- SEBI proposes rule change for road InvITs to exclude debt-funded maintenance from cash flow calculations
- Current rules reduce payouts during major maintenance funded by debt, causing investor payout volatility
- New proposal aims to smooth investor payouts and lower fluctuations linked to periodic road maintenance
Road-focused Infrastructure Investment Trusts (InvITs) could see higher and more stable investor payouts under a rule change proposed by the Securities and Exchange Board of India (SEBI), as the regulator looks to address an issue that industry participants say has unfairly weighed on distributions.
In a consultation paper released on Monday, SEBI proposed allowing road InvITs to exclude the impact of certain debt-funded major maintenance expenses while calculating net distributable cash flows, the key metric used to determine payouts to unitholders.
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The proposal targets a unique feature of road assets. Highway projects periodically require large-scale resurfacing and maintenance works to comply with concession agreements. These expenses are typically financed through borrowings across the sector.
However, under current regulations, the maintenance spending still reduces distributable cash flows, often leading to a sharp fall in investor payouts during years when major repairs are undertaken.
Industry participants have argued that this creates volatility in distributions despite the maintenance costs being funded through debt rather than current operating cash flows.
SEBI has now proposed permitting road InvITs to add back such debt-funded major maintenance expenses while computing distributable cash flows. The move could help smooth payouts to investors and reduce fluctuations linked to periodic maintenance cycles.
The regulator said the proposal follows representations from the industry and is aimed at facilitating ease of doing business. Market participants have also argued that the current framework raises acquisition costs and may discourage developers from monetising road assets through the InvIT route.
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SEBI has proposed several safeguards, including mandatory approval from unitholders before availing the relaxation, auditor certification of maintenance expenses, and enhanced disclosures on borrowings and their impact on future distributions.
The regulator has sought public comments on the proposal until June 22.
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