To promote the ease of doing business, the Securities and Exchanges Board of India (Sebi) on December 6, 2023 laid down the framework for calculating the available net distributable cash flows (NDCF) by real estate investment trusts (Reits) and infrastructure investment trusts (InVITs). The circular also mentioned how respective holding companies of these trusts should calculate their NDCF.
Previously, the investment manager of these trusts would decide on how NDCFs would be calculated, after disclosing the definition in the offer document. Now, Sebi has extended its regulation for these investment trusts. Accordingly, Reits and InvITs should now distribute a minimum of 90 per cent of the NDCFs at both the trust and the special purpose vehicle (SPV) levels, according to two separate circulars from Sebi.
The new framework will be applicable from April 1, 2024.
NDCF Rule Explained
Under the rules, NDCF should be computed at the level of the respective Reit and InVIT and their holding companies (HoldCo) or SPVs. For the unversed, Reits and InVITs are structured as trusts over a holding company, which sits over many SPVs.
Reits and InVITs collect money from investors and buy equity and debt of SPVs that invest in real estate or infrastructure projects. The SPVs then collect money from these assets, for instance if it is a bridge, SPVs will collect toll, which is their revenue and distribute it to investors in these trusts. But the entire money will not be distributed, rather only a part of it after deducting expenses and maintenance cost. The technical term for this distributable revenue is NDCF.
Under the new rules, trusts are required to distribute a minimum of 90 per cent of the NDCFs at the level of the trusts and at the level of the HoldCo/SPVs.
“Further, Trust along with its SPVs needs to ensure that minimum 90 per cent distribution of NDCF be met for a given financial year on a cumulative periodic basis,” Sebi said in its circular.
Sebi also laid down an illustration of NDCF calculation that shows how NDCF should be calculated at the trust and the SPV level, listing cash flows from operating activities, proceeds from asset sales, debt repayments, and creation of necessary reserves.
The option to retain 10 per cent NDCF needs to be computed by taking together the retention done at SPV level and Trust level, Sebi said in its circular. Similarly, any restricted cash (disclosed as such) should not be considered for NDCF computation by the SPV or Reit.
