SEBI has allowed InvITs to add back payments made towards major maintenance expenses for road projects, to the extent that these expenses are funded through external debt, while calculating NDCF. The revised framework is intended to give road InvITs more flexibility in meeting large maintenance requirements without reducing the cash available for distribution to unitholders. 
The change has been introduced through SEBI's revised framework for NDCF and came into effect immediately. It follows a consultation process that began after the Bharat InvITs Association sought a review of how debt raised for major maintenance of road projects was treated in NDCF calculations. SEBI had proposed the change in its consultation paper earlier this year, noting that major maintenance expenses can be substantial over the life of a road project and are generally required under concession agreements. 
Under the revised rules, payments towards eligible major maintenance expenses can be added back at both the SPV or holding company level and the InvIT trust level. The provision is limited to road projects falling under the roads and bridges infrastructure sub-sector. Major maintenance refers to expenditure that is not part of routine maintenance and is undertaken in accordance with the obligations and requirements specified in the relevant concession agreement. 
InvITs will have to obtain approval from their unitholders before raising debt for major maintenance expenses. The approval will be required separately for each project for which the investment manager proposes to raise such borrowing, whether the project is held directly at the InvIT level or through an SPV or holding company. 
SEBI has allowed the approval to be obtained on a one-time basis for debt that is already available or proposed to be raised over the entire life cycle of a project. Alternatively, approval can be obtained for a specific major maintenance expense. 
If an InvIT later needs to raise additional debt beyond the borrowing proposal approved by unitholders, fresh approval will be required before the additional borrowing is undertaken. Under the InvIT regulations, the relevant resolution requires at least 60 per cent of the votes cast to be in favour. 
The revised framework also places disclosure requirements on InvITs using external debt for major maintenance. They will have to disclose the projects for which such borrowing is proposed, the category of major maintenance expenses involved and the estimated cost. 
InvITs will also have to explain the possible impact of the borrowing on future growth and distributions. Where relevant, disclosures will need to indicate how future distributions could be affected if debt is unavailable for meeting major maintenance expenses and operating cash flows have to be used instead. 
A statutory auditor will have to certify that the maintenance expenditure is in line with the obligations under the concession agreement and that the actual payment has been funded through external borrowing. Only the portion of the maintenance expense that meets these requirements can be added back while calculating NDCF. 
InvITs will further have to separately report the amount of borrowing raised for major maintenance and the outstanding maintenance-related debt in their financial results and periodic reports. Their debt maturity profiles will also have to specifically identify borrowings taken for such expenses. The net borrowing ratio will similarly have to show the amount and percentage of debt raised for major maintenance. 
SEBI has also retained the broader restriction that InvITs and their SPVs cannot distribute cash flows by raising external debt, except in the specific cases permitted under the framework. 
Working capital or overdraft facilities used for treasury management or working capital purposes will not be covered by this restriction if they are squared off within the same quarter. The new provision therefore does not allow InvITs to use general borrowings to support distributions. It specifically addresses eligible major maintenance expenses for road projects that have been funded through external borrowing. 
The change also follows SEBI's broader easing of borrowing rules for InvITs. In May, the regulator permitted certain fresh borrowings even where net borrowings exceed 49 per cent of the value of InvIT assets, including borrowing for major maintenance expenses of road projects, subject to specified conditions. That framework also permits certain capital expenditure for enhancing asset performance or capacity and refinancing of eligible debt. 
The revised NDCF framework addresses a specific issue faced by road InvITs, where major maintenance can require substantial funding but the expense could reduce the cash flow available for distribution when funded from operating cash. By allowing eligible debt-funded maintenance payments to be added back, SEBI has created a separate treatment for this cost while retaining approval, certification and disclosure requirements. 
Source PTI