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 Name||Market cap (Rs cr)||2018||2017||2016||Disputes/issues|
|Ashoka Buildcon||3401||543||240||173||Claims, tax disputes, bank guarantees|
|Reliance Naval||758||478||160||90||Service tax, excise duty, sales tax|
|Coal India||144260||396||137||90||General disputes|
|Hinduja Ventures||683||382||42||32||Service tax, licence fee|
|Reliance Comm||1828||341||22||18||Litigation and spectrum charges; custom and excise duties; service tax|
|Network 18||3450||327||287||204||Decreasing shareholder funds|
|GMR Infrastructure||10050||297||220||147||Decreasing shareholder funds|
|HCL Infosystems||650||287||72||66||Increase in excise duty and income tax|
|Jaiprakash Associates||1511||234||198||61||Income-tax disputes|
|Hindustan Aeronautics||22392||176||147||142||Sales-tax and income-tax disputes|
|Gateway Distriparks||1173||173||147||145||Bank guarantees|
|Schneider Electric||2340||169||71||29||Increase in excise and sales duties and income tax|
|Gujarat State Petronet||8973||163||68||67||Bank guarantees and contractual disputes|
|Future Retail||21725||162||149||3||Corporate guarantees|
|Usha Martin||1009||150||106||29||Fuel surcharge matters, increase in excise and sales duties, tax disputes|
|PNC Infratech||3308||140||114||94||Sales-tax disputes, bank guarantees|
|Mahindra Holidays||2731||135||134||121||Luxury tax and matters pertaining to revenue recognition|
|NBCC||9909||131||127||109||VAT and income-tax disputes|
|Panacea Biotec||1216||117||102||79||Decreasing shareholder funds|
|TV18 Broadcast||6103||109||107||88||Lawsuits for copyright and objectionable content, defamation suits|
|Atul Auto||736||107||36||11||Bank guarantees|
|Zee Media Corporation||800||102||66||7||Corporate guarantees|
|Data as on March 01, 2019|