CCEA approves initiatives to revive the construction sector

Furthering the objective of infusion of liquidity into the construction sector

The Cabinet Committee on Economic Affairs chaired by the Prime Minister, today approved certain measures for the effective implementation of the CCEA's decision of 31 August 2016 on Initiatives to revive the Construction Sector'.

Following proposals put forward by NITI Aayog with respect to the arbitrations by/against Government Entities were approved:

(i) Government Entities will take the decision to initiate proceedings for setting aside of the arbitral award, and any appeal(s) thereto, with the opinion of a Law Officer i.e. Attorney-General for India / the Solicitor-General for India / the Additional Solicitor-General for India, in consultation with Department of Legal Affairs.

(ii) Where a Government Entity has challenged an arbitral award, resultant of which the amount of the arbitral award has not been paid, 75% of such award will be paid by the Government Entity to the contractor / concessionaire against a bank guarantee only for the said 75% and not for its interest component. With respect to the interest payable to the Government. Entity, should the subsequent court order require refund of the said 75%, payment of the same will be as per court order.

The above order is applicable to Government Entities i.e. all Public Sector Undertakings of the Central Government, Autonomous Organisations of the Central Government, Special Purpose Vehicles (SPV) where 50% (fifty per cent) or more of the paid-up share capital is held by the Central Government, and all Central Government Departments.

Major Impact

These approved measures would help in ensuring that the remedies of challenge/appeal are resorted to in a prudent and judicious manner, and in furthering the objective of infusion of liquidity into the construction sector. Given the significant multiplier effect the construction sector has on the economy, these are expected to give a major boost to economic growth. And as the sector that provides one of the largest segments of direct and indirect employment, its revival would also help in significant employment generation.

Over the last few years, an increasing number of infrastructure projects in the construction sector have been / are subject of prolonged legal proceedings. In a substantial number of these projects which go into arbitration, payment of award is not released to the contractor / concessionaire for the award is challenged in court.

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 (NPAs) in their balance sheets.

To address the above, the CCEA had, pursuant to a proposal put forward by NITI Aayog, in 2016, approved various short-term and long-term measures including for Government Entities to pay 75% of the award to the contractor / concessionaire against a Bank Guarantee. However, this policy decision of interim payment of 75% has been falling short of- its intended objective of infusion of liquidity into the construction sector on account of insistence on bank guarantee for the interest component, should the subsequent court order require refund of the amount paid by the Government Entity. As a result of which, contractors/concessionaires continue to be marred by financial stress, ultimately affecting the entire commercial ecosystem and the broader economy.

Powered by Capital Market - Live News