New Arbitration Guidelines Can Help Infrastructure Companies Reduce Debt
The guidelines will help in speedy resolution of claims pending in arbitration for years
The government’s approval of new arbitration guidelines will help in speedy resolution of claims pending in arbitration for years and provide much-needed liquidity for the infrastructure sector, companies say.
Under the new norms, the government will release 75 percent of the arbitration award against margin free bank guarantee in situations where the award has been given but has been contested by concerned authorities. Also, all arbitration cases will be resolved within one year.
The new regime, proposed by the National Institute for Transforming India (NITI) Aayog, will ensure that projects are not stalled, and the developer and its projects do not suffer from lack of funds till the dispute is resolved.
The total amount currently tied up in arbitration is estimated at Rs 70,000 crore, according to a press note released by the government of India on August 31, 2016.
In the next 12-18 months, about 40 percent of the amount would be secured, according to filings by some infrastructure companies on the stock exchanges. The companies also told the stock exchange that their debt would be reduced in the range of 40-50 percent because of the government’s decision.
Hindustan Construction Company Ltd.’s debt could be halved following Cabinet’s decision from their current debt of Rs 4,900 crore, the company said in a press release.
We are pleased with the Cabinet’s decision on payment arbitration awards to the infrastructure companies. HCC will immediately be able to reduce its debt by almost half as a result and within 12-14 months, materially reduce it further.Ajit Gulabchand, CMD, HCC
HCC currently has over Rs 3,200 crore tied up in arbitration, and with the new norm, the company can get about Rs 2,400 crore (75 percent of Rs 3,200 crore) freed immediately. The company is also confident that within the next 12 months, additional claims worth Rs 5,000 crore would be settled.
Reliance Infrastructure ltd., which has Rs 14,000 crore under various stages of arbitration for various projects, called this a ‘bold and positive move’ which will help revive stalled projects which suffer due to long settlement periods, the company said in a press release.
SPML Infra Ltd. currently has a standalone debt of Rs 540 crore and around Rs 500 crore are stuck in arbitration. The company said in a stock exchange filing that the government’s directive will help reduce debt immediately. “With this directive SPML will immediately be able to reduce its debt substantially. Implementation of this directive will enable SPML and such other contractors to execute projects more effectively,” Subhash Chand Sethi, chairman of SPML Infra said.
For Patel Engineering Ltd., the guidelines can help the company reduce debt by as much as 55-60 percent, the company’s Managing Director, Rupen Patel said in a stock exchange filing.
Analysts believe this can give a much-needed push to the infrastructure sector and the economy on the whole.
“It can impact the economy in a good way. The stuck infrastructure projects would be kick-started, which can trigger economic activity in the country.”Gaurav Karnik, partner and leader, real estate and infrastructure at consulting firm EY India