Trouble in the making

In air force, stealth aircraft have a special place. They are deadlier than ordinary aircraft because they can't be detected by most radars. Indeed, what is insidious and invisible has the potential to cause greater harm than what is visible. This reminds us of contingent liabilities. These are financial obligations that could materialise in the future. If you study just the balance sheet, you may not realise their presence. However, if you study the notes to financial statements, they could be found. The balance sheet doesn't reflect them as they haven't occurred yet. But they have the potential to make a dent in the balance sheet if they occur. Examples of contingent liabilities include tax disputes, pending lawsuits, guarantees, etc. The table below lists companies whose contingent liabilities are more than equity and have been increasing in the past three years. This means that if these liabilities are realised, the entire equity of these companies could be wiped off. If you are still wondering whether this really happens, Matrimony.com is a case in point. Its costs from litigation resulted in the company's equity base turning negative. While valuing a company, hence, do see the contingent liabilities. If not anything, that will help you preclude the need for a contingency plan later. Problems to solve Contingent liabilities-to-shareholders' funds (%)Company NameMarket cap (Rs cr)201820172016Disputes/issuesAshoka Buildcon3401543240173Claims, tax disputes, bank guaranteesReliance Naval75847816090Service tax, excise duty, sales taxCoal India14426039613790General disputesHinduja Ventures6833824232Service tax, licence feeReliance Comm18283412218Litigation and spectrum charges; custom and excise duties; service taxNetwork 183450327287204Decreasing shareholder fundsGMR Infrastructure10050297220147Decreasing shareholder fundsHCL Infosystems6502877266Increase in excise duty