Companies (Auditor’s Report) Order 2020
Clause 9 of CARO 2020
02 June 2021
Accounting & Auditing
In addition to the main audit report reflecting opinion on True and Fair view of financials statement, Companies Act cast reporting responsibility on auditors for certain additional matters as well. A major part of such additional and specific reporting matters is listed in Companies
(Auditor’s Report) Order 2016 (“CARO 2016”) and now in Companies (Auditor’s Report) Order
2020 (“CARO 2020”). While reporting under CARO 2020 was to be applicable from financial year 2019-2020 however same was first deferred to year 2020-2021 and again to year 2021-22 (period starting 1st April 2021).
CARO 2020 contains 21 clauses on which comments are required to be made by Auditors, on the basis of the audit of company’s records and policies. Considering that most of these are critical ones and are required to be complied with by company’s management, we thought it is appropriate to release a knowledge series that reflects our views on the same.
Note: It may be taken into consideration that reporting for financial year 2020-21 (April 2020 to March 2021) shall be made under CARO 2016 and CARO 2020 shall be applicable for period starting from 1st April 2021. Considering this we have given a comparative analysis of both with
specific comments on changes in last part of this document.
Clause 9 of CARO 2020 [Paragraph 3(ix)]:
Clause 9 is related to loans and borrowings taken by company, reporting on correct utilisation and defaults in repayment of principal and interest thereon. The specific reporting requirement under this clause are as follows:
a) Whether the company has defaulted in repayment of loans or other borrowings or in the
payment of interest thereon to any lender, if yes, the period and the amount of default to be reported as per the format below:
b) Whether the company is a declared wilful defaulter by any bank or financial institution or other lender;
c) Whether term loans were applied for the purpose for which the loans were obtained, if not, the amount of loan so diverted and the purpose for which it is used may be reported; d) Whether funds raised on short term basis have been utilised for long term purposes,
if yes, the nature and amount to be indicated;
e) Whether the company has taken any funds from any entity or person on account of or to
meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions and the amount in each case;
f) Whether the company has raised loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies, if so, give details thereof and also
Nature of borrowing including debt securities Name of lender* Amount not paid on due date Whether principal or interest No. of days delay or unpaid Remarks, if any
We discuss above in details so as to bring more clarity on compliances required by companies and management and our reporting responsibilities.
Default in Repayment of Loans/borrowings or interest
Clause (a) requires reporting for default in repayment of loans or other borrowings or interest thereon. In normal circumstances defaults occur when payment of dues is not done by the due date. Similar concept applies in case of borrowings as well for the purpose of this clause. In this case, default would mean non-payment of dues to lenders by the last date specified in loan documents.
The format prescribed for reporting of clause (a) requires reporting for banks, financial institution and Government. As per RBI Act 1934, financial institutions includes all banks, public financial institutes and non-banking financial companies (NBFCs).
The reporting is required for default towards Government as well which primarily covers departments of Central Governments, State Governments and Union Territory but does not include Government Company, Public Sector Undertaking, Boards, authority, corporation and Foreign Government.
It may be noted that under this clause lender wise reporting is required in respect of banks, financial institutions, and Government but not in respect of other lenders. Accordingly, information in respect to other lenders may be given categories on consolidated basis e.g. Debenture holders.
Reschedulement or Restructuring of Loans
Many a times, companies submit application for rescheduling or restructuring of borrowings. In case application is approved by banks/FIs, the facts should be reported.
It may be noted that, mere submission of application for rescheduling or restructuring of loans does not mean that no default has occurred.
Reserve Bank of India in its master circular has defined the term Wilful Defaulter to remove any ambiguity in this term. As per the relevant circular, “wilful default” is construed to have occurred on happening of any of following events:
ii. The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
iii. The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
iv. The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender. It may be noted that RBI circular is applicable for banks/financial institutions to which any amount is due but does not apply to Government or other lenders e.g., Individual, company etc. However, considering the powers of Government/authorities, the reporting should cover declaration of wilful defaults by them as well.
Declaration of Wilful Defaulter post Balance Sheet date but before
issuance of Audit Report
It may be possible that company has been declared wilful defaulter post balance sheet date but before audit report issue date. As per SA 560 “Subsequent Events”, Auditors are required to perform procedures to identify any material event that requirement adjustment or disclosure in financial statements.
Accordingly, auditors are under obligation to verify and consider the impact of same in the audit report.
As the reporting requirement is with respect to diversion of Term Loans, it is important to understand the term “Term Loan”. In the common parlance, loans with fix repayment period of
more than 36 months are usually known as “Term Loan”. Accordingly, cash credit limits, overdraft facilities are not considered as Term Loan.
It may be noted that as the clause is silent on nature of borrowers, so all term loans are to be reported under this clause irrespective of whether same are from banks/financial institutions.
Diversion of Term Loan
Reserve Bank of India has defined the term Diversion of funds in its master circulars (which is updated on regular basis). As per RBI, divergence of funds can be construed on occurrence of any of the following events:
ii. Deploying borrowed funds for purpose/activities or creation of assets other than those for which the loan was sanctioned;
iii. Transferring borrowed funds to the subsidiary/Group companies or other corporate by whatever modalities;
iv. Routing of funds through any bank other than the lender bank or members of consortium without proper permission of the lender;
v. Investment in other companies by way of acquiring equities/debt instruments without approval of lenders
vi. Shortfall in deployment of funds vis-à-vis the amount disbursed /drawn and then difference not accounted for.
Utilisation of Term Loan for the defined purpose
While it may be difficult to establish exact correlation between funds raised and their utilisation, a holistic view needs to be taken. Following cases may be referred in this regard:
i. It may happen that company has invested the funds for some time before they are actually used for the defined purpose. In such case, this fact may be mentioned instead of assuming it to be case of diversion of funds.
ii. The loan is disbursed toward the end of the year and might not have been utilised for the purpose. In this case, this fact should be reported.
Short term Funds utilisation for Long-term purpose
As a prudent financial management policy, business entity should fund it long term funds requirement through long term sources of funds. Utilisation of short-term funds for long term needs may create liquidity issues for company which may significantly affect financial health of company. Few examples of use of short-term funds for long term purpose are:
i. Investing money raised through cash credit/overdraft facilities in long term investment in shares of subsidiary, associates or joint ventures.
ii. Investing money raised from public deposit due for repayment in three years in a project whose pay back period is say 10 years.
Verification of Short-Term Funds utilisation
An analysis of cash flow statement may also be helpful in reviewing this.
Coverage for loan transaction with Subsidiaries, Associates, JVs
The word entity or person has not been defined in the reporting clause; however, entity would include banks, financials institution, company, LLP, trust, government or others irrespective of legal form.
The clause covers granting of loans/advance/making payment on behalf of subsidiary, associates or Joint Ventures or making investment in such entities.
Payment on behalf of Subsidiaries, associates or Joint Ventures
The clause covers meeting obligation on behalf of subsidiaries, associates or Joint Ventures. While this term Obligation is not defined in the order or Act, however in general parlance,
obligation means commitment to pay a particular sum of money. So, obligation of subsidiary, associates or JVs mean the amounts that are required to be paid by such subsidiary, associates or JVs.
Any payment done by company on their behalf are treated as loans/advance in the books of accounts of the company and are covered for reporting under this clause.
Reporting for loans raised against pledge of securities
Reporting requirement with reference to clause (f) is for raising loans against pledge of securities of subsidiaries, associate or Joint ventures. In such cases, details of sums raised and default if any is required to be reported.
It may be noted that the requirement is for loans raised during the year and not in earlier years.
Pledge of Securities
It may be noted that securities here do not only mean equity shares. As per section 2(81) of Companies Act 2013 and section 2 (h) of Securities Contracts (Regulation) Act 1956, securities include:
❖ Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body corporate;
❖ Units or any other instrument issued by any collective investment scheme to the
❖ Financial Assets and Enforcement of Security Interest Act, 2002;
❖ Units or any other such instrument issued to the investors under any mutual fund
❖ Government securities;
❖ Such other instruments as may be declared by the Central Government to be securities;
❖ Rights or interest in securities.
Comparison with Companies (Auditor’s Report) Order 2016 (CARO 2016)
While this clause was there in CARO 2016 however, many new requirements have been added in 2020. A summary of change is given below:
(a) Whether the company has defaulted in repayment of loans or other
borrowings or in the payment of interest thereon to any lender, if yes, the period and the amount of default to be reported as per the prescribed format which includes:
❖ Nature of borrowing, including debt
❖ Name of lender (lender wise details to
be provided in case of defaults to)
❖ Amount not paid on due date ❖ Whether principal or interest ❖ No. of days delay or unpaid ❖ Remarks, if any.
Whether the company has defaulted in repayment of loans or borrowing to a financial institution, bank,
Government or dues to debenture holders? If yes, the period and the amount of default to be reported (in case of defaults to banks, financial institutions, and Government, lender wise details to be provided)
Reporting is required for default of dues of any lender in addition of the ones specified in CARO 2016.
(b) Whether the company is a declared wilful defaulter by any bank or financial institution or other lender;
❖ New Requirement
(c) Whether term loans were applied for the purpose for which the loans were obtained; if not, the amount of loan so diverted and the purpose for which it is used may be reported;
❖ New Requirement
(d) Whether funds raised on short term basis have been utilised for long term purposes, if yes, the nature and amount to be indicated;
❖ New Requirement
(e) Whether the company has taken any funds from any entity or person on account of or to meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions and the amount in each case;
We trust, you will find the content of this publication useful. You may connect with the following team members if you wish to have any clarification regarding above. Feedback towards further improvisation of the publication or on topics requiring guidance shall be highly appreciated. It shall be our pleasure to respond to your queries and to consider your suggestions / feedback for future releases.
CA Manoj Sharma
Partner – Assurance & Risk Advisory
CA Ritesh Kumar Partner – Assurance
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Disclaimer: While every care has been taken in the preparation of this Knowledge series to ensure its accuracy at the time of publication, SNR & Company assumes no responsibility for any errors which despite all precautions, may be found therein. Neither this document nor the information contained herein constitutes a contract or will form the basis of a (f) Whether the company has raised
loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies, if so, give details thereof and also report if the company has defaulted in repayment of such loans raised;