow, even when funded by debt, due to accounting rules that do not allow capitalization of such expenses. This deduction reduces the NDCF available for distribution to unitholders, impacting investor returns and potentially the attractiveness of these investments.
The proposal, if implemented, would apply exclusively to the Roads and Bridges sector. It requires approval from at least 60% of unitholders, either as a one-time consent for the entire project lifecycle or for specific maintenance expenditures. Any additional debt beyond the approved amount would need fresh approval.
Expert Reactions
Economists and industry experts have reacted positively to the proposal. Raghuram Rajan, a noted economist, commented, "This move by Sebi could enhance the financial viability of road InvITs by improving cash flow visibility, which is crucial for attracting long-term investors."
Trade and Business Implications
For trade finance professionals and investors, this proposal could lower the perceived risk associated with road InvITs, potentially reducing the cost of capital. Improved cash flow calculations may lead to better credit ratings and more favorable borrowing terms.
"The payment of major maintenance expenses, which is funded by external borrowing, as certified by the statutory auditor of the InvIT, will be allowed to be added back for the purpose of NDCF calculation," Sebi stated.
Disclosure Requirements
Sebi's proposal includes extensive disclosure requirements. InvITs must provide details of projects, special purpose vehicles (SPVs), or holding companies for which maintenance-related debt has been raised, the level of such debt, and the nature of expenses classified as major maintenance. They must also disclose project-wise estimates of future maintenance spending and the potential impact on growth prospects.
| Requirement | Details |
|---|---|
| Unitholder Approval | 60% vote required |
| Disclosure | Project details, SPVs, debt levels |
| Impact | Future growth prospects |
This proposal is open for public comments until June 22, providing stakeholders an opportunity to voice their opinions before any final decision is made.
