SME Times News Bureau | 10 Nov, 2021
In yet another attempt to address the liquidity concerns in the
construction sector, the government has decided to pay 75 per cent cent
of the contract amount due to contractors even if such payment is
disputed and under arbitration.
The move is expected to address
cash flow problems being faced by project contractors that have resulted
in delays in several infrastructure projects. Release of funds would
not only help speed up work on existing projects but will also allow
deployment of funds in newer projects.
An office memorandum from
the Finance Ministry's Department of Expenditure said that a new Rule
227A has been inserted into the General Financial Rules (GFRs) followed
by the government departments and agencies to deal with payment systems
to be followed in cases of arbitration awards.
As per the new
rule, in cases where ministry or departments have challenged an arbitral
award and the amount of such award has not be paid, 75 per cent of the
due amount (by ministry/department) will be paid to the contractors
against a bank guarantee (BG).
The BG amount will only be for the
said arbitral award and not for the interest which may become payable
to the ministry should subsequent court order require refund of the said
amount, as per the new rule.
Under the terms of the new rules,
the payment will be made only into an escrow account with the
stipulation that proceeds be used first, for payment of lenders' dues,
second for completion of projects and then for completion of other
projects of the ministry or the department. Any balance remaining in the
account can then used by the contractors with the prior approval of the
government and the lead banker.
The changes are in line with an
earlier Cabinet approval of proposals put forward by the NITI Aayog for
improved liquidity in the construction sector.
