Introduction.
The Master Circular for Infrastructure Investment Trusts (InvITs) issued by Securities and Exchange Board of India (SEBI) prescribes the format for calculating the Net Distributable Cash Flows (NDCF) by InvITs as well as by its Special Purpose Vehicle (SPVs). Under the existing calculation method, major maintenance expenses for road projects funded through external borrowings are treated as operating expenses under accounting principles hence such expenses reduce the NDCF.
SEBI has come up with a consultation paper which proposes a solution to this practical challenge. In this newsletter, we shall understand the proposal discussed in this consultation paper dated 1st June 2026[1] and impact of the proposal if made effective.
Proposed change in NDCF Calculation.
As per present formula, the calculation of NDCF begins from net operating cash flow and thereafter line items are added and deducted from such cash flow to arrive at NDCF amount. Since major maintenance expense funded through borrowing is treated as operating expense, it is already reduced while arriving at cash flow from operating activity.
Now it is proposed that, InvITs and their SPVs/HoldCos shall be allowed to add back to cash flow from operating activity, payments made towards major maintenance expenses for road projects to the extent such expenses are funded through external borrowings while calculating NDCF.
Point to be noted is that, this new calculation method will be relevant only to InvITs involved in road projects.
Safeguard mechanism
Considering the direct and complicated impact of this treatment on distributions made to investors (unit holders), this proposed calculation method is subject to certain conditions.
- Unit holder approval: This expense shall be added back to cash flow only after obtaining approval from unit holders with a majority of more then 60% votes. The consultation paper also provides the list of items which should be included in the explanatory statement to be sent to unitholders along with notice of meeting approving this proposal.
- Certificate from statutory auditor: A certificate from the statutory auditor confirming that the expenditure qualifies as major maintenance expenditure and has been funded through external borrowing would be mandatory.
- Disclosure requirements: the InvITs/SPVs/Holdcos will have to show the borrowing raised and outstanding as on date for MM expense separately in notes to NDCF and while calculating net borrowing ratio. Also disclosures are to be made in the Annual, Half yearly, Quarterly Report of the InvIT.
Impact of proposed norms. [JB1]
From an investor’s perspective, this proposal is a double-edged sword that demands careful scrutiny beyond the headline distribution number. While the proposal is expected to provide greater stability in distributions by allowing debt-funded major maintenance expenses to be added back while computing NDCF, investors should carefully assess the quality and sustainability of such distributions. A higher NDCF may not necessarily indicate improved operating performance of the underlying road assets; rather, it could reflect the benefit of additional borrowing undertaken for major maintenance obligations. Investors should therefore look past the reported NDCF yield and focus on three things:
- first, the quantum and repayment schedule of MM debt already availed or proposed, since this directly maps to how long and by how much future distributions will be subdued;
- second, the adequacy of the explanatory statement placed before unitholders for approval, particularly the year-wise and project-wise MM expense estimates verified against the latest valuation report; and
- third, the Net Borrowing Ratio post-MM debt, as this debt consumes leverage headroom that would otherwise fund portfolio acquisitions and growth, potentially impacting the long-term NAV of the InvIT.
For road InvITs and their investment managers, the proposal resolves a long-standing structural mismatch between accounting treatment and economic reality. Since major maintenance obligations are inherent to toll road concessions and often involve substantial expenditure at periodic intervals, the current framework can depress projected cash distributions during maintenance years, thereby affecting asset valuations and bid economics. By permitting debt-funded major maintenance expenditure to be added back while computing NDCF, the proposal could enhance the attractiveness of road assets for InvIT structures and facilitate monetisation by sponsors. However, InvITs would need to carefully balance the benefit of higher distributable cash flows against the increased leverage arising from such borrowings, as debt raised for major maintenance would consume part of the borrowing capacity that may otherwise be available for future acquisitions, expansions, or strategic growth initiatives. Further, InvITs must recognise that this flexibility comes with heightened governance obligations: the 60% unitholder approval threshold, statutory auditor certification for each MM event, and granular disclosures in quarterly, half yearly and annual reports will raise the bar for transparency.
Conclusion.
The proposal provides relief to road sector InvITs by recognising the unique nature of major maintenance expenditure and its financing requirements. While it may improve distributable cash flows, SEBI has balanced the relaxation with unitholder approval, auditor certification and enhanced disclosure requirements to safeguard investor interests. The last date for giving comments to SEBI on the consultation paper issued in this regard is 22nd June 2026
[1] https://www.sebi.gov.in/reports-and-statistics/reports/jun-2026/consultation-paper-on-review-of-framework-for-calculation-of-net-distributable-cash-flows-for-invits_101725.html
[JB1]Subject to comments of Sir & aashima