SEBI Proposes Revised NDCF Norms for Road InvITs to Account for Debt-Funded Maintenance Costs

The Securities and Exchange Board of India (SEBI) has proposed allowing Infrastructure Investment Trusts (InvITs) in the roads and bridges sector to add back certain major maintenance expenses while calculating Net Distributable Cash Flow (NDCF), as per PTI reports.  

The proposal applies only to maintenance payments funded through external borrowing and would be subject to specified conditions.  

The proposal was issued through a consultation paper after SEBI received representations from the Bharat InvITs Association (BIA) on the treatment of debt used for major maintenance of road assets. 

Industry Concern Over Existing Framework 

According to the industry body, road projects require periodic major maintenance to maintain asset quality and operational standards. These expenses can be substantial and are often financed through borrowings. 

However, under existing accounting principles, such expenditure cannot be capitalised because it does not result in additional economic benefits such as a longer concession period or higher toll collections.  

As a result, the expense is deducted from operational cash flows, reducing the NDCF available for distribution. 

Proposed Treatment of Debt-Funded Expenses 

To address this issue, SEBI has proposed that payments made towards major maintenance of road projects be added back to NDCF calculations to the extent they are funded through external debt. 

The regulator also stated that the expenditure must be certified by the statutory auditor of the InvIT as having been funded through external borrowing before it can be considered for the add-back. 

Unitholder Approval Requirement 

SEBI has proposed that InvITs obtain unitholder approval before adopting this mechanism. The resolution would require support from at least 60% of the votes cast. 

Approval may be obtained either for the entire lifecycle of a project or for specific maintenance programmes. Any requirement for additional borrowing beyond the approved level would need fresh approval from unitholders. 

Disclosure Norms Suggested 

The consultation paper also outlines disclosure requirements. InvITs would need to provide details of the projects, special purpose vehicles (SPVs) or holding companies involved, the level at which debt is raised, and the categories of expenditure treated as major maintenance. 

They would also be required to disclose project-wise and year-wise estimates of maintenance expenditure based on the latest valuation report, along with the potential impact of such borrowings on future growth. 

Read More: CBI Arrests RCom's Former MD Amitabh Jhunjhunwala in in ₹2,929 Crore SBI Loan Fraud Case! 

Conclusion 

SEBI noted that its existing NDCF framework does not permit the use of borrowed funds for distributions to unitholders. Public comments on the latest proposal have been invited until 22 June, following which the regulator will review stakeholder feedback. 

For daily market updates and regular stock market news in Hindi, stay tuned to Angel One's share market news in Hindi. 

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.   
 
Investments in the securities market are subject to market risks, read all the related documents carefully before investing.