The pace of release of arbitration claims for infrastructure developers has gained limited traction, due to the inability of road developers/project companies to provide bank guarantees, says India Ratings and Research (Ind-Ra). Ind-Ra notes that in the last six months since introduction of the arbitration scheme INR9.8 billion funds have been released compared to INR26.3 billion claims made to National Highways Authority of India (NHAI; 'IND AAA'/Stable).
Due to the financial difficulties faced by many developers in the sector, Ind-Ra believes that banks are wary of taking exposure in the form of bank guarantees, without adequate margins/collateral. The government's initiative to release 75% of locked amount in arbitration awards has thus had a limited impact on the liquidity of developers except a few road developers.
As per NHAI data, HCC has been the biggest beneficiary receiving INR3.80 billion (out of total claims of INR10.8 billion) while the balance claims are pending due to absence of BGs or opening of Escrow Accounts. Other notable beneficiaries who received full claims are namely, IRB Infrastructure Developers Ltd ('IND A-'/Rating Watch Positive) - INR2.70 billion, Shapoorji Palonji -INR1.41 billion, Atlanta Infra Assets Ltd INR1.18 billion. Companies which submitted claims (in the absence of BGs) but have not received any funds are Oriental Structure Engineers Pvt Ltd and its group companies (claimed INR2.83 billion), IL&FS Engineering and construction company ltd (claimed INR1.54 billion) and Reliance Infrastructure Group (claimed INR1.33 billion).
Ind-Ra notes that non-submission of bank guarantees (BGs) despite reminders from NHAI and non-opening of Arbitral Award Escrow Account (escrow account) are the key deterrent to the success of the scheme initiated by the Cabinet Committee on Economic Affairs. The scheme was approved on 31 August 2016, and the NHAI started accepting claims under the scheme on 7 December 2016.
In its effort to revive the ailing construction sector, the arbitral scheme had been approved and put forward by NITI Aayog and the NHAI started accepting claims. As per the scheme, NHAI would release 75% of the arbitration award amount to an escrow account against margin free BGs, in those cases where the award is further challenged by NHAI. To ensure receipt of funds (from NHAI) under this scheme, concessionaire/contractor needs to furnish BG equivalent to 75% of arbitration award along with interest amount for one year. Ind-Ra believes that speedy settlement of arbitration claims would have provided much needed relief to the infrastructure developers in dire need of funds, deservingly in this case.
NHAI has pending arbitration awards amounting to INR220 billion as on 31st March 2015. As per NHAI, 65 claims amounting to INR26.3 billion have been submitted by road developers and funds for 19 cases amounting to INR9.8 billion have been released/settled against margin free BGs as of 26 May 2017. Data from NHAI website suggests that out of 47 claims yet to be settled, 45 claims are pending on account of non-receipt of BGs and non-opening of Escrow Account and two claims have been submitted with improper BGs.
As per the scheme, on opening the designated escrow account and receipt of bank guarantee from the concessionaire, NHAI shall deposit 75% of the arbitration amount. The claims so received shall be appropriated in the following order: a) debt service payments; b) all payments relating to construction/completion of the said project; c) all payments relating to construction of other projects of NHAI under execution by the developer; and d) balance, if any, in accordance with the instructions of the developer after receiving the prior written approval of the lenders' representative and NHAI.
The Confederation of Indian Industry has highlighted that arbitration claims are the key reasons behind burgeoning debt of construction companies, accounting for around 150% of the debt and average time taken for resolution of such claims is seven years. Ind-Ra believes that NHAI's latest proposal to set up a conciliation committee of independent experts is a positive development for the sector against the back drop of increase in stressed assets and poor response to the arbitration scheme by the highway developers.
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