Change in arbitration norms a welcome change in an industry struggling with liquidity issues: Colliers India Research

India Infoline News Service | Mumbai | September 22, 2016, 11:21 IST

A lot of pending claims with the government bodies are one of the key factors behind the growing debt of construction companies. An estimated amount of more than Rs. 70,000 crore is tied up in arbitration and over 85% claims raised are still pending. The average settlement time for these claims is 7 years.

The Cabinet Committee on Economic Affairs approved a series of initiatives on arbitration norms to revive the construction sector, which will help resolve the arbitration cases sooner and will get the stalled construction projects moving. Some of the key norms that were approved are as follows:
  • The government will release 75% of the amount against margin free guarantee for companies where PSU’s (public sector undertakings) or government departments have challenged the arbitral award
  • Pending arbitration cases can be transferred from the pre-amendment arbitration act to the amended arbitration act and conciliation committees or councils can be set up to ensure speedy disposal of pending cases
  • Item rate contracts may be substituted by EPC (Engineering Procurement Construction) contracts; currently a lot of claim issues are related to the item rate contracts
  • Department of Financial Services, along with the Reserve Bank of India may develop a suitable one time scheme to relieve debts of construction companies
 
A lot of pending claims with the government bodies are one of the key factors behind the growing debt of construction companies. An estimated amount of more than Rs. 70,000 crore is tied up in arbitration and over 85% claims raised are still pending. The average settlement time for these claims is ~ 7 years. This move will give an impetus to the construction companies, who will now be able to pay off their debts, apart from infusing cash into the construction industry. For example: giant construction companies such as Hindustan Construction Company (HCC) have over INR 3,200 crore of arbitration awards and will now receive the 75% of the amount.
 
“The recent initiatives by the Cabinet committee on arbitration norms are a welcome change to an industry struggling with liquidity issues. Release of 75% of pending amounts will help contractors clear their outstanding debt and will also help improve the financial health of the banks. Though this will mainly impact the infrastructure sector and developers, working on Government contracts, it is certainly yet another step to help the overall economic health of our country. Another positive move by the Cabinet committee is the setting up of Conciliation Committees which will help resolve pending cases and a speedy disposal.” says, Suresh Castellino, National Director, Capital Markets & Investment Services at Colliers International India.
 
This recent initiative is in line with the several other initiatives by the government, such as Smart Cities, Housing for All, Real Estate Regulation Act, and relaxation of FDI norms in real estate and construction sector. Together, these initiatives will give a boost to India’s infrastructure development pace and have a multiplier effect on the economic growth of the country.
 

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