The government’s efforts to revive the ailing construction sector by introducing an arbitration scheme, whereby road developers can make claims to the National Highways Authority of India (NHAI) may not be paying off.

According to India Ratings and Research (Ind-Ra), formerly Fitch Ratings India, the pace at which arbitration claims are released has gained limited traction, mainly due to the inability of developers to provide bank guarantees.

Ind-Ra notes that in the past six months since the introduction of the arbitration scheme, ₹980-crore funds have been released compared with ₹2,630-crore worth claims made to NHAI.

“Due to the financial difficulties faced by many developers in the sector, Ind-Ra believes banks are wary of taking exposure in the form of bank guarantees (BG), without adequate margins/collateral. The government’s initiative to release 75 per cent of locked amount in arbitration awards has thus had a limited impact on the liquidity of developers, except a few road developers,” Ind-Ra said.

As per NHAI data, Hindustan Construction Company has been the biggest beneficiary, receiving ₹380 crore (out of total claims of ₹1,080 crore), while the balance claims are pending due to absence of BGs or opening of escrow accounts.

As per the scheme, NHAI will release 75 per cent of the arbitration award amount to an escrow account against margin-free BGs in cases where the award is further challenged by NHAI.

To ensure receipt of funds (from NHAI) under this scheme, concessionaire/contractor needs to furnish BG equivalent to 75 per cent of arbitration award, along with interest amount for one year.

When contacted for comments, a Reliance Infrastructure spokesperson said. “We have submitted Bank Guarantee sanctions of ₹133 crore, which is 75 per cent of the arbitration award won, to NHAI about four months back. We are awaiting disbursals against the same.”

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