IL&FS crisis: Firms to be compensated for cost hike in raw material

The IL&FS is grappling with arbitration claims worth around Rs 70 bn with the National Highways Authority of India, which are under various stages of resolution

As far as arbitration cases with Infrastructure Leasing and Financial Services (IL&FS) are concerned, any cost escalation on account of raw material because of a change in law will be compensated to the company if it provides a proper invoice, an official said.

The IL&FS is grappling with arbitration claims worth around Rs 70 billion with the National Highways Authority of India, which are under various stages of resolution. The Union government is of the view that if there is any cost escalation in raw material due to a change in law, it will be compensated to the company.

The official said the government would pay and start work on contracts in the arbitration cases, where the claims are as low as Rs 20 million and Rs 30 million from the IL&FS’s side.

For instance, if a company mines a particular quantity of raw material and utilises lesser quantity, it would be compensated for the amount used and not actually mined. Road construction is undertaken by IL&FS mainly through special purpose vehicles floated by its subsidiary IL&FS Transportation Networks.

In its annual report , IL&FS noted that the introduction of the New Land Acquisition Act has prompted many owners, whose lands were acquired under the earlier Act to seek for additional compensation in line with the amended Act, leading to further unanticipated delays for projects.

In order to get private sector investment back into road construction, the Cabinet in August 2016 approved a proposal, under which the government agencies would pay 75% of the amount of the contract to clear the cases stuck due to contractual, land acquisition or other regulatory issues.

The idea behind the move was to enable recovery of loans by banks and allowing construction companies to speed up execution of the ongoing projects.