CARO 2020 – Clauses (xii) to (xvi): Nidhi, Related Parties, Internal Audit, Non-Cash Transactions & NBFC
## CARO 2020 – Clauses (xii) to (xvi)
Five shorter clauses applicable to specific types of companies or transactions.
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### Clause (xii) — Nidhi Companies
Applicable only to Nidhi companies.
Check
Requirement
Net Owned Funds to Deposit ratio
Maintained at 1:20
Unencumbered term deposits
Maintaining ≥ 10% of outstanding deposits
Default in payment of interest/repayment of deposits
Report details if any
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### Clause (xiii) — Related Party Transactions (RPT)
Whether all transactions with Related Parties comply with:
Section 177 (Audit Committee approval)
Section 188 (Related Party Transactions)
Whether details of RPTs are disclosed in Financial Statements as required by applicable Accounting Standards.
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### Clause (xiv) — Internal Audit
Whether the company has an internal audit system commensurate with its size and nature of business.
Whether the reports of the Internal Auditor have been considered by the Statutory Auditor.
> Statutory auditor is required to review and consider internal audit reports — not just acknowledge their existence.
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### Clause (xv) — Non-Cash Transactions with Directors
Whether the company has entered into any non-cash transactions with:
Directors, OR
Persons connected with directors
If yes → Whether Section 192 of the Companies Act, 2013 has been complied with.
> Section 192 restricts a company from entering into non-cash transactions with its directors unless approved by shareholders in a general meeting.
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### Clause (xvi) — NBFC & Core Investment Company (CIC)
(a) Whether the company is required to be registered under Section 45-IA of the RBI Act, 1934 (as an NBFC) — and if so, whether registration has been obtained.
(b) Whether the company has conducted any banking or finance activities without a valid Certificate of Registration from RBI.
(c) Whether the company is a Core Investment Company (CIC):
If so, whether it continues to fulfill the criteria of a CIC.
Whether the company qualifies for exemption from registration OR is unregistered CIC.
> Core Investment Company: An NBFC that holds ≥ 90% of its net assets as investments in equity/preference shares/debt/loans in group companies AND invests ≥ 60% in equity instruments.
Worked example
### Example 1
Nidhi Company — Deposit Ratio Breach [Clause xii]:
A Nidhi Company has Net Owned Funds of ₹50 lakh and total deposits of ₹12 crore.
Actual deposits: ₹12 crore → exceeds permissible limit.
Answer: The auditor reports under Clause 3(xii) that the company has NOT maintained the required 1:20 ratio of Net Owned Funds to deposits. Actual ratio: 1:24 (₹12 crore / ₹50 lakh), which exceeds the permissible 1:20.
### Example 2
Related Party Transaction — No Audit Committee Approval [Clause xiii]:
XYZ Ltd entered into a contract with XYZ Holdings (a related party) worth ₹5 crore without obtaining Audit Committee approval as required by Section 177.
Answer: The auditor reports under Clause 3(xiii) that the company has entered into related party transactions but Section 177 (Audit Committee approval) has NOT been complied with for the ₹5 crore contract. Details must be disclosed.
### Example 3
Non-Cash Transaction with Director [Clause xv]:
ABC Ltd transferred its commercial vehicle (book value ₹20 lakh) to its Managing Director without any cash consideration and without seeking shareholder approval in a general meeting.
Answer: The auditor reports under Clause 3(xv) that the company entered into a non-cash transaction with a director (transfer of vehicle worth ₹20 lakh) but Section 192 has NOT been complied with (no shareholder approval obtained in general meeting).
⚠️ Common exam mistakes
Clause (xii) on Nidhi — forgetting the 10% unencumbered term deposit requirement alongside the 1:20 ratio — both must be checked.
Clause (xiii) — reporting only Section 188 compliance and forgetting Section 177 (Audit Committee) — both sections must be checked for RPTs.
Clause (xiv) — assuming internal audit 'considered' means just read once — the statutory auditor must actively evaluate internal audit reports and use them in planning/risk assessment.
Clause (xv) — confusing non-cash transactions (Section 192) with related party transactions (Section 188) — a non-cash deal with a director is governed by Section 192 regardless of related party status.
Clause (xvi) — failing to distinguish between an NBFC (Section 45-IA of RBI Act) and a Core Investment Company — CICs have separate criteria and some are exempt from registration.
Bare-Act text Clauses 3(xii) to 3(xvi) · Companies (Auditor's Report) Order, 2020 (CARO 2020) · click to expand
3(xii): Nidhi Company: (a) whether the Net Owned Funds to Deposit ratio is 1:20 or not; (b) whether the company is maintaining ten percent unencumbered term deposits as specified in the Nidhi Rules; (c) whether there has been a default in payment of interest on deposits or repayment thereof for any period. 3(xiii): whether all transactions with the related parties are in compliance with sections 177 and 188 of the Companies Act where applicable and the details have been disclosed in the financial statements as required by the applicable accounting standards. 3(xiv): (a) whether the company has an internal audit system commensurate with the size and nature of its business; (b) whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor. 3(xv): whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether the provisions of section 192 of the Companies Act have been complied with. 3(xvi)(a): whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained; (b) whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certificate of Registration from the Reserve Bank of India; (c) whether the company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfil such criteria.