CARO 2020 clause 3 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.
Clause 3(ix) follows borrowed money from the day it falls due to the day it is spent. It asks whether the company defaulted, whether a lender declared it a wilful defaulter, whether term loans were used for their purpose, whether short-term funds financed long-term assets, whether funds were raised for group entities and whether group securities were pledged. This article explains the ICAI Guidance Note's reading of each limb.
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. Where the GN refers to RBI directions on wilful defaulters, use RBI's directions as in force.
Report every default existing at the year end and every default during the year, with days of delay, up to the audit report date. Wilful defaulter reporting is limited to declarations by banks and financial institutions and, for other lenders, by the government or its authorities. Term loans are tested against the sanctioned purpose, short-term funds against long-term use, and group funding for all funds, long or short term.
The Order's wording is in the live clause vii to x explainer. Reviewing sanction letters and fund flows is a core part of financial and legal due diligence. The previous clause is in our statutory dues article.
3(ix)(a): defaults (paragraph 62)
Borrowings exclude public deposits (clause 3(v)) and preference share capital. The auditor reports defaults during the year and defaults existing at the balance sheet date, whenever they began, counting days of delay or unpaid amount up to the report date. "Default" means non-payment by the last date in the loan documents or trust deed.
The table needs nature of borrowing (including debt securities), lender, amount not paid on the due date, principal or interest, days of delay and remarks. Lender-wise detail is required for banks, financial institutions and the Government; other lenders, such as debenture holders, may be grouped. "Financial institution" includes banks, public financial institutions and NBFCs. "Government" means central and state departments, not a government company, public sector undertaking, board, authority or foreign government.
Procedures:
- obtain the repayment schedule and tie it to loan agreements or debenture trust deeds;
- test dates and amounts against bank statements and lender advices;
- obtain lender confirmations of status and overdue position (see SA 505);
- a restructuring application does not remove a default; approval during the year is mentioned, approval after year end goes in remarks;
- a due date on a holiday with payment debited the next working day is not a default;
- for a lender dispute follow the existing terms and briefly describe the dispute;
- for demand loans with no terms, take a representation that no demand was made.
3(ix)(b): wilful defaulter (paragraph 63)
Reporting covers a declaration in the year under audit up to the report date. RBI's directions on wilful defaulters (as in force) apply to banks and financial institutions, so for other lenders only a declaration by the government or a government authority is reported. A bank or institution that has not lent to the company is still covered.
Ask management about declarations and show-cause notices and take a signed declaration; add the question to bank confirmations; check credit information reports, public databases and the central repository of large credits; and apply SA 560 to declarations after year end. A show-cause notice alone may be mentioned. See wilful defaulter under Schedule III for the matching disclosure, which the auditor reviews first.
3(ix)(c): application of term loans (paragraph 64)
A term loan has a fixed repayment schedule; cash credit, overdraft and call money are not term loans. The GN reads the clause as covering term loans from any lender. The auditor compares the sanctioned purpose with actual use. Amounts need not match one to one when funds pass through a common account.
The GN lists the diversion events from RBI's directions: short-term funds for long-term use, assets other than sanctioned, transfers to subsidiaries or group companies, routing through other banks without permission, investment in other companies without lender approval, and unexplained shortfall in deployment. Not a diversion: buying a better version of the sanctioned machine, or parking funds temporarily during construction (mention the temporary use and the final end use). A loan received at year end and unspent is reported as such. A loan from an earlier year used this year is also tested, and compound instruments classified as equity under Ind AS are tested as debt. If funds were diverted, state the amount, the sanctioned purpose and the actual use.
3(ix)(d): short-term funds for long-term use (paragraph 65)
| Step | GN approach |
|---|---|
| Short-term sources | Temporary credit such as cash credit and overdraft |
| Long-term sources | Share capital, reserves, long-term debt; current maturities of long-term loans count as long-term |
| Long-term applications | PPE, intangibles, long-term investments, repayment of long-term loans |
| Compare | If long-term funds are significantly below long-term applications, short-term funds likely financed long-term assets |
| Indicator | A current ratio below 1 (current maturities treated as non-current) points the same way |
| Nature of use | State it only where a direct trail exists; otherwise give the overall picture and read the cash flow statement, since money is fungible |
A maturity-pattern analysis is finer where the company manages risk that way. An example is overdraft money invested in long-term shares of a subsidiary.
3(ix)(e) and (f): group funding and pledges (paragraphs 66 and 67)
(e) Funds taken to meet obligations of subsidiaries, associates and joint ventures. The lender can be a bank, company, LLP, trust or government, and funds include long and short term. The clause normally matters only if the company also lent to, invested in or paid obligations of group entities in the year. Funds taken in the year are reported even if repaid, and funds from earlier years repaid or outstanding in the year also count. "Obligation" means what a group entity must itself pay its vendors, lenders, employees or authorities. List group entities, review related party schedules, obtain balance confirmations, ask component auditors where needed, read the cash flow statement (strong operating or investing cash flow and equity may show borrowings were not used), apply the term loan utilisation tests to other borrowings, and take a representation.
(f) Loans raised on pledge of securities in group entities. Only loans taken during the year are reported, even if repaid, from any lender. Securities have the Companies Act meaning and are not limited to equity. Read loan documents and charge documents. A negative lien is not a pledge, and a general charge on all assets is covered only if group securities are actually pledged. On default the answer is yes or no, since details sit in 3(ix)(a); an invoked pledge points to a default.
A worked example
Quill Infra Limited took a bank term loan of Rs 12 crore for a warehouse and moved Rs 2 crore to its subsidiary to meet supplier dues. The auditor reports Rs 2 crore as diverted under (c), lists the bank, subsidiary and nature of the transaction under (e), and gives the bank lender-wise under (a) for interest unpaid for 40 days at year end.
Need help with borrowings and fund use?
Mapping each loan to its sanction purpose and repayment dates in advance avoids unexpected remarks. TaxClue's financial and legal due diligence team can review your borrowing documents and fund flows with you.
Key takeaways
- Report defaults arising in the year and those still existing at year end, with days of delay.
- Preference shares and public deposits are not borrowings for clause 3(ix)(a).
- Wilful defaulter reporting covers banks, financial institutions and government declarations.
- Test term loans against the sanction purpose and compare long-term sources and applications.
- Pledge reporting covers only loans raised during the year, with yes or no on default.
Read next
- CARO 2020 clauses 3(x) and 3(xi) in practice: fund raising and fraud
- CARO 2020 clauses 3(vii) and 3(viii) in practice
- SA 570: going concern, part 1
- Wilful defaulter under Schedule III
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.