CARO explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
When a company invests in, lends to or gives a guarantee or security for another party, clause 3(iii) asks the auditor six questions about amounts, terms, repayment, overdue sums, rollovers and demand loans. Clause 3(iv) then asks whether sections 185 and 186 of the Companies Act, 2013 were complied with. This article sets out what the ICAI Guidance Note expects the auditor to examine.
It is explained from the ICAI Guidance Note on the Companies (Auditor's Report) Order, 2020 (Revised 2022 Edition, July 2022). CARO 2020 applies to audits of financial years commencing on or after 1 April 2021. Later amendments to the Order, Schedule III and the laws named should be checked.
Clause 3(iii) is triggered if the company made investments, gave guarantees or security, or granted loans or advances in the nature of loans during the year. Sub-clauses (a) and (e) do not apply to companies whose principal business is lending. The auditor reports gross amounts for the year, not net, and includes loans already repaid within the year. Clause 3(iv) reports each non-compliance with section 185 or 186.
The wording of the Order is in the live clause iii to vi explainer. Reviewing intercompany loans and approvals is a core part of financial and legal due diligence. The inventory clause before this one is in our clause 3(ii) article.
Scope and starting point (paragraph 49)
The auditor first decides whether the company did any of the listed things. Two points on scope:
- Advances in the nature of loans. The GN says it depends on facts. A normal trade advance against an order is not a loan. An advance far above the order value, or held far longer than trade practice, is a loan to that extent. Where no trade practice exists, the supply period (from purchase of material to delivery) is a guide. Interest on an advance points to a loan but does not settle it.
- Form of the loan. Long or short term, repayable on demand or not, in cash or in kind, all are covered.
The auditor starts by understanding the controls over making investments, loans and guarantees: purpose, legal permissibility, terms and who is authorised. The GN also asks the auditor to check sections 179, 180, 185, 186 and 187 and any sector rules, such as RBI directions for NBFCs.
The six sub-clauses
| Sub-clause | What the auditor reports | Points from the GN |
|---|---|---|
| (a) | Aggregate amount granted during the year and balance at year end, for subsidiaries, joint ventures and associates, and separately for others | Gross amounts, without netting later settlements. Only financial guarantees (for a third party's borrowings) are in scope. Not applicable to companies lending as a principal business |
| (b) | Whether investments, guarantees, security and loan terms are prejudicial to the company | Applies to every company, including NBFCs |
| (c) | Whether repayment and interest schedule is stipulated and receipts are regular | Covers loans granted in the year and opening balances |
| (d) | Total overdue for more than ninety days and whether reasonable steps were taken for recovery | Covers principal and interest on all parties |
| (e) | Renewed or extended loans, or fresh loans to settle overdues, with percentage of the year's loans | Aimed at evergreening. Not applicable to lending companies |
| (f) | Loans repayable on demand or without terms, with percentage and amounts to promoters and related parties | Promoter under section 2(69) and related party under section 2(76) |
Sub-clause (a). Obtain from management every party, relationship, gross amount granted, settlement dates and year-end balances. Loans granted and repaid within the year must still be reported. For guarantees, take a written representation that none is unrecorded, examine the register of guarantees, check it to board and general meeting minutes, and confirm authority. For listed companies, check the related disclosure of loans to subsidiaries, associates and firms or companies in which directors are interested. The GN suggests a grid by type (guarantees, security, loans, advances) and by counterparty (subsidiaries, joint ventures, associates, others).
Sub-clause (b). Terms include interest rate, security, repayment period, restrictive covenants and the borrower's standing. Advances disguised as loans are found by listing all advances against their purchase orders and spotting excess amounts or credit periods. For investments, look at the company's ability to invest, the investee's standing, source of funds and valuation. The GN gives a practical example: equity support to a loss-making subsidiary is not by itself prejudicial. A staff loan on concessional terms under a policy open to all employees is normally not prejudicial, even if the borrower is a director's relative. Cross-refer to clause 3(iv) when section 186 is breached.
Sub-clause (c). "Regular" means principal and interest received normally when due. If there is no stipulated schedule, the auditor says so and may say he cannot comment on regularity. If a schedule exists but receipts are irregular, report the cases with remarks.
Sub-clause (d). An amount is overdue when not received on the due date under the arrangement. Reasonable steps need not be legal: reminders, a lawyer's notice or enhanced security can qualify. Get the management's steps in writing and weigh them against the evidence.
Sub-clause (e). The list includes loans due in the year and rolled over, and also those falling due at the balance sheet date and renewed before the report date. The GN's own illustration: an opening loan of Rs 100 and three new loans of Rs 200, 300 and 400, with two loans (Rs 100 and Rs 200) extended on falling due, gives 33 per cent.
Sub-clause (f). The auditor lists promoters and related parties at any point during the year, reads agreements for demand terms or missing schedules, and reports the gross amount with the percentage. Schedule III covers loans to promoters, directors, KMP and related parties; CARO also captures those to other parties. Apply SA 550 for related party identification.
Clause 3(iv): sections 185 and 186 (paragraph 56)
Section 185 (loans to directors). Get the list of directors and persons in whom they are interested, using Form MBP-1 and the section 189 register. Examine every transaction, including guarantees and security, and obtain evidence for any exception relied on. The GN notes that "indirect loan" is not defined, and that a loan routed through intermediaries to a person covered by section 185 is read as caught. Report the nature of non-compliance, the maximum amount during the year and the year-end amount. The GN also records the exemptions for government companies and for certain private companies. See our section 185 explainer.
Section 186 (loans and investments). The GN's procedure list covers: all transactions and opening and closing balances; whether the sixty per cent of paid-up capital, distributable reserves and securities premium account limit or the one hundred per cent of distributable reserves and securities premium limit (whichever is more) was crossed at any time, and if so whether a special resolution was passed; the two-layer limit for investment companies; disclosure of particulars and purpose; board resolution and prior approval of a public financial institution where a term loan is subsisting; loans to companies registered under section 12 of the SEBI Act; interest rate not lower than the prescribed government security yield; no new loans if deposits or interest are in default; and the MBP-2 register. Exempt classes are noted in the GN, though the two-layer limit still applies to them. Our section 186 explainer covers the Act. The GN suggests a table of non-compliances: two layers, limits exceeded without special resolution, low interest rate, other defaults.
A worked example
Vega Retail Limited lent Rs 80 lakh to its subsidiary during the year at 5 per cent, below the government security yield for the loan tenor, without a repayment schedule. The auditor reports under (a) the gross amount, under (b) that the terms are prejudicial because of the rate, under (c) that no schedule was stipulated, and under (f) that the loan has no terms and is to a related party. Under clause 3(iv) the low interest rate is a section 186 default.
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Key takeaways
- Clause 3(iii) is triggered by investments, guarantees, security and loans or advances in the nature of loans made in the year.
- Report gross amounts, including loans repaid within the year.
- Sub-clauses (a) and (e) do not apply to lending companies; (b) applies to everyone.
- Overdue means ninety days or more past due; reasonable steps need not be legal.
- Clause 3(iv) reports each section 185 or 186 non-compliance with amounts.
Read next
- CARO 2020 clauses 3(v) and 3(vi) in practice: deposits and cost records
- CARO 2020 Guidance Note: which companies the Order covers
- Section 186: loans and investments
- SA 550: related parties
Disclaimer: Based on the Companies (Auditor's Report) Order, 2020 as explained in the ICAI Guidance Note on CARO 2020 (Revised 2022 Edition), as consulted on 3 October 2026. CARO applies to financial years commencing on or after 1 April 2021; later amendments to the Order, Schedule III and the laws referred to should be checked. This article is general information, not legal advice; check the official text before acting.