New Delhi, June 2 -- The Securities and Exchange Board of India (SEBI) has proposed a measure that could ease cash-flow management for infrastructure investment trusts (InvITs), potentially enabling unitholders to have a steadier income flow and helping InvITs bid more competitively for road and bridge projects.
In a consultation paper issued on June 1, the capital markets regulator proposed allowing major maintenance (MM) expenses, which are met through external debt, to be added back while calculating net distributable cash flow (NDCF), subject to certain conditions.
InvITs are not allowed to raise debt to distribute cash flow. However, they routinely raise debt to meet major maintenance expenses, which can be quite high, and this has a huge impact on cash flows. Since these expenses can't be capitalized and are treated as operating costs, they reduce NDCF.
Under SEBI's latest proposal, which came at the request of the industry group Bharat InvITs Association, such MM expenses can be added back to calculate the NDCF. This means there would be more cash to distribute to unitholders in the initial years until loan repayments begin.
According to industry participants, the change could enable strong financials with improved profitability for InvITs, enhancing their competitiveness when bidding for future projects.
Conditions apply
SEBI also outlined several conditions for the relaxation. Firstly, it would be limited to only road and bridge infrastructure assets.
Secondly, the MM expenses won't include routine maintenance and will be limited to the requirements specified in the concession agreement.
Thirdly, it would need the go-ahead from at least 60% of the votes cast on the resolution.
InvITs would also need to provide additional disclosures on the projects, SPVs or holding companies for which the debt has been raised, year-wise and project-wise estimates of MM expenses for which the debt is raised, and the possible impact of such debt on future growth, among other things.
Disclaimers would also need to be added on how the MM debt would increase total borrowings and reduce the leverage headroom for future fund growth, and on how without the MM reserve build-up, unitholders may get higher distributions in the initial years but will need to take lesser cash flows once loan repayments start.
Published by HT Digital Content Services with permission from VC Circle.