SMPL Infra says in case of challenge of arbitral award, about 75% amount should be put in escrow account
Settlements of arbitration awards won by private sector construction companies are not being done by government agencies and PSUs despite Cabinet directives, head of SMPL Infra, a leading player in water infrastructure space, has claimed.
As per a Cabinet Committee on Economic Affairs (CCEA) decision based on NITI Aayog suggestion, in cases where government departments and PSUs have challenged arbitral awards against them, 75% of the amount should be first deposited into an escrow account against a bank guarantee. This is not being followed, leading to piling up of dues and upsetting cash flows of these construction companies.
"Niti Aayog had come up with an excellent solution to the issue of mounting dues stuck in arbitration. But that's not being followed," Subhash Sethi, chairman, SPML Infra, said.
In 2016, CCEA, chaired by the Prime Minister, approved measures to revive the construction sector, including a proposal put forward by Niti Aayog wherein government agencies would pay 75% of the arbitral award amount to an escrow account against margin free bank guarantee, in those cases where the award is challenged.
"In developed markets, arbitration awards are as good as Supreme Court orders which are honoured. In India, arbitration awards are challenged in all sorts of fora from district courts to high courts and it takes years to settle those cases," Sethi said on the sidelines of a conference on the infrastructure sector organised by CII, adding that his company has around Rs 400 crore stuck in arbitration awards won by the company.
The recommendations of Niti Aayog were based on a study which showed that most of the arbitration processes were initiated by government agencies, which have lost a majority of those cases.
In the case of National Highways Authority, out of a total 347 arbitral awards, just 38 went in favour of the authority and 309 went in favour of the contractor or concessionaire.
"This illustrates that the grievances of the contractors are real concerns and a lot of progress can be made if the government departments and PSUs deposit 75% of the arbitral award against them in escrow and make the liquidity available to contractors," a report by law firm Khaitan & Co said.
Overall, close to Rs 70,000 crore was tied up in arbitration at that time and the average settlement time for claims was estimated at more than seven years.
Sethi said he expects some of the arbitration cases of SPML are likely to get settled and paid off in the coming quarters.
With the public sector banks reeling under several scams, their ability to fund genuine projects in the infra space would be impacted.
"Funding was never a constraint in India, but the issue would be whom to fund and how to fund," Sethi said.
It's not just SMPL, other construction sector leaders like L&T have also raised their voices against the issue.
L&T's chief executive officer S M Subrahmanyan was recently quoted on the difficulties being faced in dealing with government departments which are too willing to approach the dispute settlement board, arbitration and court rather than discussing the issues.
MONEY STUCK
- In the case of NHAI, out of a total 347 arbitral awards, just 38 went in favour of the authority
- Meanwhile, around 309 arbitral awards went in favour of the contractor or concessionaire
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