Whalesbook
New Borrowing Rules for InvITs
India's Securities and Exchange Board of India (Sebi) has expanded how Infrastructure Investment Trusts (InvITs) can use borrowed money when their debt exceeds 49% of asset value. This rule change, effective immediately and building on amendments from April 2026, aims to give the sector more financial flexibility. InvITs can now use new loans for capital projects designed to boost asset performance or increase capacity. Funds can also be used for major maintenance work, which is especially important for road projects.
The regulator also clarified rules for refinancing debt. InvITs, their Special Purpose Vehicles (SPVs), and holding companies can now refinance existing loans, as long as the original borrowing followed InvIT rules. Importantly, only the principal amount can be refinanced; interest, fees, or other charges are not eligible.
Managing Higher Debt Levels
While these changes are expected to bring more capital into infrastructure projects, they also make careful debt management even more critical. Previously, InvITs were generally limited to borrowing up to 49% of their asset value. The new rules allow borrowing beyond this limit for specific uses. Some rules already allowed for up to 70% leverage for highly-rated entities with a good track record, showing a more flexible approach under strict conditions. Using borrowed funds for capital spending and maintenance can help growth, but InvITs will need strong financial oversight to manage the increased debt risks. The sector, which managed over ₹5.8 lakh crore in assets by 2025, needs to balance expansion plans with financial safety.
SPV Rules Clarified for Asset Lifecycle
Sebi has also updated rules for Special Purpose Vehicles (SPVs) once their concession agreements end. Before, an SPV could lose its status if it no longer held an eligible infrastructure asset, often forcing it to be sold off early. The new rules let SPVs keep their classification even after a concession finishes, clearing up confusion and helping manage the asset's life cycle. This flexibility includes a one-year period for InvIT investment managers. They must either sell, liquidate, or merge the SPV, or acquire a new infrastructure project within it, by the end of one year after the concession or related obligations conclude. This one-year period does not include time needed for official approvals, offering a realistic allowance. To maintain openness, InvITs must give detailed reports on the SPV's investments, debts, and plans until the transition is finished.
Infrastructure Sector Growth Outlook
These rule changes fit with India's large plans for infrastructure development. The Indian infrastructure market is expected to grow from an estimated USD 205.96 billion in 2026, with a projected 8% annual growth rate until 2031. Government programs like the National Infrastructure Pipeline (NIP) and PM Gati Shakti are directing substantial public funds, with government bodies still making most of the investments. However, the sector faces major funding hurdles, including long project timelines and high capital needs. InvITs are seen as a key way to help overcome these issues, bringing in private money and allowing developers to reduce debt to fund new projects. Lower interest rates in 2026 could also support sector growth by reducing borrowing costs for InvITs.
Investor View: Performance and Risks
InvITs have shown strong returns, beating major indexes like the Nifty50 in 2025 with an equal-weight return of 19.55%. Investors are drawn to them because of reliable income from stable, long-term contracts on infrastructure assets, resulting in less volatile and consistent distributions compared to regular stocks. The sector is expected to grow, with assets under management potentially reaching ₹8 lakh crore in India within the next four to six years. However, investors should be aware of the risks, such as changes in interest rates, potential impacts from regulatory or policy shifts on income, risks from having too many assets in one area, and difficulties refinancing in changing credit markets.
Potential Risks and Bear Case Concerns
Although Sebi's rule updates aim for growth and efficiency, the wider borrowing options bring higher financial risks if not handled very carefully. More capacity for debt, especially above the 49% limit, could lead some InvITs to borrow too much. This might make it hard to pay back loans during economic slowdowns or when interest rates rise. Relying on refinancing debt has risks; difficult credit conditions when loans are due could reduce income available for distribution. Also, the extended time for SPV management after concessions, while offering operational freedom, requires thorough reporting and careful buying or selling of assets within the one-year limit. Not doing so could cause long-term hidden debts or operational issues, and managing frequent disclosures might become a burden. The main worry for a cautious outlook is that more borrowing could hide weak asset performance or expose InvITs to bigger market risks if credit tightens, even with Sebi's new flexibility. For example, IRB InvIT Fund, a road asset developer, has a market cap of ₹4,843 crore and a P/E of 14.2, but shows a low interest coverage ratio and weak sales growth historically. This shows that financial health can differ greatly within the sector. How well these new rules work will depend heavily on InvITs' internal management and their ability to manage finances wisely.