Market regulator Sebi on Monday proposed allowing InvITs to add payments made for major maintenance of road projects back into Net Distributable Cash Flow (NDCF) computation, capped at the amount funded by external debt.

This mechanism should apply only to the ‘Roads and Bridges’ sector and requires strict unitholder approval.

The proposal came after the Securities and Exchange Board of India (Sebi) received representation from the Bharat InvITs Association (BIA) regarding the treatment of debt availed by InvITs for incurring major maintenance expenses of road projects while calculating the NDCF.

The industry association highlighted that although major maintenance (MM) expenses extend the road’s life and enhance its quality, they cannot be capitalised 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) holding road projects cannot capitalise these MM expenses under the current NDCF framework, any MM expense incurred by availing debt is mandatorily reduced from the operational cash flow, which decreases the NDCF, the industry body added.

Accordingly, in its consultation paper, Sebi proposed that “payments made for the purpose of MM expense for the Road Projects of InvITs to the extent funded by external debt will be allowed to be factored (added back) for the purpose of the NDCF computation”.

Regarding unitholders’ nod, Sebi suggested approval from unitholders shall be required where votes cast in favour of the resolution should be at least 60 per cent of total votes cast, before adding back payments made for major maintenance expenses for road projects to the extent funded by external borrowing.

Approval can be obtained on a one-time basis covering the entire project life cycle or for specific MM expenses, but any deviation requiring additional debt necessitates prior unitholder approval.

When seeking unitholder approval, the explanatory statement accompanying the notice for the unitholding meeting should disclose the names and details of the projects/SPVs (Special Purpose Vehicles)/ Holdcos (Holding companies) for which the MM debt is proposed or has already been raised, Sebi suggested.

Other required disclosures include whether the MM debt may be raised at the Trust level or SPV/HoldCo level; the category of all expenses considered as MM expenses; year-wise and project-wise estimates of the MM expenses for which debt is raised or proposed to be raised, based on the latest available valuation report; and the possible impact on the InvIT’s future growth potential of InvIT due to using debt for MM expenses.

“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 said.

Earlier, Sebi prescribed a standardized framework for the calculation of NDCF for InvITs, which prohibited using borrowed money for distributions to unitholders.

Sebi has sought public comments till June 22 on the proposal.