SEBI eases InvIT rules to allow debt-funded road maintenance costs in distributions

On Friday, the Securities and Exchange Board of India (SEBI) amended the guidelines for determining net distributable cash flows (NDCF) of infrastructure investment trusts (InvITs). This change permits the inclusion of selected debt-funded major maintenance expenses related to road projects when calculating the cash available for distribution. This adjustment was prompted by industry demands and the recommendations of SEBI’s Hybrid Securities Advisory Committee (HySAC).

Under the updated framework, expenses incurred for major maintenance on road projects can be added back to NDCF at both the HoldCo/SPV and InvIT trust levels. However, this addition is contingent on the expenses being funded through external borrowing. SEBI has imposed several safeguards to ensure compliance with the revised rules.

The eligible road projects must be categorized under the roads and bridges sub-sector, and the major maintenance expenditures must exceed routine maintenance levels, in line with the terms of the concession agreement.

Before including such expenses back into NDCF, InvITs must secure the approval of unitholders. This approval necessitates a simple majority vote (at least 60%) and must be obtained for each individual project where the investment manager intends to leverage external debt for major maintenance. The unitholder meeting's explanatory statement will need to provide comprehensive disclosure regarding the projects, the categories of major maintenance expenses, the estimated project-wise and year-wise expenses, and the potential impact on the InvIT's long-term growth prospects.

Additionally, this statement must disclose the current and projected effects on distributions to unitholders.

SEBI has stipulated that the approval for such debt can be obtained either for existing debt or proposed debt throughout the project's lifecycle, or for specific maintenance expenses. Any additional borrowing beyond what has been approved will necessitate a fresh approval process. An independent statutory auditor will be required to certify that the maintenance expenses are in line with the concession agreement requirements and have been financed through external borrowing. Only payments that are certified by the auditor will be eligible for inclusion back into NDCF.

In addition to the aforementioned requirements, SEBI mandates separate disclosures of the borrowing for major maintenance, including the exact amount and percentage of debt, the outstanding debt, and the maturity profile of the debt. All comments pertaining to these changes must be submitted in English, as full sentences, and must adhere to the community guidelines to avoid abusive or personal language. SEBI has emphasized that all comments will be moderated accordingly.