NHAI Policy Update: Reimbursement of Increased Royalty Charges

The issue of reimbursing increased royalty charges on minor minerals in highway construction has been a subject of legal and policy discussions. Over the years, the National Highways Authority of India (NHAI) has issued multiple circulars outlining the reimbursement mechanism for EPC (Engineering, Procurement, and Construction) and DBFOT (Design, Build, Finance, Operate, and Transfer) projects.

The Hon’ble Supreme Court of India, in the case of National Highways Authority of India vs. ITD Cementation India Limited [2015 SCC OnLine SC 384] dated 24.04.2015, ruled on the reimbursement of increased royalty charges due to legislative changes in Item Rate Contracts. The Court upheld that contractors should be compensated for such increases, provided the contract allowed for price adjustments under “Change in Law” provisions.

In response, NHAI issued Policy Circular No. 185/2015 dated 27.11.2015), confirming that reimbursement of increased royalty charges in Item Rate Contracts would be permitted under Change in Law provisions.

Further strengthening this policy, Policy Circular No. 2.5.11/2019 dated 17.05.2019) extended the reimbursement mechanism to DBFOT and EPC projects. To safeguard NHAI’s financial interests, the circular introduced the requirement of an Unconditional Indemnity Bond from contractors/concessionaires before any reimbursement was processed.

A crucial turning point came in 2024, when the Hon’ble Supreme Court of India, in the case of Mineral Area Development Authority & Anr. vs. M/s Steel Authority of India & Anr. [Civil Appeal Nos. 4056-4064 of 1999] (hereinafter referred to as the “2024 Supreme Court Ruling”), ruled that “Royalty is not a tax.” This landmark decision resolved a long-standing legal debate and had direct policy implications. It established that royalty payments are a cost incurred by contractors/concessionaires, and any increase should be reimbursed under contractual provisions.

Following the 2024 Supreme Court Ruling, NHAI revised its policy framework and issued Policy Circular No. 2.5.17/2025 (Dated 13.03.2025). The new circular eliminated the Indemnity Bond requirement, simplifying the reimbursement process and enhancing procedural efficiency.

During the Executive Committee Meeting of NHAI (EC Meeting on 14.02.2025, Agenda Item No. 653.23), the following key decisions were made:

1. Existing Policies (2015 & 2019) will continue.
2. The Indemnity Bond requirement is removed.
3. Payments will now be governed solely by contractual provisions on Price Adjustment and Wholesale Price Index (WPI).

This policy update marks a major step toward streamlining the reimbursement process while aligning with judicial clarity on the nature of royalty payments. This policy evolution demonstrates how judicial pronouncements and policy decisions shape contractual obligations in the infrastructure sector. With the 2024 Supreme Court Ruling providing final clarity, contractors and concessionaires can now claim royalty reimbursements without additional financial safeguards, streamlining the process for all stakeholders involved.

Action Points for Stakeholders

• Contractors/Concessionaires should file royalty reimbursement claims with NHAI following the existing contractual provisions.
• No Indemnity Bond needs to be submitted.
• All concerned authorities must process claims as per the 2015 & 2019 circulars, in line with the 2024 Supreme Court ruling.