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Trouble in the making

The companies listed below have contingent liabilities higher than equity

Trouble in the making

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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/issues
Ashoka Buildcon3401543240173Claims, tax disputes, bank guarantees
Reliance Naval75847816090Service tax, excise duty, sales tax
Coal India14426039613790General disputes
Hinduja Ventures6833824232Service tax, licence fee
Reliance Comm18283412218Litigation and spectrum charges; custom and excise duties; service tax
Network 183450327287204Decreasing shareholder funds
GMR Infrastructure10050297220147Decreasing shareholder funds
HCL Infosystems6502877266Increase in excise duty and income tax
Jaiprakash Associates151123419861Income-tax disputes
Hindustan Aeronautics22392176147142Sales-tax and income-tax disputes
Gateway Distriparks1173173147145Bank guarantees
Schneider Electric23401697129Increase in excise and sales duties and income tax
Gujarat State Petronet89731636867Bank guarantees and contractual disputes
Future Retail217251621493Corporate guarantees
Future Enterprises15601531194Guarantees
Usha Martin100915010629Fuel surcharge matters, increase in excise and sales duties, tax disputes
PNC Infratech330814011494Sales-tax disputes, bank guarantees
Mahindra Holidays2731135134121Luxury tax and matters pertaining to revenue recognition
NBCC9909131127109VAT and income-tax disputes
Panacea Biotec121611710279Decreasing shareholder funds
TV18 Broadcast610310910788Lawsuits for copyright and objectionable content, defamation suits
Atul Auto7361073611Bank guarantees
Zee Media Corporation800102667Corporate guarantees
Data as on March 01, 2019