At Rs 3 trillion, corporate guarantees highest in 4 years but far from peak

Corporate guarantees by BSE 500 companies have seen a significant increase over the past two years, with total value crossing Rs 3 trillion in 2022-23. Still, this figure is far lower than previous highs.

At the end of FY23, the BSE 500 companies had total corporate guarantees worth Rs 3.06 trillion, up 22.6 per cent increase from Rs 2.49 trillion at the end of FY22 (which itself was 33 per cent higher than Rs 1.87 trillion in FY21).

Despite this steep rise, total outstanding corporate guarantees are still 28 per cent lower than the record high of Rs 4.23 trillion at the end of FY14.

Corporate guarantees have come into focus, with the government imposing a goods and services tax (GST) on them for the first time. According to a recent order by the Central Board of Indirect Taxes and Customs (CBIC), an 18 per cent GST will apply to corporate guarantees between parent companies, subsidiaries, and other related parties either on the financial consideration charged by the guarantor for that service, or 1 per cent of the value of the guarantee, whichever is higher.

This new tax order could force the BSE 500 companies to pay nearly Rs 3,000 crore in taxes on corporate guarantees provided by parent or holding companies on behalf of their subsidiaries or joint ventures, potentially increasing the financial cost for new ventures, which are largely implemented through step-down subsidiaries and JVs.

Among individual companies, Larsen & Toubro had provided the biggest corporate guarantee, at Rs 77,720.8 crore, at the end of FY23, primarily in the form of corporate and performance guarantees on behalf of its subsidiaries and joint venture partners. It was followed by Bharti Airtel (Rs 34,985 crore) and Reliance Industries (Rs 18,208 crore).

Corporate guarantees are part of a company’s contingent liabilities, which are yet to be recognised as debt or payment obligations. Contingent liabilities include corporate guarantees extended to lenders against credit facilities provided to subsidiary and joint venture companies, corporate and bank guarantees for performance given on behalf of subsidiaries and joint ventures, tax demands under litigation and appeals, and claims against the company not acknowledged as debts.

Total contingent liability of the BSE 500 companies was up 7.8 per cent to a record high of Rs 168.4 trillion at the end of FY23. In comparison, their total liabilities, including equity, increased by 10.5 per cent to Rs 358.4 trillion, while their total borrowings rose by 11.6 per cent to Rs 233.1 trillion.

These include banks, insurance, and non-banking financial companies.

Excluding banking, financial services, and insurance (BFSI) companies, total contingent liabilities of the companies in the sample decreased by 16.9 per cent year-on-year to Rs 4.37 trillion in FY23, while the corporate guarantees they provided increased by 22.8 per cent to Rs 2.89 trillion. In comparison, total borrowings of these non-financial companies increased by 6.6 per cent year-on-year to Rs 16.5 trillion.

The most significant year for corporate guarantees by non-BFSI companies was FY15 when they had undertaken guarantees worth Rs 3.8 trillion.

The role of corporate guarantees in the corporate balance sheet has also declined over the years. They were equivalent to 1.3 per cent of the outstanding debt of all BSE 500 companies in FY23, down sharply from a record of 4.8 per cent in FY14. For non-BFSI companies, corporate guarantees were equivalent to 17.5 per cent of their total borrowings in FY23, down from 35.7 per cent in FY15.