Loan support is crucial to maintaining the pace of work, Andhra has made it clear that it doesn’t want the encumbrances of a company with a history of poor credit servicing to be passed on to it. (Reuters)

Andhra Pradesh’s decision to bar infrastructure companies that had, in the last five years, applied for corporate debt restructuring (CDR) or strategic debt restructuring (SDR) from bidding for projects that are part of the development of the state’s new capital, Amravati, speaks of good sense. The rule means many companies, including ones from Andhra, will not be eligible for undertaking the projects even though they meet the other, regular eligibility criteria. This is a logical move given how companies with a SDR/CDR history are less likely to be able to raise either equity or loans for a new project. Given loan support is crucial to maintaining the pace of work, Andhra has made it clear that it doesn’t want the encumbrances of a company with a history of poor credit servicing to be passed on to it. This is crucial if it wants to be ready with its new capital by 2024, beyond which the Andhra Pradesh Reorganisation Act 2014 doesn’t allow Hyderabad to remain the state’s de jure capital.

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While Andhra Pradesh is not the first state to bar companies with poor credit history—Telangana had done it last year for an irrigation project—other states and the Centre could benefit from such an approach, too. However, instead of just barring companies with a CDR/SDR history, governments could consider such a stand for also those companies where stress in servicing loans has started showing. That would ensure they are not saddled with over-leveraged companies. In addition, governments must get licence-holders and successful bidders to adhere to timelines for various milestones, starting with financial closure. This will prevent companies from squatting on projects for years, for one reason or the other, while other eligible players can’t take them up.