7 September 2016
CHANGE IN ARBITRATION NORMS FOR CONSTRUCTION COMPANIES
The Union Cabinet has recently changed the arbitration norms for construction companies. Under the new norms, the government will release 75 percent of the amount against margin free guarantee in cases where arbitral awards have been given, but have been contested. Companies can use the 75 percent amount to pay existing debts. The norms also dictate that 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. Further, item rate contracts may be substituted by EPC (Engineering Procurement Construction) contracts. Department of Financial Services, along with the Reserve Bank of India may develop a suitable one-time scheme to relieve the debts of construction companies.
Capital Markets & Investment Services view
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 one further step to help the overall economic health of our country. Another positive move by the Cabinet Committee is setting up of Conciliation Committees which will help resolve pending cases and a speedy disposal.
The change in arbitration norms will improve the cash flow position of those developers who have a significant exposure in infrastructure or government contracts, like HCC, Jaypee Group and NCC. The direct impact of the change in arbitration norms on real estate seems to be minimal; however, it is a good step that should speed up the completion of infrastructure projects, thus leading to a better economic environment. This initiative is in sync with several other initiatives by the government such as ease of doing business in India, Smart Cities, Housing for All, Real Estate Regulation & Development 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.