Construction and projects in India: overview

A Q&A guide to construction and projects law in India.

The Q&A gives a high level overview of the main trends and significant deals; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; labour laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; and proposals for reform.

To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.

This Q&A is part of the global guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-guide.

Sameer Parekh, Parekh & Co.
Contents

Overview of the construction and projects sector

1. What are the main trends in the local construction and projects market? What are the most significant deals?

Main trends

In recent years, the construction industry in India has suffered a major downturn after having been one of the fastest growing sectors. While construction projects awarded by government authorities have seen an increase, commercial and residential property development has yet to see any major improvement.

A key change in the past decade is the shift in construction projects from the use of item rate/re-measurement contracts to design and build projects, particularly in relation to larger projects (for example, airports, metro rail and certain hydropower projects). Another change is the move from the traditional model of a government authority awarding and funding contracts, to the use of public private partnership (PPP) models. As a result, a number of major developers have become pure project developers, awarding subcontracts on a back-to-back engineer, procure and construct (EPC) basis. For many of these projects, a government entity can also be a stakeholder in the developer special purpose vehicle (SPV) that is awarded the contract. However, the PPP model has not been as successful as hoped and the Government of India is rethinking PPP structure. It is also reassessing and preferring annuity-based build-operate-transfer (BOT) projects with viability gap funding. The biggest challenge for the construction industry is that most of the companies are carrying huge debts.

A major factor that has delayed construction projects is the slow grant of environmental clearances. This issue is likely to be resolved in the future (see Question 25).

Major projects

Many recent major construction projects have been larger projects (for example, airports, metro rail, road construction, hydropower and thermal power projects). Projects in special economic zones (SEZs) and commercial and residential projects had seen an increase, but there has recently been a substantial reduction in these projects. However, it is likely these kinds of projects will increase with the new change in government. This increase is also likely to affect private commercial property developers.

 

Procurement arrangements

2. Which are the most common procurement arrangements if the main parties are local? Are these arrangements different if some or all of the main parties are international contractors or consultants?

Generally, if both the parties are Indian, the usual arrangement is an item rate contract, with some of the material supplied by the employer or purchase on a "star rate" basis. However, where the contract is subject to international competitive bidding, an increasing number of contracts are shifting from item rate to an engineering, procurement and construction (EPC) basis.

Additionally, some contracts utilise EPC with public private partnership (PPP) models, for example, build-operate-transfer (BOT) and build-own-operate-transfer (BOOT). Many road construction projects are given on a BOT basis, where toll collection is used as the basis for recovering costs (see Question 4).

 

Transaction structures

3. What transaction structures and corporate vehicles are most commonly used in both local and international projects?

Local projects

In local projects, most of the contracts are given to an Indian entity. In smaller projects, special purpose vehicles (SPVs) or joint ventures (JVs) are not common. The funding is usually supplied entirely by the employer.

International projects

In projects involving international competitive bidding, particularly where foreign lenders are involved (for example, the Asian Development Bank (ADB) and the Japan International Co-operation Agency (JICA)), the preferred structures are JVs or SPVs.

The form of JV typically utilised in India is an unincorporated JV, referred to as an "association of persons". An "association of persons" is recognised by the Income Tax Act 1961. It enables various parties to combine their qualification requirements and skills without actually having to start or incorporate a SPV. However, for build-operate-transfer (BOT) projects, the preferred structures involve setting up of an SPV. In some projects, incorporation of a SPV is required by the employer. Typically, in these projects, the SPV does not carry out all of the work and subcontracts some of the work (either to their own principals or to other subcontractors).

In many large projects (for example, airport projects), the SPVs are set up by the developers with the government entity and in turn subcontract the entire construction work to an EPC contractor (who further subcontracts specialised work). Most large projects involve international competitive bidding.

 

Finance

4. How are projects financed? How do arrangements differ for major international projects?

In the past, funding for most projects in India was supplied by the employer, who only engaged contractors on an item rate basis. The employer also funded the supply of building materials (for example, cement and steel).

However, this structure has undergone a substantial change and, for both item rate and engineering, procurement and construction (EPC) contracts, most of the funding is currently from government entities who either receive budgetary allocation or loans from foreign lenders. Many government entities like the National Highways Authority of India (NHAI) can also issue bonds, including tax free bonds, to raise financing.

In build-operate-transfer (BOT), build-own-operate-transfer (BOOT) projects and projects with developers, both debt and equity funding is used. One of the recent issues with this model has been that in many projects (particularly road projects), even after the construction phase is over, the contractor or the SPV was not permitted to sell the equity. As a result, more complex arrangements were not entered into and only an escrow arrangement was worked out in which all toll collection and other earnings would be deposited. The NHAI has also tried annuities-based projects where the bidders bid based on amount they want from the NHAI (or will pay to the NHAI). This takes care of viability funding and the government is seriously considering using this arrangement in other infrastructure projects.

 

Security and contractual protections

5. What forms of security and contractual protections do funders typically require to protect their investments?

Security

In build-operate-transfer (BOT) and build-own-operate-transfer (BOOT) projects, the income stream is the security provided to the lenders (apart from guarantees granted by the parent companies). As a large number of projects do not permit the lender to take over the projects, the project itself is not deemed to be a security.

However, it is expected that transfer of projects will be permitted more often in the future. Most lenders and banks are very reluctant to take over projects and run them, and, therefore, there are very few cases where projects have been taken over by the lenders. Where income streams form the guarantee to the lenders, there have been cases where the lenders have been forced to take up toll collection to recover their dues, which is not preferable.

Contractual

A lender taking over the project is not always permitted in the contract. As a result, apart from the income stream, the typical contractual methods for securing the loans are to use the assets of the SPV and parent company guarantees.

 

Standard forms of contracts

6. What standard forms of contracts are used for both local and international projects? Which organisations publish them?

Local projects

The Central Public Works Department has a format for awarding item rate contract. However, recently, this format has only been used by the concerned agency, namely, the Central Public Works Department and certain other public works departments. A popular form of contract is provided by the Fédération Internationale des Ingénieurs-Conseils (FIDIC) Conditions of Contract (produced by the International Federation for Consulting Engineers). For an item rate contract, in particular, the National Highway Authorities of India (NHAI) has been using the guidelines provided by FIDIC Construction, First Edition, 1999 (Red Book). However, many changes are made to these standard forms, typically by conditions of particular application or specific conditions of contract.

However, for engineer, procure and construct (EPC) contracts NHAI has developed its own forms of contract which are updated from time to time. For many EPC contracts, the FIDIC Design-Build and Turnkey, First Edition, 1995 (Orange Book) is typically used. The Metro Rail Contracts have also been developed from the FIDIC EPC/Turnkey Projects, First Edition, 1999 (Silver Book) and the Orange Book, but are quite different from either.

International projects

See Question 3.

Some of the employers/clients have developed their own formats over the years (for example, NHAI and the Delhi Metro Rail Corporation (DMRC)) while others use either the FIDIC Red Book for item rate contracts and the FIDIC Orange or Silver Book for EPC Contracts. Build-operate-transfer (BOT) contracts are subject to approval of the relevant central or state government and are generally developed for large individual projects.

 

Contractual issues

Contractors' risks

7. What risks are typically allocated to the contractor? How are these risks offset or managed?

In more typical item rate contracts, the employer bears the risk of a change in law (including taxes and compensation for inflation, providing land and the design). The contractor is subject to most other risks. Typically, the contractor is entitled to full extension of time for events which are beyond the contractor's control and which lead to delays to the project.

However, in a large number of government contracts, a substantial number of delaying events (even if they are beyond the contractor's power) are the basis of extension of time, but prolongation costs are prohibited by contractual clauses. Delay in land acquisition is a common cause for delays to such projects. Adverse geological occurrences and site encumbrances are also causes which often lead to disputes. In many cases, environment approval or court orders relating to improper environmental impact analysis have also led to delays. Stoppage of work due to local issues is also a cause of a number of arbitrations. This is because, even where there are provisions for compensation, the employer is not always willing to compensate the contractor, often suggesting that these issues should have been discovered by the contractor during the pre-bidding inspection. In fact, land acquisition and site encumbrances, along with geological occurrences are often the bone of contention as far as the risk for the same is concerned. Even if the employer is otherwise happy to grant time extension for this, he will be reluctant to do so if the contract links prolongation costs to the grant of a time extension.

 

Excluding liability

8. How can liability be excluded or restricted under local law?

The Indian Contract Act 1872 has provisions for determining the liability in the case of defaults by the contracting parties. Parties are also free to contract and can agree to impose liability on one or the other party. Many contracts include exclusion of liability clauses. Typically, the courts would enforce these exclusion clauses. However, in certain cases if enforcement of a particular exclusion clause causes extreme hardship, the courts have declined to enforce the terms or declined to enforce it in the facts of the case. Many clauses that limit the liability of the employer are also read down or read strictly against the employer.

 

Caps on liability

9. Do the parties usually agree a cap on liability? If yes, how is this usually fixed? What liabilities, if any, are typically not capped?

Section 73 of the Indian Contract Act 1872 addresses damages. Under this section, damages which are to be awarded to the non-defaulting parties, must be actual damages. Punitive damages are not permitted under Indian law. However, parties are free to agree to liquidated damages, if they are genuine pre-estimates of likely loss. These become the ceiling on the amount payable but what is liable to be paid is only the actual loss.

Additionally, liquidated damages can be awarded when there are genuine pre-estimates of likely loss and it is for the non-defaulting party to show that these are not genuine loss or are excessive or penal in nature. Essentially, Indian law does not permit penal damages or damages which are in terrorem. Indian law only contemplates damages which put the non-defaulting party back in the position that he would be, but for the breach or damages causing event. Therefore, Indian law allows damages that are compensatory and not punitive. If liquidated damages are stipulated, the party in breach must pay the same. However, in the event the party in breach declines to do so, the arbitrators or the court will have to decide if the sum stipulated is a genuine pre-estimate of likely damages or is punitive in nature. If liquidated damages are in the punitive in nature then the arbitrator or the court will only award what is reasonable or actual loss caused. However, the determination of actual loss cannot exceed the liquidated damages specified.

Most contracts do have liquidated damage clauses for delay in work. However, other liabilities are not always capped.

 

Force majeure

10. Are force majeure exclusions available and enforceable?

Force majeure clauses are available and are enforceable under Indian law. Force majeure is normally a defined term in most contracts and the consequences set out.

 

Material delays

11. What contractual provisions are typically negotiated to cover material delays to the project?

Most major contracts in India are those granted by the government or governmental agencies. These contain clauses for extension of time as well as prolongation costs. While the provision for extension of time is generally very wide, provisions for prolongation costs are restricted. However, most of these clauses are non-negotiable and parties must bid, based on the provisions as provided.

Subcontracts in such projects (which would be between private parties) also have similar terms. However, all other private contracts will have negotiated term to cover delays to the projects.

The Indian Contract Act 1872 has detailed provisions which apply even where a standard-form contract (for example FIDIC Conditions of Contract) is adopted, the clauses relating to liability, time extension, prolongation costs and liquidated damages, as well as unencumbered possession of site are typically modified by the employer to limit its own liability. These have been the subject matter of a large number of disputes. In private contracts there is scope for negotiating these clauses. As a result, disputes are not as common.

 

Material variations

12. What contractual provisions are typically negotiated to cover variations to the works?

Most agreements contain a clause for variation. Typically, in all contracts, whether item rate or an engineer, produce and construct (EPC), the variation clause provides for variations instructed by the employer or variations suggested by the contractor and approved by the employer. This is in line with most standard-form contracts.

In either case, the employer typically seeks a cost and work method proposal from the contractor and will approve the variation and its cost based on these proposals. In item rate contracts, additional work is only paid at the rate already agreed upon. In the event no rate is agreed upon for any additional work, rates are calculated either based on the contractual rate or based on break-up of cost submitted by the contractor and approved by the engineer or the employer.

In EPC contracts where there are no individual rates, the contract often provides for submission of the break-up rates in a sealed cover that is used in case of any additional work or dispute in regard to the contract. However, normally, whenever a variation is proposed, the contractor must give a proposal which is then accepted or rejected by the employer. Typically, if the variation is suggested by the employer, the contractor will be asked to provide a proposal including a modified design along with a cost-breakup and an updated time schedule. This variation will then be verified and approved along with appropriate modifications and will then become part of the schedule of works.

The contractor can also suggest a variation in design or in the work method or in materials used. This proposal must also be approved and priced by the employer and then implemented. It is important to note that usually the employer will appoint an engineer for the project who will deal with these issues, of instructing variations, appraisal and pricing of proposals and finally approving them. At the same time, it is seen that in many projects, many variations are verbally conveyed on a day-to-day basis, including redesign and change of method by the engineer on site, while the work is taking place. These are frequently by mutual understanding but fail to be conveyed in writing. This lack of written instructions can cause difficulties at the payment stage as it is possible to dispute whether a variation was indeed approved or not and whether it must be reimbursed or not.

 

Other negotiated provisions

13. What other contractual provisions are usually heavily negotiated by the parties?

Most large contracts are awarded by the government or government agencies based on international competitive bids. Therefore, clauses of these contracts are not easily negotiated.

Many contracts which are based on international standard-form contracts (for example, the FIDIC Conditions of Contract), with some modifications, typically tend to favour the employer. It is difficult for the bidders or even the successful contractor to negotiate any of the terms. However, parties do seek and get clarifications relating to some of the clauses before the bid submission date and some times even manage to have some of the clauses amended. However, this is rare.

However, private contracts between, for example, a developer or a special purpose vehicle (SPV) with a contractor or subcontractors are typically negotiated. However, even in these contracts, the scope for negotiation is not very large and the employer tends to retain their contract forms. Additionally, contracts with subcontracts can be on a back-to-back basis.

The following are some of the clauses that can be negotiated:

  • Price.

  • Escalation clauses.

  • Changes in law.

  • Liability for site encumbrances.

  • Geological occurrences.

  • Unforeseeable conditions.

However, radical changes are rarely achieved. After the lowest bidder is found, there is also a tendency to further negotiate the price. Terms and requirements for attaining financial closure and/or conditions precedent to the commencement of contract are also sometimes negotiated.

The Central Vigilance Commission (CVC) has now tried to put a stop to this practice. Under the CVC Guidelines, the bid documents must clearly specify criteria to be adopted for evaluation purposes.

For the two bid system, the CVC Guidelines specify that techno-commercial negotiations can be conducted with all the bidders to clarify the deviations regarding tender specifications and requirements. After bringing the acceptable offers on a common platform, all the commercial terms and conditions and technical specifications, must be frozen. If some changes are made in terms and conditions or technical specifications, the bidders may be given a fair chance to revise their price bids accordingly. The distribution of work, if considered necessary, must be done in a fair and transparent manner.

 

Architects, engineers and construction professionals

14. How are construction professionals usually selected? Following selection, how are they then formally appointed?

Construction professionals for government projects are selected based on competitive bids where bidders must meet the pre-qualification or qualification criteria and then submit the price bid.

There is no formal bidding process for private contracts. However, bids are invited. These professionals are often engaged using an engagement letter along with conditions of engagement. In many projects, the independent engineer is selected by the contractor from a panel supplied by the employer.

 
15. What provisions of construction professionals' appointments are most heavily negotiated? Are liabilities routinely limited or capped in construction professionals' appointments?

Contracts of professionals are not very heavily negotiated and typically the rates are principal items of negotiation. However, liability of a professional is typically capped and these caps are mostly enforced, usually through a limited liability clause in the contract, which can be taken recourse of in case of a dispute. Arbitrators and the courts accept and enforce these clauses limiting liability.

 

Payment for construction work

16. What are the usual methods of payment for construction work? Are there ways for the contractor and consultants to secure payment or mitigate risks of non-payment under local law?

Methods of payment

The method of payment is usually provided for in the contract. In item rate contracts, payments are based on running account bills. The invoices are submitted by the contractor on the principle of re-measurement and certification by an independent engineer before payment by the employer within the specified time. Engineer, procure and construct (EPC) contracts are more complex and payments are linked to completion of certain works or key dates/milestones. In EPC contracts too, the contractor would raise bills according to key dates/completion of certain works achieved. Once certified, these bills become interim payment certificates that then must be paid by the employer.

However, in both forms of contract, the employer or the independent engineer can, for example:

  • Raise issues about delays and about quality of work.

  • Deduct liquidated damages for delay.

  • Disapprove or reduce some items in the bills.

  • Make various adjustments.

Many bills may be returned as disputed and uncertified. In build-operate-transfer (BOT) projects, the contractor recovers his costs through the revenues generated by operations. In many contracts, the operation period is extended to provide compensation to the BOT contractor if applicable.

Securing payment

While the advances given by the employer are secured by guarantees provided by the contractor, there are no such similar contractual guarantees to secure the payments to the contractor.

 

Subcontractors

17. How do the parties typically manage their relationships with subcontractors?

Subcontracts are awarded by the contractor according the structure of the contract. If the whole works can be divided into packages, the subcontracts are then awarded accordingly for different packages. These can also be awarded according to the different specialised jobs or activities to be carried out during the works.

Subcontractors can either be nominated by the employer, or they can be proposed by the contractor according to the pre-qualifications set by the main contract and approved by the independent engineer or employer. Typically, the nature of the subcontracts will depend on the nature of the main contract and they will often be back-to-back with the main contract.

The subcontractor has no privity directly with the principal employer. However, it is the subcontractor will often try to claim against the principal employer, particularly if there is no arbitration clause. In any event, the subcontractor can apply to a court (even if there is an arbitration clause) to stop payment by the employer to the contractor for dues of the subcontractor. However, such orders are passed only in very rare cases where there are no disputed questions of fact. After the subcontractor has a decree in his favour, he can attach amounts payable by the employer to the contractors.

Where there are nominated subcontractors, the question of liability between the employer and contractor and subcontractor becomes more complicated.

 

Licensing

18. What licences and other consents must contractors and construction professionals have to carry out local construction work? Are there any specific licensing requirements for international contractors and construction professionals?

There are no specific licences and consents required for construction professionals to work in India. However, a foreign company working in India must register itself under the Companies Act 2013 and act under the foreign direct investment (FDI) guidelines.

 
19. What licences and other consents must a project obtain?

A large number of licences and permits are required for a construction project. Typically, the responsibility of obtaining the consents is divided between the employer and contractor. The employer typically obtains permission relating to zoning laws and environment laws, among others. The contractor must obtain all permissions necessary for carrying out the works. Additionally, various registrations are required for taxation purposes.

 

Projects insurance

20. What types of insurance must be maintained by law? Are other non-compulsory types of insurance maintained under contract?

There are no types of insurance that are specifically required by law for a construction project. However, a construction project usually has insurance requirements, which are often taken jointly by the employer or by the employer and contractor. Advance losses and profit insurance is not common in India.

 

Labour laws

21. Are there any labour law requirements for hiring (local and foreign) workers?

India has a large number of labour laws. Many of these laws are also state specific. Workers are also often hired from labour contractors and can be engaged as contract labour except in certain industries (not connected with construction law) where contract labour is prohibited.

If the workers are hired as permanent employees there are strict rules for retrenchment and retrenchment compensation. Foreign workers must have the necessary visas and work permits and the payment to them must comply with the requirements of the Reserve Bank of India (RBI).

 
22. Which labour laws are relevant to projects?

A number of labour laws in India are relevant for construction projects. The central or federal laws include the:

  • Minimum Wages Act 1948.

  • Factories Act 1948.

  • Industrial Disputes Act 1947.

  • Contract Labour (Regulation and Abolition) Act 1970.

Additionally, states may also have their own labour laws, including provision for minimum wages.

 
23. Must an employer pay statutory redundancy or other payments at the end of a project? Are all employees eligible?

Employers must pay statutory redundancy payments, if the employees are permanent employees. "Permanent employees" are employed directly by the employer and are on the employer’s payroll without a pre-determined time limit. In addition to their employment, they often receive additional benefits (for example, subsidised healthcare and contributions to the retirement plan). However, if they are employed only for the project or taken as contract labour, these provisions may not apply. Contract labour is governed by the Contract Labour (Regulation and Abolition) Act and certain benefits must be provided to such contract labour.

 

Health and safety

24. Which health and safety laws apply to projects?

Health and safety is a state subject on which individual states can make laws. However, the Central Government has passed the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act 1996 to regulate the employment conditions of building and other construction workers. This Act applies to all establishments which employ ten or more workers.

Additionally, other labour laws which also contain health and safety regulations may be applicable, depending upon the nature of activities, including the Factories Act 1948 and the Industrial Disputes Act 1947. Various states also have their own laws relating to health and safety.

 

Environmental issues

25. Which local laws regulate projects' effects on the environment?

There are a number of environment laws which govern construction projects. Most of these laws are central or federal, including:

  • The Air (Prevention and Control of Pollution) Act 1981, as amended in 1987. The Air Act was introduced to provide for the prevention, control and abatement of air pollution in India.

  • The Water (Prevention and Control of Pollution) Act 1974. Water Act was introduced to provide for the prevention and control of water pollution and the maintaining or restoring of wholesomeness of water. Under section 19 (3) of the said Act the State Government may, by notification in the Official Gazette:

    • alter any water pollution prevention and control area, whether by way of extension or reduction; or

    • define a new water pollution, prevention and control area, in which may be merged one or more water pollution, prevention and control areas, or any part or parts of that area.

  • The Environment Protection Act. The Environment Protection Act was introduced for protection and improvement of environment and prevention of hazards to human beings, other living creatures, plants and property. The purpose of the Environment Protection Act is:

    • to co-ordinate the activities of the various regulatory agencies already in existence;

    • to create an authority or authorities with adequate powers for environmental protection;

    • to regulate the discharge of environmental pollutants and the handling of hazardous substances; and

    • speedy response in the event of accidents threatening environment and punishment to those who endanger human environment, safety and health.

  • The Explosives Act 1884. The Explosives Act was introduced to regulate the manufacture possession, use and sale of explosives.

There are other regulations made in addition to these Acts which may be applicable (for example, for hazardous materials).

Environmental impact assessments (EIAs)

There is an EIA Notification of 2004 under which all projects above certain minimum criteria must obtain a "no objection" from the concerned environmental authorities. Various additional conditions are imposed by the environment authorities while granting a "no objection" decision, such as a proper Environment Management Plan, afforestation, protection and preservation of flora and fauna in the area.

Therefore, in a construction project, the environment authorities check the safety and advisability of the project from an environmental stand point. Issues also arise about the use of forest land for the project or for disposing of waste. The environmental approval also deals with measures to minimise environment pollution or hazard (including minimising cutting of trees or compensatory afforestation). However, many of these environment approvals are required to be taken by the employer, while those relating to the actual work are to be taken by the contractor.

Sustainable development

Environmental approval also considers sustainable development and, as a result, conditions are often imposed in this regard by the environmental authorities. This is currently on a case-by-case basis but there are plans to standardise the process. The courts have also considered environmental issues from time to time, particularly relating to sustainable development and the right of the landowners whose lands have been acquired. A number of hydroelectric projects have been postponed in view of lack of proper environmental studies relating to sustainable development.

 
26. Do new buildings need to meet carbon emissions or climate change targets?

There are currently no carbon emissions or climate change targets for new buildings in India.

 

Prohibiting corrupt practices

27. Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties?

There are various laws which prohibit corrupt business practices both under criminal common law and also specific law, namely, the Prevention of Corruption Act 1988. The Companies Act 2013 also contains provisions relating to corrupt practices and there are also investigating bodies for white collar crimes.

Penalties can be both civil and criminal, depending on the nature of the act. There is provision for jail, criminal penalties or other statutory penalties.

 

Bankruptcy/insolvency

28. What rights do the client and funder have on the contractor's bankruptcy or insolvency?

Typically, most contracts allow the employer to terminate the contract upon bankruptcy or insolvency of the contractor and similarly that of the employer. Insolvency law in India is governed by the Sick Industrial Companies Act 1985, in which a company which has eroded its net worth is must go before the Board of Industrial and Financial Reconstruction (BIFR). There is a winding up procedure provided under the Companies Act 2013 which normally goes to the High Court.

 

PPPs

29. Are public private partnerships (PPPs) common in local construction projects? If so, which sectors commonly use PPPs?

PPP projects are quite common, specifically in larger projects. PPPs are also becoming more common in smaller projects and there are many cases of PPPs in road and bus stop projects. In larger projects, including airports, these are very common and becoming more popular. However, there are many issues which need to be resolved for PPPs to be successful.

 
30. What local laws apply to PPPs?

There is no specific legal or statutory framework for PPPs at the central level. However, a few states (for example, Punjab) have State Acts that govern construction contracts and have their own statutory tribunal where disputes are resolved.

 
31. What is the typical procurement/tender process in a PPP transaction? Does the government or another body publish standard forms of PPP project agreement and related contracts?

There is no typical procurement/tender process in PPP transactions in India. All government tendering is governed by the guidelines laid down by the Central Vigilance Commission to ensure transparency and avoid corrupt practices. Tender procedures are also guided by the lending agencies such as the World Bank, the Asian Development Bank (ADB), European Investment Bank and the Japan International Co-operation Agency (JICA), among others.

Generally, there are no standard forms for PPP projects. However, various authorities do have approved formats, which are regularly amended. For example, the National Highways Authority of India (NHAI) has its own format which is regularly updated and amended. This format is approved by the government authorities. Many other bodies are also developing formats. However, these are not standard formats.

 

Dispute resolution

32. Which are the most common formal dispute resolution methods used? Which courts and arbitration organisations deal with construction disputes?

The most common formal dispute resolution method in India for large construction projects is arbitration. Mostly, the arbitration agreements in India relate to ad hoc arbitration, though institutional arbitrations are also prevalent. In the absence of an arbitration clause, the matter goes to court. A small number of states, such as Punjab, have statutory tribunals to hear such disputes.

The Indian Arbitration and Conciliation Act 1996 also contains provisions relating to conciliation, although conciliation is rarely adopted. However, in many large contracts there is a pre-arbitration process involving a Dispute Review Board, Dispute Adjudication Board, an expert body or a mediator who must be approached before invoking formal arbitrations. In case of courts, the matters are to be filed in the appropriate court of pecuniary jurisdiction. In some of the states this is the District Court, while in the larger states (for example, Delhi, Mumbai, Chennai, Calcutta), the High Court itself has jurisdiction to hear the original proceedings.

 
33. What are the most commonly used alternative dispute resolution (ADR) methods?

The most common ADR used is a mediator or the Disputes Review Board. Conciliation is not commonly used. In some cases matters are referred to an expert body before arbitration can be invoked.

 

Tax

34. What are the main tax issues arising on projects?

The following taxes can affect construction projects in India:

  • VAT. The transfer of property in goods involved in the execution of works contract can be taxable under the local state VAT Act, including an agreement for carrying out for cash or for deferred payment or other valuable consideration, the building, the construction, manufacture, the processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.

  • Central Sales Tax. Central Sales Tax is payable in case of inter-state transfer of goods.

  • Service Tax. Under section 65B(54) of the Finance Act 2012, "works contract" means a contract in which the transfer of property in goods involved in the execution of the contract is subject to tax as sale of goods and the contract is for the purpose of carrying out:

    • construction;

    • erection;

    • commissioning;

    • installation;

    • completion;

    • fitting out;

    • improvement;

    • repair;

    • renovation;

    • alteration of any building or structure on land; or

    • for carrying out any other similar activity or a part thereof in relation to any building or structure on land.

    Section 66E of Finance Act 1994 gives a list of "declared" services. Section 66E (h) defines the service portion in the execution of a works contract as a service. This means, in composite contracts (that is, contracts involving goods as well as services), the service portion is chargeable to service tax.

  • Import duties or excise. The contractor may have to pay the import duties and/or excise if no exemption is granted to the project.

No additional tax is required to be paid to reflect an increase in the value of land after the completion of the project.

There are various tax concessions and promotion measures that may be applicable (for example, the Export Import Policy). These must be checked on a case-by-case basis.

 
35. Are any methods commonly used to mitigate tax liability on projects? Are there any tax incentives to carry out regeneration projects?

There are no commonly used methods for mitigating tax liability on projects. However, some large projects can be subject to tax exemption. Certain projects benefit from the Export-Import Policy, for example, projects funded by the World Bank or the Asian Development Bank (ADB) or other institutional investors. There are also some notifications exempting excise duty for certain categories of projects.

There are currently no tax incentives for regeneration projects. However, some tax benefits for regeneration projects have been contemplated.

 

Other requirements for international contractors

36. Are there any specific requirements that international contractors or construction professionals must comply with?

There are no specific requirements that international contractors or professional contractors must comply with, except for the registration requirement for foreign companies while working in India or visa/work permit requirements for individuals.

 

Reform and trends

37. Are there any proposals to reform construction and projects law? Are there any new legal or regulatory trends affecting projects?

Reform proposals

The new government has many new proposals for reform, including:

  • A change in PPP format for certain types of project (for example, a road project).

  • Providing benefits for renewable energy projects.

However, these proposals for reform are currently still in the planning stage.

Trends

One of the major problems for PPP projects has been that the developer was not permitted to sell his stake even after the construction phase was over (see Question 4). The proposed reform allows the developer to partly or completely divest their stakes in the project. This will also help banks and other financial institutions to take on the role of the contractor.

There are also plans to improve the quality of construction project contracts.

 

Main construction organisations

The Construction Industry Development Council (CIDC)

W www.cidc.in/new/index.html

The Construction Industry Development Council (CIDC) provides the impetus and the organisational infrastructure to raise quality levels across the industry. This helps to secure wider appreciation of the interests of construction business by the government, industry and peer groups in society.

Federation of Indian Chambers of Commerce and Industry

W www.ficci.com/about-ficci.asp

Federation of Indian Chambers of Commerce and Industry is the largest and oldest apex business organisation in India.



Online resources

Indian Tollways

www.indiantollways.com

Description. A private e-news magazine bringing the latest news on the developments of BOT projects in India. It is unofficial and up-to-date.

Central Public Works Department

www.cpwd.gov.in

Description. Government of India website, official and including up-to-date information.

Project Exports Promotion Council of India

www.projectexports.com

Description. Government of India website, official and including up-to-date information.



Contributor profile

Sameer Parekh, Managing Partner

Parekh & Co.

T + 91 9811 0457 75
F + 01 1233 18315
E sameeer.parekh@parekhco.com
W parekhco@parekhco.com

Professional qualifications. LLB (Delhi University), LLM (University of Pennsylvania). Admitted to practice in India, advocate on Record of the Supreme Court of India and admitted to practice in New York

Areas of practice. Litigation; arbitration; construction and infrastructure; corporate and commercial; tax; hostile takeovers litigation; capital markets/debts/equity; derivatives; banking and finance; labour and service laws; shipping; admiralty and transport; intellectual property; insurance and reinsurance; media and communications; consumer law; environmental law; criminal law.


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