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CARO 2016

BCAS Workshop on ICFR, Fraud and CARO Reporting


July 15, 2016

By Vijay Maniar

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Agenda

Overview of key developments

Changes made by CARO 2016


New requirements added by CARO 2016
Changes made to the existing clauses by CARO 2016
Clauses omitted by CARO 2016

Understanding the requirements of various clauses


New requirements
Select clauses

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Overview of key developments

MCA issued the Companies (Auditors Report) Order, 2016 (CARO 2016) on
March 29, 2016

CARO 2016 replaces the existing CARO 2015

CARO 2016 is applicable for audits of financial year 2015-16

ICAI issued Guidance note on CARO 2016 on April 23, 2016

CARO 2016 is not applicable to audit of Consolidated financial statements

Applicability to private companies has changed

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Changes made by CARO 2016

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New Requirements added by CARO 2016

Title deeds of immovable properties whether held in the name of the company

Compliance with Sections 185 & 186 in case of loans, investments, guarantees
and security

Compliance with Sections 177 & 188 in case of transaction with related parties.

Preferential allotment or private placement of shares/debentures Compliance


with Section 42 and end use of funds raised

Payment of Managerial Remuneration in accordance with applicable provision


of Act and Rules

Compliance with Section 192 in case of non-cash transactions with directors or


persons connected with him

Nidhi Companies-Compliance with Net Owned Funds to Deposits requirements

Requirement to obtain registration under Section 45-IA of the RBI Act, 1934.

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Changes made by the existing clauses by
CARO 2016
Maintenance of proper records of inventory and procedures of physical
verification not to be reported

Limited Liability Partnerships have been included in Loans granted to parties.


Also overdue amount for more than 90 days to be reported. Monetary limit of
Rs. 1 lacs as required is deleted

Wealth Tax has been removed from statutory dues

Defaults in payment of Loans, borrowings, dues Government has been added


to the list of parties, also lender wise reporting in case of defaults is now
required.

Utilisation of money raised via IPO/FPO (including debt instruments) to be


commented upon.

Fraud reporting fraud by others on the company has been omitted and only
frauds on the company by the officers/employees and fraud by the company is
to be reported.

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Clauses omitted by CARO 2016

Adequate internal control system for the purchase of inventory and fixed assets
and for the sale of goods and services.

Reporting on the accumulated losses not less than fifty per cent of the net worth
of the company.

Guarantee for loans taken by others from banks or financial institutions, the
terms and conditions whereof are prejudicial to the interest of the company.

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Understanding the requirements of various
clauses

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Understanding the requirements of various
clauses New Clauses
Clause (i)(c): Whether the title deeds of immovable properties are held in
the name of the company. If not, provide the details thereof

Immovable properties - meaning

Title deeds

Whether original documents are to be verified?

Change in the name of the company

Immovable property acquired in amalgamation or through the Business Transfer


Agreements (BTAs)?

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Understanding the requirements of various
clauses New Clauses (Contd.)
Clause (iv): In respect of loans, investments, guarantees, and security
whether provisions of section 185 and 186 of the Companies Act, 2013
have been complied with. If not, provide the details thereof.
Section 185:
Understanding the requirements u/s 185

Exemption (subject to the condition that the loan is used by the subsidiary for its principal
business activity):
- Loan given by holding company to wholly owned subsidiary
- Guarantee or security provided by holding company for loan taken by wholly owned
subsidiary
- Guarantee or security provided by holding company for loan taken from banks or
financial institutions by the subsidiary.

Parties covered u/s 185

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Understanding the requirements of various
clauses New Clauses (Contd.)
Clause (iv): In respect of loans, investments, guarantees, and security
whether provisions of section 185 and 186 of the Companies Act, 2013
have been complied with. If not, provide the details thereof.

Section 186:
Understanding requirements of section 186 how is it different from section 185

Special resolution not required if loan, guarantee or security is provided to wholly owned
subsidiary or JV, or for acquiring securities of the wholly owned subsidiary

Whether approval is required if the loan, investment, guarantee, etc. is less than the limit
prescribed in section 186?

Approval from financial institution

Default in repayment of the deposits accepted or in payment of interest thereon

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Understanding the requirements of various
clauses New Clauses (Contd.)
Parties covered u/s 185
Director Or

Other
person in whom
director is interested

Director of the Director of the holding Firm in which the such Private company in
company or his company or his director or his relative which such director is
partner or his relative partner or his relative is a partner a director or member

Any body corporate BOD/MD or Any body corporate where such


manager is acting on the advice director(s) control or exercise > 25%
of companys BOD or any of its of the total voting power in the
director general meeting

Such Director = Director of the Company or Director of the holding company


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Understanding the requirements of various
clauses New Clauses (Contd.)
Clause (xiii): Whether all transactions with the related parties are in
compliance with section 177 and 188 of Companies Act, 2013 where
applicable and the details have been disclosed in the Financial
Statements etc., as required by the applicable accounting standards
Section 177
Requirement to form an audit committee
- All listed company
- Public Company: Paid up capital > Rs. 10 crores or Turnover > Rs. 100 crores or o/s
Loans, Borrowings, Deposits > Rs. 50 crores

Approval or subsequent modification of transactions with related parties

All transactions with related parties are covered

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Understanding the requirements of various
clauses New Clauses (Contd.)
Clause (xiii): Contd
Section 188
Only specified transactions covered and special resolution limits
- Transaction for goods, materials or services > 25% of turnover
- Buying/selling (otherwise disposing)/leasing of property of any kind > 10% of net worth
- Availing or rendering of services > 10% of net worth
- Appointment of agent for sale/purchase of goods/materials/property/services
- Related party's appointment to any office or place of profit on the company, its subsidiary
company or associate company. > Rs 2.5 lacs
- Underwriting subscription of any securities or derivatives of the company > 1% of net worth

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Understanding the requirements of various
clauses New Clauses (Contd.)
Clause (xiii): Contd

Sec 188 Contd..


Exemption to private limited companies

Transactions in ordinary course of business and on an arms length

Example of the ordinary course of business

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Understanding the requirements of various
clauses New Clauses (Contd.)
Related Party as per section 2(76) of Companies Act 2013
Ultimate Holding
Company
(Not applicable for Director or relative of
Associate of Holding Pvt. Co.)
Company holding co or his
relative

Director or his Any body corporate


relative Company BOD/MD or manager
is acting on the
advice of Companys
Pvt. Co. In which director or manager
Firm in which director/manager
Director/manager or his relative is
or his relative is a a member or
partner director
Any person on
whose advice the
KMP or his relatives director or manager
Public Company of the Company acts
Director/manager is a
director and along with Subsidiaries and fellow
with his relative holds subsidiaries Associates
2% paid up capital (Not applicable for Pvt. (Not applicable for
Co.) Pvt. Co.)

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Understanding the requirements of various
clauses New Clauses (Contd.)
Clause (xiv): Whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the year under
review and if so, as to whether the requirement of Section 42 of the Companies
Act, 2013 have been complied with and the amount raised have been used for the
purposes for which the funds were raised. If not, provide the details in respect of
the amount involved and nature of non-compliance

Meaning of Private Placement and Preferential Allotment

Securities covered

Temporary parking of the funds

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Understanding the requirements of various
clauses New Clauses (Contd.)
Clause (xi): Whether Managerial remuneration has been paid or provided in
accordance with the requisite approvals mandated by the provisions of section 197
read with schedule V to the Companies Act? If not, state the amount involved and
steps taken by the Company for securing refund of the same

Applicable to only public companies

Overall limit under section 197

Schedule V

Amount involved and steps taken by the company for securing refund

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Understanding the requirements of various
clauses New Clauses (Contd.)
Clause (xv): Whether the company has entered into any noncash
transactions with directors or persons connected with him and if so,
whether the provisions of section 192 of Companies Act, 2013 have been
complied with
Understanding requirement of section 192?

Meaning of Person connected with the director

Noncash transactions

Court Scheme

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Understanding the requirements of various
clauses New Clauses (Contd.)
Clause (xvi): 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.
Registration is required when financing activity is a principal activity

50-50 test

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Understanding the requirements of various
clauses New Clauses (Contd.)
Clause (xii): Whether the Nidhi Company has complied with the Net Owned Funds
to Deposits in the ratio of 1:20 to meet out the liability and whether the Nidhi
Company is maintaining ten per cent unencumbered term deposits as specified in
the Nidhi Rules, 2014 to meet out the liability;

Nidhi Company is formed for the mutual benefits of its members

Deposits are taken and lending are done only to the members

Net Owned funds as per last balance sheet = Paid up share capital (+) free
Reserves (-) accumulated losses (-) Intangible Assets (-) Proceeds from issue
of preference shares

Deposits include fixed deposit, recurring deposits and savings deposits


accepted by Nidhi from its members.

10% is to be calculated on the deposits outstanding at the close of business on


the last working day of the second preceding month.

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Understanding the requirements of various
clauses Specific Clauses

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Understanding the requirements of various
clauses Specific Clauses (Contd.)
Clause (vii)(a): Whether the company is regular in depositing undisputed statutory
dues including Provident Fund, employees State Insurance, Income-tax, Sales-tax,
Service Tax, duty of customs, duty of excise, value added tax, cess and any other
statutory dues to the appropriate authorities and if not, the extent of the arrears of
outstanding statutory dues as on the last day of the financial year concerned for a
period of more than six months from the date they became payable, shall be
indicated;

Understanding undisputed statutory dues


Rectification matters

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Understanding the requirements of various
clauses Specific Clauses (Contd.)
Clause (vii)(b): Where dues of income Tax or sales Tax or service Tax or
duty of customs or duty of excise or value added tax have not been
deposited on account of any dispute, then the amounts involved and the
forum where dispute is pending shall be mentioned.
Only dues of Income tax, Sales Tax, VAT, Service tax, Excise and Custom duty are to be
considered

Show cause notice

Demands set aside

Demands stayed

Appeal is preferred by the department

Appeal is preferred by the company

Dues for multiple years can be aggregated to provide stage wise summary of the
disputed dues

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Understanding the requirements of various
clauses Specific Clauses (Contd.)
Clause (viii): 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).
What has changed from CARO clause 2015?
- default of dues to government has been added
- Leander wise default has to be provided.

All defaults existing on the balance sheet date has to be reported irrespective of the
period in which the default has occurred

In case of dispute with respect to repayment existing terms and conditions is to be


considered for reporting

For loans from banks/FI/Government only principal amount has to be considered. For
debenture holders both principal and interest o/s has to be considered

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Understanding the requirements of various
clauses Specific Clauses (Contd.)
Clause (iii): Whether the company has granted any loans, secured or unsecured to
companies, firms, Limited Liability Partnerships or other parties covered in the register
maintained under section 189 of the Companies Act, 2013. if so, (a) Whether the terms and
conditions of the grant of such loans are not prejudicial to the companys interest; (b) Whether
the schedule of repayment of principal and payment of interest has been stipulated and
whether the repayments or receipts are regular; (c) If the amount is overdue, state the total
amount overdue for more than 90 days, and whether reasonable steps have been taken by
the company for recovery of the principal and interest
What has changed from CARO 2015?

Parties covered u/s 189


(a) companies, body corporate, firm or association of individuals in which the directors are interested
(b) body corporate in which director(s) hold > 2% shareholding or of which the director is a promoter,
manger or CEO
(c) firm or other entity in which the director is a partner, owner or member.
(d) related parties covered u/s 188.

Terms and conditions - prejudicial to the interest of the company

Reasonable steps may not always be legal

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Understanding the requirements of various
clauses Specific Clauses (Contd.)
Clause (v): In case, the company has accepted deposits, whether the directives
issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any
other relevant provisions of the Companies Act, 2013 and the rules framed
thereunder, where applicable, have been complied with? If not, the nature of such
contraventions be stated; if an order has been passed by Company Law Board or
National Company Law Tribunal or Reserve Bank of India or any Court or any other
Tribunal, whether the same has been complied with or not?

Understanding of the section and the rules

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`
Understanding the requirements of various
clauses Specific Clauses (Contd.)

Clause (ix): Whether moneys raised by way of initial public offer or further
public offer (including debt instruments) and term loans were applied for
the purposes for which those are raised. If not, the details together with
delays or default and subsequent rectification, if any, as may be applicable,
be reported;
What has changed from the requirements of CARO 2015?
- Utilization of monies raised via IPO/FPO has been added
- Delays or default and subsequent rectification has been added

Moneys raised from issues of all kinds of securities has to be considered

Since the order is silent term loans raised from persons other than bank /
financial institution has also to be considered.

End use for which the funds are raised should be verified from the offer
document or from the loan agreement.

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Understanding the requirements of various
clauses Specific Clauses (Contd.)
Clause (vi): Whether maintenance of cost records has been specified by
the Central Government under sub-section (1) of Section 148 of the
Companies Act, 2013 and whether such accounts and records have been
so made and maintained.
Companies (Cost Records and Audit Rules) 2014 has been notified

Applicable to specified companies with turnover > Rs. 35 crores.

Cost records means details relating to utilisation of materials, labour and other
items of cost applicable to production of goods or provision of services.

Detailed examination is not required, only a general review is required.

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Thank You

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