Introduction: The Securities and Exchange Board of India (SEBI) has issued a crucial circular (SEBI/HO/DDHS/DDHS-PoD/P/CIR/2023/185) on December 06, 2023, introducing a revised framework for the computation of Net Distributable Cash Flow (NDCF) by Real Estate Investment Trusts (REITs). This article provides an in-depth analysis of the circular, outlining the changes, applicability, and key considerations.
Detailed Analysis:
- Regulation 18(16) Overview: Regulation 18(16) of SEBI (Real Estate Investment Trust) Regulations, 2014 sets the foundation for NDCF computation at the REIT and HoldCo/SPV levels, with a minimum distribution requirement of 90%.
- Standardization for Ease of Doing Business: SEBI’s decision to standardize the NDCF framework aims to promote Ease of Doing Business within the real estate sector. The revised framework, outlined in Annexure A, provides a comprehensive structure for calculating NDCF at the HoldCo/SPV and REIT levels.
- Applicability and Supersession: The revised NDCF framework becomes effective from April 1, 2024, superseding the previous framework outlined in the Master Circular for Real Estate Investment Trusts dated July 06, 2023.
- Authority and Accessibility: The circular is issued under the authority of Section 11(1) of the Securities and Exchange Board of India Act, 1992, and Regulation 33 of the REIT Regulations. It is readily available on SEBI’s official website under the “Legal” category and the “Circulars” dropdown.
- Annexure A – Computation Details: The circular includes detailed computations for NDCF at both the HoldCo/SPV and Trust levels. It covers various aspects, including cash flows, proceeds from real estate investments, finance costs, debt repayment, and the creation of reserves.
- Illustration and Retention Calculation: The article provides an illustration demonstrating the computation of maximum retention under Regulation 18(16), emphasizing the combined retention at SPV and Trust levels.
- Distribution Requirements and Surplus Cash: The circular emphasizes the minimum 90% distribution requirement on a cumulative periodic basis. It also addresses surplus cash considerations, outlining scenarios where surplus cash can be distributed.
- Cash Flow Restrictions and Clarity on Proceeds: Noteworthy restrictions include the prohibition on distributing cash flows obtained through external debt, except under specific circumstances. Clarity is provided on the treatment of proceeds from the sale of real estate investments and assets.
- Capital Expenditure and Temporarily Parked Funds: The circular clarifies the inclusion of capital expenditure in NDCF computation and provides guidance on temporarily parked funds, ensuring compliance with Regulation 18(16)(d).
Conclusion: SEBI’s circular (CIR/2023/185) marks a significant milestone in streamlining NDCF computation for REITs. The revised framework, effective from April 1, 2024, introduces standardization to enhance the Ease of Doing Business. Real estate investors and stakeholders must familiarize themselves with the updated guidelines to ensure compliance and make informed financial decisions. For a more detailed understanding, refer to Annexure A and the complete circular available on SEBI’s official website.
Securities and Exchange Board of India
Circular No. SEBI/HO/DDHS/DDHS-PoD/P/CIR/2023/185 Dated: December 06, 2023
To,
All Real Estate Investment Trusts (REITs)
All Parties to REITs
Madam/Sir,
Sub: Revised framework for computation of Net Distributable Cash Flow (NDCF) by Real Estate Investment Trusts (REITs)
1. Regulation 18(16) of SEBI (Real Estate Investment Trust) Regulations, 2014 (“REIT Regulations”), provides that the Net Distributable Cash Flow (NDCF) shall be computed at the level of REIT and HoldCo/SPV. Further, the minimum distribution shall be 90% of the NDFC at the Trust level as well as the HoldCo/SPV level, subject to applicable provisions in the Companies Act, 2013 or the Limited Liability Partnership Act, 2008. Paragraph F of Chapter 3 of the Master Circular for Real Estate Investment Trusts provides an indicative framework for calculating NDCF at SPV level and at the REIT level.
2. In order to promote Ease of Doing Business, it has been decided to standardize the framework for calculation of available Net Distributable Cash Flows. Accordingly, the revised framework for computation of NDCF by REITs and its Holdcos/SPVs shall be as per Annexure A.
Applicability of revised NDCF Framework:
3. The revised framework shall be applicable with effect from April 1, 2024 and supersedes the Framework for calculation of Net Distributable Cash Flows provided in Paragraph F of Chapter 3 of the Master Circular for Real Estate Investment Trusts (REITs) dated July 06, 2023.
4. This circular is being issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 and Regulation 33 of the REIT Regulations. This circular is issued with the approval of the competent authority.
5. This Circular is available on the website of the Securities and Exchange Board of India at sebi.gov.inunder the category “Legal” and under the drop down “Circulars”.
Yours faithfully
Ritesh Nandwani
Deputy General Manager
Department of Debt and Hybrid Securities
Tel No.022-26449696
Email id – [email protected]
Annexure- A
A. Computation of Net Distributable Cash Flow at HoldCo/ SPV level: –
| Particulars |
| Cash flow from operating activities as per Cash Flow Statement of HoldCo/ SPV |
| (+) Cash Flows received from SPV’s which represent distributions of NDCF computed as per relevant framework (refer note 1 and 9 below) (relevant in case of HoldCos) |
| (+) Treasury income / income from investing activities (interest income received from FD, tax refund, any other income in the nature of interest, profit on sale of Mutual funds, investments, assets etc., dividend income etc., excluding any Ind AS adjustments. Further clarified that these amounts will be considered on a cash receipt basis) |
(+) Proceeds from sale of real estate investments, real estate assets or shares of SPVs or Investment Entity adjusted for the following
|
| (+) Proceeds from sale of real estate investments, real estate assets or sale of shares of SPVs or Investment Entity not distributed pursuant to an earlier plan to re-invest as per Regulation 18(16)(d) of REIT Regulations or any other relevant provisions of the REIT Regulations, if such proceeds are not intended to be invested subsequently |
| (-) Finance cost on Borrowings, excluding amortisation of any transaction costs as per Profit and Loss Account and any shareholder debt / loan from Trust |
| (-) Debt repayment (to include principal repayments as per scheduled EMI’s except if refinanced through new debt including overdraft facilities and to exclude any debt repayments / debt refinanced through new debt, in any form or equity raise as well as repayment of any shareholder debt / loan from Trust ) |
| (-) any reserve required to be created under the terms of, or pursuant to the obligations arising in accordance with, any: (i). loan agreement entered with banks / financial institution from whom the Trust or any of its SPVs/ HoldCos have availed debt, or (ii). terms and conditions, covenants or any other stipulations applicable to debt securities issued by the Trust or any of its SPVs/ HoldCos, or (iii). terms and conditions, covenants or any other stipulations applicable to external commercial borrowings availed by the Trust or any of its SPVs/ HoldCos, or (iv). agreement pursuant to which the SPV/ HoldCo operates or owns the real estate asset, or generates revenue or cashflows from such asset (such as, concession agreement, transmission services agreement, power purchase agreement, lease agreement, and any other agreement of a like nature, by whatever name called); or (v). statutory, judicial, regulatory, or governmental stipulations; or – (refer note 2) |
| (-) any capital expenditure on existing assets owned / leased by the SPV or Holdco, to the extent not funded by debt / equity or from reserves created in the earlier years (refer note 10) |
| NDCF for HoldCo/SPV’s |
B. Computation of Net Distributable Cash Flow at Trust level: –
| Particulars |
| Cashflows from operating activities of the Trust |
| (+) Cash flows received from SPV’s / Investment entities which represent distributions of NDCF computed as per relevant framework (refer note 1 and 9 below) |
| (+) Treasury income / income from investing activities of the Trust (interest income received from FD, any investment entities as defined in Regulation 18(5), tax refund, any other income in the nature of interest, profit on sale of Mutual funds, investments, assets etc., dividend income etc., excluding any Ind AS adjustments. Further clarified that these amounts will be considered on a cash receipt basis) |
(+) Proceeds from sale of real estate investments, real estate assets or shares of SPVs/Holdcos or Investment Entity adjusted for the following
|
| (+) Proceeds from sale of real estate investments, real estate assets or sale of shares of SPVs/ Hold cos or Investment Entity not distributed pursuant to an earlier plan to re-invest as per Regulation 18(16)(d) of REIT Regulations or any other relevant provisions of the REIT Regulations, if such proceeds are not intended to be invested subsequently |
| (-) Finance cost on Borrowings, excluding amortisation of any transaction costs as per Profit and Loss account of the Trust |
| (-) Debt repayment at Trust level (to include principal repayments as per scheduled EMI’s except if refinanced through new debt including overdraft facilities and to exclude any debt repayments / debt refinanced through new debt in any form or funds raised through issuance of units) |
| (-) any reserve required to be created under the terms of, or pursuant to the obligations arising in accordance with, any: (i). loan agreement entered with financial institution, or (ii). terms and conditions, covenants or any other stipulations applicable to debt securities issued by the Trust or any of its SPVs/ HoldCos, or (iii). terms and conditions, covenants or any other stipulations applicable to external commercial borrowings availed by the Trust or any of its SPVs/ HoldCos, (iv). agreement pursuant to which the Trust operates or owns the real estate asset, or generates revenue or cashflows from such asset (such as, concession agreement, transmission services agreement, power purchase agreement, lease agreement, and any other agreement of a like nature, by whatever name called); or (v). statutory, judicial, regulatory, or governmental stipulations; or – (refer note 2) |
| (-) any capital expenditure on existing assets owned / leased by the REIT, to the extent not funded by debt / equity or from contractual reserves created in the earlier years (refer note 10) |
| NDCF at Trust Level |
Notes/ Other Rules:
1. NDCF computed at SPV level for a particular period to be added under this line item, even if the actual cashflows from SPV to REIT has taken place post that particular period, but before finalization and adoption of accounts of the REIT.
2. The specified agreements could be for either PPP or non-PPP projects. The Trust retains the option to distribute any surplus amounts, unless such surplus is required to create reserves for any subsequent period.
3. The option to retain 10% distribution under Regulation 18(16) needs to be computed by taking together the retention done at SPV level and Trust level. Refer Illustration below:
Illustration:
| Particulars | SPV A | SPV B | Total at SPV level |
| NDCF as computed | 100 | 150 | 250 |
| Amount retained by SPV | 5 | 10 | 15 |
| Net amount distributed to Trust | 95 | 140 | 235 |
–
| REIT | Scenario 1 | Scenario 2 |
| Received from SPV | 235 | 235 |
| Add:- other items at Trust level for computation of NDCF | 65 | (35) |
| Total NDCF | 300 | 200 |
| Combined NDCF for computing Max retention | ||
| NDCF of Trust (A) | 300 | 200 |
| NDCF of SPV’s (B) | 250 | 250 |
| Less: – Amount distributed by SPV’s (C ) | (235) | (235) |
| D = A + B -C | 315 | 215 |
| Max retention amount – 10% of D | 31.5 | 21.5 |
| Amount already retained by SPV | 15 | 15 |
| Max amount that can be retained by Trust | 16.5 | 6.5 |
4. Further, Trust along with its SPVs needs to ensure that minimum 90% distribution of NDCF be met for a given financial year on a cumulative periodic basis as specified for mandatory distributions in the REIT regulations (subject to provisions of Note 1 above).
5. Surplus cash available in SPVs due to:
(i) 10% of NDCF withheld in line with the Regulations in any earlier year or half year or
(ii) Such surplus being available in a new SPV on acquisition of such SPV by REIT
(iii) Any other reason, excluding if such surplus cash is available due to any debt raise could be considered for distribution by the SPV to the REIT, or by the Trust to its Unitholders in part or in full, but needs to be disclosed separately in the NDCF computation and Distribution.
6. Similarly, any restricted cash (disclosed as such) should not be considered for NDCF computation by the SPV or REIT (e.g. unspent CSR balance for any year deposited in a separate account as per Companies Act which will be utilized in subsequent years, DSRA reserve, major maintenance reserve etc)
7. Further, it is expressly provided that no Trust or SPVs can distribute any cashflows by obtaining external debt, except to the extent clarified in note 2 above (this will exclude any working capital / OD facilities obtained by Trust/ SPVs as part of Treasury management / working capital purposes as long as they are squared off within the quarter).
8. Further, it is also clarified that Proceeds from sale of real estate investments, real estate assets or shares of SPVs or Investment Entity adjusted for transaction costs or repayment of debt taken for such assets or other items as mentioned above which is intended to be reinvested or planned to be reinvested as per Regulation 18(16)(d) of REIT Regulations, could be temporarily parked in Overdraft accounts or used to repay any additional/ unrelated debt. Further if such proceeds are not intended to be reinvested as per the timeline provided in the Regulations and such net proceeds are to be distributed back to Unitholders, then redrawing such temporarily parked funds to distribute such net proceeds will not be considered as a contravention of note 7 above.
9. Cash flows received from SPV’s / Investment entities which represent distributions of NDCF computed as per relevant framework at the Trust level for further distribution to Unitholders shall exclude any such cash flows used by the Trust for onward lending to any other SPVs / Investment entities to meet operational / interest expenses or debt servicing of such other SPVs / Investment entities.
10. Capital expenditure include amounts incurred and paid towards asset enhancement and are capitalized to asset value in the financial statements including lease payments. It is further clarified that Existing Assets as referred to in this line item includes any new structure / building / other infrastructure constructed on an existing real estate asset which is already a part of the REIT.
