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Hitting the Hurdle

Hitting the Hurdle

The Centre's move to address the liquidity crisis in the construction sector fails to address key issues.

Road Ahead: Construction sector may still face several speed brakers (Photo: Shekhar Ghosh) Road Ahead: Construction sector may still face several speed brakers (Photo: Shekhar Ghosh)

The revival package announced by the Centre for the ailing construction industry was expected to address the acute liquidity crisis faced by the companies, which were distressed primarily due to non-payment of dues by government departments.

However, the jury is out on how effective the move will be in addressing the the problems. By the government's own admission, pending dues worth Rs 70,000 crore are stuck in arbitration. Therefore, the decision may not be enough to revive the sector.

Based on a NITI Aayog recommendation, the Centre has asked departments to pay 75 per cent of the dues to private contractors who may have won in a lower tribunal but are awaiting the final arbitration award from a higher court. The payment would, however, be made against a margin-free bank guarantee. This, say experts, will allow contractors to use the money to not only complete projects, but also shed part of their debts. The Centre has also directed officials to bring all existing cases under the amended Arbitration Act of 1996, which requires time-bound completion of the process.

Says P.R. Swarup, Director General, Construction Industry Development Council: "Since most of the money of the construction industry is stuck with government agencies, it could have asked the disputing parties to settle the issue by agreeing to pay an amount that's slightly lower than the disputed amount as the contractor has won an award."

Since private contractors would have to furnish bank guarantees to avail the benefit, Swarup is of the view that companies with mounting debt may not be able to convince banks to give guarantees. A bank guarantee is a promise to a third party - a government department in this case - by the bank to meet the obligation of the debtor in case it fails to fulfil its contractual obligations.

However, Ajit Gulabchand, CMD, Hindus-tan Construction Company (HCC), says banks will have no problem in giving a guarantee as the amount received against the guarantee would also be used by the construction companies to pay part of their bank loans, which otherwise would anyway have become NPAs or had to be restructured.

According to Gulabchand, HCC will be able to immediately reduce its debt by almost half as a result of the government step. The company has arbitration awards for over Rs 3,200 crore and claims worth around Rs 5,000 crore are still in arbitration. However, Gaurav Karnik, National Leader, Real Estate and Infrastructure, E&Y, says a bank guarantee will depend on the financial performance of a company. "So, a defaulter may not be able to get a bank guarantee."

The revival of the construction sector, therefore, may still be in limbo.

Published on: Sep 03, 2016, 4:48 PM IST
Posted by: Karan Dhar, Sep 03, 2016, 4:48 PM IST