A Legal Challenge Threatens To Add To Road Builders’ Woes

A legal challenge to changes made by five states in the law to make land acquisition easier threatens to increase troubles for road builders amid liquidity stress and a slowdown in new orders ahead of the general election.

The development could cast a cloud on land acquisition not only for new projects but also for those that haven’t officially received “appointed date” (a technical term for the day when a contract letter is handed over to a developer to start work), Rohit Natrajan, analyst from Antique Stock Broking, told BloombergQuint.

The Supreme Court issued a notice to Gujarat, Andhra Pradesh, Telangana, Jharkhand and Tamil Nadu on petitions challenging the constitutional validity of amendments made to the right to fair compensation and transparency provisions in the Land Acquisition Act, 2013. The petition, filed by social activists, challenges the power of the states to introduce amendments conflicting with the central law and wants them to be declared illegal, newswire PTI reported. The petitioners, according to the report, said amendments made by the states “adversely affected the rights of livelihood of land owners and farmers”.

Land acquisition delays causing losses or cost overruns is common in India. Road-building companies are finding it difficult to secure funding for awarded projects due to a liquidity crisis. The National Highways Authority of India awarded fewer projects in the first half despite expectations that the government would push infrastructure ahead of the 2019 Lok Sabha election.

Shares of Ashoka Buildcon Ltd., IRB Infrastructure Developers Ltd., KNR Constructions Ltd. and Sadbhav Engineering Ltd. have fallen between 22 percent and 65 percent so far this year. That compares with a 16 percent fall in the Nifty Infrastructure Index during the period. The petition adds to the uncertainty.

It questions the removal of the clause that requires consent of at least 70 percent of landowners for projects in public-private participation and also lack of rehabilitation. The states diluted the provision to return land if not used for more than five years, according to the petition.

There could be implications of this petition for the projects that may be identified as the ones where the process got diluted, Shubham Jain, group head and vice-president of ICRA, said. The land acquisition is the government’s responsibility in case of public-private partnership projects, he said, adding that any additional compensation will have to be borne by the states.

K Jalandhar Reddy, executive director at KNR Constructions Ltd., told BloombergQuint, that an adverse ruling from the Supreme Court could pose a problem for the acquisition of land in future by these states. The company hasn’t received final permission to start work—two in Tamil Nadu and one in Telangana— being built under the hybrid annuity model under which the government makes a chunk of the payment upfront. It has got 40-50 percent of the land required for its two projects in Tamil Nadu and is confident in getting the rest from the NHAI, according to Reddy. But still a negative outcome of the petition could have a bearing on KNR Construction’s new project in Tamil Nadu and Andhra Pradesh each, he said.

Overall 14 projects worth around Rs 17,000 crore across five states haven’t received an appointed date, according to data compiled by Bloomberg Quint. Here’s the list of bidders and projects that have not received permission to commence work in these five states.

Among the projects that haven’t received permission until November on account of delays in land acquisition or regulatory clearances, Crisil said most fall under the hybrid model.

Not everyone agrees that the petition in the Supreme Court will have much impact.

The states do have the right to legislate on the matter, Rakesh Arora, an independent expert and managing director of Go India Advisors, said. “For projects like roads, railways, etc which are of public interest at large, states may not find it difficult to defend their case.”

Ashoka Buildcon, which awaits permission to commence work in five of its projects, doesn’t expect any major fallout. “The company hasn’t received any appointed date for HAM Projects in Gujarat and Jharkhand, but it is in the final stages of receiving it,” Paresh Mehta, chief financial officer at Ashoka Buildcon, said. “Don’t see any challenges arising out of Supreme Court’s notice to the respective state governments over the amendments in land acquisition bill.”