GFR rules tweaked to allow release of 75% amount stuck in construction arbitration

By: |
November 10, 2021 3:10 AM

On October 7, 2021, NITI Aayog had asked the department of expenditure to incorporate decisions of the Cabinet regarding arbitration awards under GFRs.

real-estate-industryIf otherwise eligible and subject to contractual provisions, retention money and other amounts withheld may also be released against BG.

The Centre has amended the General Financial Rules (GFRs), followed by the government departments and agencies, to give effect to a Cabinet decision permitting these entities to pay 75% of arbitral amount to contractors in the construction sector against bank guarantees in cases where the entities have challenged the arbitration awards. The Cabinet on August 30, 2016, and November 20, 2019, had considered the NITI Aayog proposals and approved measures for improved liquidity in the sector.

On October 7, 2021, NITI Aayog had asked the department of expenditure to incorporate decisions of the Cabinet regarding arbitration awards under GFRs to facilitate release of funds stuck in litigation.

According to the revised GFR rules, “in cases where the ministry/department has challenged an arbitral award and, as a result, the amount of the arbitral award has not been paid, 75% of the arbitral award (which may include interest up to date of the award) shall be paid by the ministry/department to the contractor/concessionaire against a bank guarantee (BG). The BG shall only be for the said 75% of the arbitral award as above and not for the interest which may become payable to the ministry/department should the subsequent court order require refund of the said amount.”

Further, it said the payment may be made into a designated Escrow Account with the stipulation that the proceeds will be used first, for payment of lenders’ dues, second, for completion of the project and then for completion of other projects of the same ministry/department as mutually agreed/ decided.  Any balance remaining in the escrow account subsequent to settlement of lenders’ dues and completion of projects of the ministry/department may be allowed to be used by the contractor/ concessionaire with the prior approval of the lead banker and the ministry/ department.

If otherwise eligible and subject to contractual provisions, retention money and other amounts withheld may also be released against BG.

Challenge of the award, in most cases, defers the payment of the arbitral award pending the decision in challenge/ appeal, which process then takes years to attain finality. This is seen to cause severe liquidity constraints in the construction sector as the large sums of money raised by contractors / concessionaires for execution of projects get blocked — stressing their balance sheets. The foregoing then causes a ripple effect throughout the financial ecosystem — directly impacting the repayment of debt to lenders, leading to increasing non-performing assets.

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