Govt frames rules for release of 75 pc of amount stuck in arbitration in construction sector

New Delhi: To address liquidity issues facing the construction sector, the government has framed rules that will allow for the release of 75 percent of the amount to contractors against a bank guarantee in cases where a department has challenged an arbitral award.

The Cabinet Committee on Economic Affairs (CCEA) had in November 2019 permitted government departments to pay contractors 75 percent amount awarded to a contractor by a dispute-settling arbitration panel. This was to be done in cases where the arbitration award has been challenged.

”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 percent 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,” the Department of Expenditure said in an order dated October 29.

A new Rule 227A has been included in the general financial rule (GFR) to give effect to this.

The bank guarantee ”shall only be for the said 75 percent of the arbitral award and not for the interest which may become payable to the ministry/department should the subsequent court order require a refund of the said amount,” the order said.

The payment, it said, shall be made into a designated escrow account with the stipulation that the proceeds will be used first for payment of lenders’ dues. Thereafter, it can be used for the completion of the project and then for the completion of other projects of the same ministry/ department as mutually agreed/ decided.

”Any balance remaining in the escrow account subsequent to the settlement of lenders’ dues and the 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,” it said.

It went on to state that any retention money and other amounts withheld may also be released against a bank guarantee.

The CCEA had decided that government entities will take the decision to initiate proceedings for setting aside of the arbitral award, and any appeal thereto, with the opinion of the Attorney General for India, the Solicitor General for India, or the Additional Solicitor-General for India.

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 the execution of projects to 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 issue, the CCEA had, pursuant to a proposal put forward by the NITI Aayog, approved various short-term and long-term measures including for government entities to pay 75 percent of the award against a bank guarantee.