Contingent liabilities: meaning, how they work in India and examples

A contingent liability is a possible obligation that depends on something not yet settled. The company has not lost the case or accepted the tax bill, so no money is owed today. If the outcome goes against it, a real payment follows.

Common examples are a tax department's demand that the company is contesting, a lawsuit from a customer or supplier, a guarantee the company gave for a loan taken by a group firm, and a claim for penalties from a regulator. Because the outcome is open, the amount is shown as a possible figure in a note, not as a debt on the balance sheet.

The word contingent simply means depends on something else. Here the something else is a court ruling, a tax authority's decision or a counterparty's failure to pay. Until it happens, the company carries an exposure, not a debt, and the notes are where that exposure is made visible to readers of the accounts.

Indian Accounting Standard 37 (Ind AS 37), on provisions, contingent liabilities and contingent assets, sets the treatment. In simple terms there are three cases. If an outflow is probable and the amount can be estimated reliably, the company records a provision, which is an actual cost in the accounts. If an outflow is only possible, the company discloses a contingent liability in the notes. If an outflow is remote, nothing is shown.

The standard leaves the judgement of probable, possible and remote to management and auditors, and it does not give fixed percentages. Sources that quote numbers such as 50% are using informal shorthand. The same logic means a case can move between the groups over the years as the facts change.

A Draft Red Herring Prospectus (DRHP) is filed with SEBI before an IPO. Contingent liabilities appear in four main places.

• The notes to the restated financial statements, which list each type of claim and the amount for every year covered.
• A summary of contingent liabilities and commitments in the financial information section, often with a note on what the company has paid or deposited under protest.
• Risk factors, where the company explains the biggest disputes and says what a loss could do to profit or cash.
• The outstanding litigation section, which describes the cases behind many of the figures.

A guarantee is a promise to pay if someone else fails to. A company that guarantees a loan taken by a subsidiary or a promoter's firm has a contingent liability equal to the amount guaranteed, even though no money has moved. Capital commitments, which are contracts to buy equipment or property that have not yet been delivered, are listed alongside but are a different item: they are planned spending, not disputed claims.

A guarantee for a related party deserves an extra look, because it links this topic with related-party transactions, where the key question is who benefits.

A tax demand is a bill issued by a tax authority, usually after an assessment or audit. Until the company has appealed and lost, many companies treat the unpaid part as a contingent liability, because they believe the demand is wrong. A DRHP usually splits these by type: income tax, goods and services tax (GST), customs and other.

Some companies pay a part of the demand under protest to be allowed to appeal. That deposit sits as an asset, while the demand itself is shown as contingent. A tax demand is therefore not automatically a debt, but it is not harmless either, because appeals can take years and interest can build up.

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, known as ICDR, ask issuers to disclose outstanding litigation involving the company, its directors, promoters and subsidiaries. Schedule VI is the main reference. Criminal cases, regulatory action, tax cases and civil cases are usually listed separately.

For civil and tax matters, a materiality test decides what is listed in detail. The board sets a policy and discloses it in the offer document. According to law-firm summaries of the 2025 ICDR amendments, civil cases are tested against the lower of that policy and a figure based on 2% of turnover, with other conditions, as of November 2026. Check the current text, because the tests have changed over time.

Startups tend to have fewer old tax cases than listed industrial groups, so their contingent liabilities look different. Common items include GST demands on how a marketplace charged tax on fees, disputes with gig workers or franchisees over classification, claims from landlords after store closures, consumer complaints about refunds, and guarantees given to banks or payment partners.

Platform companies sometimes also disclose claims that arise from data or intellectual property disputes. The key question is whether a type of claim can repeat across many customers or transactions, because a small amount per case can add up to a large total.

A big number alone says little. A rule of thumb is to compare the total contingent liability with figures that show how much cushion the company has. These comparisons help, but they are only a starting point.

• Against net worth: a contingent liability of 5% of net worth is a smaller worry than one of 50%.
• Against profit: compare it with the profit after tax across a few years.
• Against cash: could the company pay the claim, or part of it, from cash it holds?
• Over time: is the figure growing quickly, and are the cases old?
• Against IPO money: check whether any of the fresh issue is meant to settle such claims.

A provision is booked as a cost and a liability because an outflow is probable. A contingent liability is only disclosed. If a company moves an item from contingent to provision, its profit falls, and that can be a signal worth reading in the notes. Contingent assets work the other way: they are possible gains and are disclosed only when an inflow is probable.

This guide gives general information and is not legal, tax or investment advice. A professional should read the actual filing for any investment decision.