Construction sector may get ₹50,000 crore liquidity push
- The directive, issued by the finance ministry, will enforce the cabinet decision taken on November 20, 2019 to help the construction sector, which continues to face a liquidity crunch, the officials said requesting anonymity.
In a big boost for construction firms, the finance ministry has directed all central government entities to release 75% of disputed amount—estimated at around ₹50,000 crore across 600 projects under litigation—in cases where arbitrators have decided in favour of contractors, but where the government entities have subsequently moved appellate tribunals, two officials familiar with the matter said.
The directive, issued by the finance ministry, will enforce the cabinet decision taken on November 20, 2019 to help the construction sector, which continues to face a liquidity crunch, the officials said requesting anonymity.
“In fact, it was a long-pending issue. It is one of NITI Aayog’s proposals in 2016 to address problems faced by the construction sector. The Cabinet Committee on Economic Affairs (CCEA) considered this in its meeting on August 31, 2016 and approved it,” one of the officials said.
According to a NITI Aayog statement issued on September 5, 2016, it was decided that in such cases, where central government departments or agencies challenged arbitral awards, 75% of the award money would be paid to the contractor against a bank guarantee without prejudice to the final order of the court.
“The decision was again reiterated by the Cabinet on November 20, 2019, but it could not be implemented in letter and spirit. Hence, the finance ministry on October 29 specified it as part of GFRs (general financial rules) dealing with arbitration awards,” a second official said. GFRs direct the government and its agencies on matters related to the public finance.
According to the amended GFR, the contractor is required to issue a bank guarantee for 75% of the arbitral award and not for the interest amount, this person added.
“However, the contractor is not allowed to appropriate the amount as per his will. The payment will be made into an escrow account. The amount will first be used for payment of lenders’ dues, then for the completion of the project,” he said.
The move is aimed at dissuading government agencies from filing “frivolous appeals” with the purpose to delay payments to the contractor. “It is seen that government agencies eventually lose majority of these cases in courts of law, but not without escalating project cost and creating time overruns,” the first official said.
Shaneen Parikh, partner & head-international arbitration at Cyril Amarchand Mangaldas said the move is in aid of India’s high-priority, but cash-stressed, construction sector. “By mandating the provision of bank guarantees against receipt of 75% of the award amount, the government undertakings are secured in case of a successful outcome. This is particularly welcome given that the government (and its agencies) are the most prolific litigants before Indian courts,” she said, adding that the requirement for immediate payment will curb frivolous challenges and wasteful expenditure.
“Provision regards escrow will help clearing outstandings of the financial institution and for completion of the project,” Raj Panchmatia, partner at Khaitan & Co said.
According to Sumit Gupta, partner at law firm MV Kini, the move will address the liquidity issues in the construction sector. “The move is also beneficial to the public entity, as upon payment the interest liability to the said extent will stop, without adversely affecting the pending challenge to the arbitral award.”