India Inc contingent liabilities go up in 5 yrs

Increases by 56.5% to Rs 180,530 cr.

India Inc's contingent liabilities "" net of provisioning "" has increased by 56.5 per cent (Rs 65,177 crore) since 2000-01 to Rs 180,530 crore in 2004-05.

Contingent liabilities are possible obligation that arises from past events, but the probability of payment is minimal.

In spite of the substantial surge, there is no need to press the panic button. The reason: a chunk of the liabilities, that is capital commitments and guarantees undertaken, have emerged through the normal course of business, while disputed tax claims comprise the balance.

In terms of percentage of net worth, the liabilities have, however, risen only marginally. They account for 29 per cent of the net worth of 3,702 companies studied here, marginally up from 28 per cent of their net worth. Manufacturing and services sectors have been covered under the study, data for which was sourced from Capitaline Plus.

Rating agencies tend to take into consideration contingent liabilities of corporates to determine their debt-servicing capabilities. In other words, a company with high contingent liability is considered to be highly leveraged although these liabilities may not lead to actual outgo of funds.

Contingent liabilities in the books of 3,702 companies stood at Rs 268,158 crore at the end of FY05, up by Rs 122,080 crore since FY01.

However, they have made provisions worth Rs 87,628 crore. Of the total liabilities of Rs 268,158 crore, capital commitments aggregated at Rs 78,752 crore, guarantees undertaken Rs 73,404 crore, letter of credit Rs 14,939 crore, bill discounted Rs 8,951 crore, disputed sales tax Rs 23,668 crore, disputed income tax Rs 15,813 crore, excise duty Rs 7,934 crore, disputed claims Rs 6,289 crore and others Rs 10,822 crore

Capital commitments or estimated capital contracts account for 29.4 per cent of the total contingent liabilities. "The cost of capital contracts are estimated in the beginning of the work and the payments are made as and when the work is done by the contractors," said the chief financial officer of a manufacturing company.

The other major commitment has been guarantees undertaken, which aggregated Rs 73,404 crore, that is 27.4 per cent of the total liabilities. Guarantees outstanding includes corporate guarantees given on behalf of subsidiary companies.

Excluding these two items, remaining liabilities stood to Rs 116,001 crore at the end of 2004-05, up Rs 17,151 crore in the last five years. At this level, these liabilities account for 16.33 per cent of the net worth of corporates.

As per the data, contingent liabilities include claims not acknowledged as debt, guarantees undertaken, letter of credit, bills discounted, disputed sales tax, excise duty, income tax, other disputed claims, estimated capital contracts remaining and others.

The disputed claims, including that of sales tax, excise duty and income tax, aggregated to Rs 45,771 crore (17 per cent of the total contingent liabilities) as at the end of FY05. These claims have been increasing steadily from Rs 21,542 crore in 2000-01, Rs 26,526 crore in 2001-02, Rs 31,431 crore in 2002-03, Rs 39,671 crore in 2003-04 and Rs 45,771 crore in 2004-05.

Of the total disputed claims, sales tax claims stood at Rs 23,668 crore in 2004-05, up from Rs 9,256 crore in 2000-01. Disputed income tax claims stood at Rs 15,813 crore (Rs 10,051 crore), excise duty claims at Rs 7,934 crore (Rs 5,387 crore) and other disputed claims Rs 6,289 crore (Rs 3,785 crore).