## CARO 2020 – Clauses 3 & 4: Loans, Investments, Guarantees & Securities

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### Clause 3: Reporting on Loans / Advances / Guarantees / Security Given

Not applicable to companies whose principal business is lending.

#### Step 1: Has the company provided any loans, advances, guarantees or security during the year?

If yes, report the following in two buckets:

Bucket	Parties
Subsidiaries, JVs & Associates	Aggregate amount during year; outstanding balance at BS date
Others (non-related parties)	Aggregate amount during year; outstanding balance at BS date

#### Step 2: Are they prejudicial to the interest of the company?

#### Step 3: Repayment Schedule

Whether schedule of repayment of principal and interest has been stipulated
Whether repayments/receipts are regular

#### Step 4: Overdue Amounts

If overdue, state amount overdue > 90 days
Whether reasonable steps have been taken for recovery

#### Step 5: Evergreening of Loans

Whether any loan/advance has been renewed, extended, or fresh loan granted to settle overdues of existing loans
If yes, specify: aggregate amount of dues renewed/extended/fresh loans and % of such amount to total loans
(Not applicable to companies whose principal business is lending)

#### Step 6: Loans Repayable On Demand / Without Terms

Whether company has granted loans/advances repayable on demand or without specifying repayment terms
If yes: aggregate amount, % to total loans granted, aggregate amount granted to promoters and related parties

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### Clause 4: Compliance with Sections 185 & 186

Section	Coverage
Section 185	Loans to directors and entities in which they are interested
Section 186	Loans, investments, guarantees, security by a company

Report: Whether the provisions of Sections 185 and 186 have been complied with. If not, provide details.

Worked example

### Example 1

Gamma Ltd has given an unsecured loan of ₹50 lakh to its wholly-owned subsidiary, Delta Ltd, at 4% p.a. (market rate is 8%). The loan was given without any repayment schedule. What will you report under CARO Clauses 3 and 4?

Answer: Clause 3: (a) Report aggregate amount and outstanding balance for subsidiaries separately; (b) The loan may be prejudicial to Gamma's interest as interest rate is below market — report accordingly; (c) No repayment schedule has been stipulated — report non-compliance; (d) Check if any amounts are overdue > 90 days; (e) Since no terms are specified, report under Step 6 (loans repayable on demand/without terms) including aggregate amount and % to total loans. Clause 4: If Section 186 limits (60% of paid-up capital + free reserves + securities premium, or 100% with special resolution) are breached — report non-compliance.

### Example 2

The auditor finds that the MD of Prism Ltd took a personal loan of ₹20 lakh from the company. Does this require reporting under Clause 3 or 4?

Answer: Primarily Clause 4 (Section 185 compliance): Loans to directors are governed by Section 185 of the Companies Act. If the loan was given in violation of Section 185 (which generally prohibits such loans unless under specific exceptions), this must be reported under Clause 4. Additionally, Clause 3 applies for reporting the aggregate amount and overdue status.

⚠️ Common exam mistakes

Forgetting that Clause 3 requires two separate disclosures — related party (subsidiaries/JVs/associates) vs. others — not a single combined figure.
Missing the 'evergreening' reporting requirement — fresh loans granted to settle existing overdues is a significant red flag that must be specifically reported.
Confusing Clause 3 (reporting on existence and terms of loans given) with Clause 4 (compliance with Sections 185 & 186 — the legal framework).
Not reporting the 'loans without repayment terms' sub-clause, which specifically asks for the amount lent to promoters and related parties.
Assuming the 'not applicable to principal lending companies' exemption covers all sub-clauses of Clause 3 — it applies only to the evergreening and on-demand lending sub-clauses.

Reference: CARO Clauses 3(iii) & 3(iv); Companies Act Sections 185 & 186 — Companies (Auditor's Report) Order, 2020; Companies Act, 2013

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CARO 2020 – Clauses 3 & 4: Loans, Investments, Guarantees and Securities (Sections 185 & 186)

Worked example

⚠️ Common exam mistakes