In a move that will help India’s ailing construction sector see a fresh fund infusion and ease the pressure on banks on linked NPAs, the Union Cabinet on Wednesday cleared a clutch of reforms including speedier resolution of disputes and the release of 75% of amounts that are stuck in arbitration.
The reforms would have a direct impact on real estate, roads and highways and other infrastructure sectors, bringing down the number of stalled projects in the sector, it is expected.
Prime Minister Narendra Modi’s Cabinet has now allowed contractors to move to the new speedier arbitration process, approved release of 75% of the amount in dispute against bank guarantee and provided for a conciliation board that will comprise of independent domain experts in new contracts.
Finance Minister Arun Jaitley, talking to media after the Cabinet meeting, said the construction sector will get a boost from the reforms as it contributes 8% of the GDP and provides employment to some 40 million people in the country.
“There are various challenges before the construction sector and the government has been trying to improve upon the functioning of the construction sector… These measures will pump in liquidity as well as activate the stranded projects,” he said.
“We have simplified arbitration law so that the process of dispute redressal could be made easier. We have also allowed establishment of commercial court,” Jaitley said.
The proposal spearheaded by government think tank Niti Aayog had moved the proposal seeking to give option for shifting of disputes between public bodies and contractors to new arbitration act from old arbitration act.
“A series of reforms have been cleared for the infrastructure sector. The government has done its bit and the onus is now on the private sector to deliver. The sector is crucial for economic activity in the country as it is the second highest sector receiving FDI, creates million sof jobs and has a huge multiplier effect on the revival of the economy. The sector had been making presentations for long to the government and now they have no reason to cry,” NITI Aayog CEO Amitabh Kant told HT.
Explaining the reforms, Jaitley said that during the pendency of an arbitral award being challenged by the public body, 75% of the amount would be released to contractor against a bank guarantee.
The amount so released will have to be spent on discharging liabilities towards bank and financial institutions. Any money left shall be used in the projects, it has been stipulated.
This move will infuse much-needed liquidity in the sector, Jaitley said, adding that department of financial services and the Reserve Bank of India will now prepare a policy to “deal with those companies that have lot of stressed assets in the construction sector.”
For new contracts, Jaitley said, there will be a provision for a conciliation board consisting of independent domain expert who will enter into contractual negotiations if there are changes in commercial circumstances around the project.
Besides, item rate contract would be replaced by turnkey contract and a model draft turnkey contract will be circulated.