Under the new norms, the government will release 75% of amounts against margin-free guarantee in situations where awards have been given but have been contested by the authorities concerned
The construction industry on Wednesday welcomed the government’s decision to approve the new arbitration guidelines, which will help in quicker resolution of claims pending in arbitration for years. Under the new norms, the government will release 75% of amounts against margin free guarantee in situations where awards have been given but have been contested by the concerned authorities. Also, all the arbitration cases will be resolved within a year.
The total amount under arbitration for the industry currently stands at Rs 1 lakh crore. Nearly Rs 70,000 crore is understood to have been disclosed by 28 public sector units as contingent liabilities in their Annual Reports for 2014-2015.
Of this, National Highways Authority of India (NHAI) is said to have over Rs 22,000 crore, NHPC has over Rs 9,000 crore, while NTPC is understood to have contingent liabilities of over Rs 7,500 crore, among others. According to legal experts, this is in line with the amendments made to the Arbitration and Conciliation Act, 1996 through the Arbitration and Conciliation (Amendment) Bill, 2015, which got notified in January 2016.
Krrishan Singhania, partner, Singhania & Company told FE, “The bank guarantee will remain alive till the disposal of the proceedings or thereafter till the disposal of the case from the court. This is the normal term of a guarantee. Even if the contractor wins the arbitration proceedings, it will not come to an end there. It will only end when one round of arbitration takes place in the High Court. Suppose the government wins it, they will encash it immediately”.
However, the devil is in the details. Senior lawyers said the terms of the guarantee will be subject to a final decision, whether by the arbitrator or by the High Court.
Nonetheless, the unanimous view is that this is a positive move to create liquidity, so that contractors can fulfill their obligations on the projects they are working on.
KK Mohanty, managing director, Gammon Infrastructure Projects said, “It will infuse cash flows into the construction industry and will improve our liquidity position”. Gammon Infrastructure has made demands of Rs 1,000-Rs 1,500 crore in pending dues and claims from government authorities.
Rohan Suryavanshi, head (strategy and planning), Dilip Buildcon also called the move by the government as a “positive step”. “It will help in reducing the financial constraint on the construction companies and will also cut short the uncertainty on the status of the pending claims,” he said.
Suryavanshi said the money stuck in arbitration for Dilip Buildcon is negligible.
Hindustan Construction Company’s chairman and managing director, Ajit Gulabchand said, “today’s cabinet decision that requires government agencies to pay 75% of arbitral awards will result in HCC’s debt being reduced by half.
HCC has arbitration awards for over Rs 3,200 crore and with the today’s decision, the company will get 75% of this amount immediately. Similarly, claims worth around Rs 5,000 crore are in arbitration process. Today’s decision will further help HCC to secure these awards within a duration of 12 months. We are pleased with the cabinet’s decision on payment of arbitration awards to infrastructure companies.”