SEBI Overhauls InvIT Accounting: Debt Funding for Major Maintenance Now Eligible for Cash Flow Add-Back

SEBI Overhauls InvIT Accounting: Debt Funding for Major Maintenance Now Eligible for Cash Flow Add-Back​

SEBI has issued a crucial consultation paper proposing a significant change to the calculation of Net Distributable Cash Flows (NDCF) for Infrastructure Investment Trusts (InvITs). The proposed framework allows InvITs to factor in payments for Major Maintenance (MM) expenses that have been financed through external debt.

This move directly addresses industry concerns, facilitating the monetization of vital infrastructure assets like roads while stabilizing capital structures. The proposal introduces comprehensive safeguards and enhanced disclosure requirements to maintain investor confidence.

Why the Change? Addressing the Industry Need​

The current regulatory framework, outlined in the Master Circular for Infrastructure Investment Trusts, generally prohibits InvITs from distributing cash flows derived directly from external debt. Historically, this necessitated that MM expenses be deducted from operational cash flow when computing the standardized NDCF.

The Bharat InvIT Association (BIA) brought to SEBI's attention that MM expenses, while vital for extending the life and quality of road projects, are typically funded by debt across the industry. Since these mandatory, yet non-capitalizable, expenses are currently treated as operating expenses, they lead to a mandated reduction in the calculated NDCF.

Proposed Framework Shift for NDCF Calculation​

SEBI’s proposal, influenced by the BIA's representation and the Hybrid Securities Advisory Committee (HYSAC) recommendations, introduces a specific allowance into the NDCF calculation for both the HoldCo/SPV and the Trust level.

Under the revised framework, payments made towards Major Maintenance expenses for road projects, to the extent funded by external debt, will be permitted as an add-back when calculating NDCF. This addition is a landmark change designed to align accounting practices with industry funding realities.

Detailed Safeguards and Investor Protections​

Recognizing the sensitivity of allowing debt use for distributable cash calculation, SEBI has attached rigorous safeguards and mandatory disclosures to the proposal. These measures are designed to protect unitholders and maintain financial transparency.

Firstly, the proposal restricts this allowance only to projects falling under the 'Roads and bridges' sub-sector. MM expenses themselves are strictly defined as expenditure on maintenance that is not routine and aligns with concession agreement requirements.

Crucially, any utilization of this mechanism requires explicit unitholder approval. This approval must be obtained under Regulation 22(5) of the InvIT Regulations, necessitating at least a sixty per cent vote in favour.

Enhanced Disclosure Requirements for InvITs​

To ensure market accountability, SEBI mandates several mandatory disclosures within the Annual, Half-Yearly, and Quarterly Reports of InvITs.

InvITs must specifically highlight the amount and percentage of debt taken for MM expenses when reporting the Net Borrowing Ratio. Furthermore, the notes to the NDCF statement must track the aggregate amount of borrowing raised and the aggregate amount of MM expenses outstanding for each project, SPV, and the InvIT itself.

The explanatory statement accompanying the unitholder meeting notice must also provide deep insights into the debt impact. This includes disclosing the potential effect on future growth potential and providing detailed year-on-year impact analysis on unitholders’ distributions, both leading up to and following the debt availment.

Implications for the Infrastructure Sector​

This consultative paper signals a significant recognition by the regulator of the financial complexities faced by the Indian infrastructure sector. By standardizing the recognition of debt-funded MM expenses, SEBI aims to:

• Improve Liquidity: Allow MM funds, which are crucial for asset longevity, to contribute to the projected distributable cash flow.
• Boost Attractiveness: Reduce the perceived financing gap, potentially discouraging developers from curtailing project monetization through InvITs.
• Enhance Capital Efficiency: Offer a clear, regulated pathway for funding operational necessities through debt while mitigating the immediate negative impact on distributable earnings.

Industry stakeholders and the public are invited to provide comments on the draft circular, highlighting SEBI's commitment to finalizing the optimal framework by June 22, 2026.