Niti Aayog prepares cabinet note to ease arbitration norms for infra companies

Niti Ayog's proposal to improve financial health of companies hit by payment delays

Good news for infrastructure companies as the government is working on a proposal to help the sector avoid cost over runs and payment delays. The Niti Aayog has prepared a cabinet note which proposes that in case of a dispute and the order of the arbitration panel going in the company's favour, no appeals should be made against the order and the govt should clear the payment due to the company. The note also suggests that infrastructure related ministries should ease arbitration norms and release stalled payments of infra companies. 

''This will significantly de-bottleneck project development, and will avoid the loss of time, blocking of material & capital, and consequent cost-overrun when executing agencies unreasonably appeal against awards, '' said Kameswara Rao, Partner(Grid), PwC. 

Further, Rao said it is not uncommon for large-scale Infrastructure projects to suffer from local implementation challenges, and executing agencies should be empowered to accept reasonable scope variations, which in some cases may come from an arbitration award. ''The tendency to challenge it merely to exhaust all options, is the problem. It can't be overcome if the executing agencies are not empowered or fear subsequent challenges to their decision,'' he noted.

Public sector bank executives, who desired not to be named, said this would help to improve financial health of companies hit by payment delays. Over some period, these companies should begin to repay interest and principal dues, helping to upgrade their status on books of banks. The positive impact will be felt gradually, according to the banks.

Niti Aayog's proposal comes at a time when about Rs 1.65 lakh crore of banks' Rs 3.65 lakh crore exposure to the construction sector is stressed. Project delays are largely due to reasons like environment clearance and land acquisition.

Deloitte India's senior director Vishwas Udgirkar observed, ''Definitely, this will help settle claims as scarce capital will not be locked and the project will be on track. Having said this the arbitration itself is a long drawn process and the way it is managed and structured, it results in delays. May be 50-70% arbitration award can be given if some one is moving to appeal. With this the private sector will not adopt delay tactics and at the same time government's interest will also be protected."

Rohit Inamdar, Vice President- ICRA said if implemented, this will provide much needed liquidity to several projects where the arbitration awards have already been announced. ''However, the pace of arbitration settlement itself needs to be accelerated so as to ensure quick dispute resolution,'' he opined.