CARO's clause 3(xii) applies only to companies registered as a Nidhi under Section 406 of the Companies Act — a specific class of company whose principal business is borrowing from and lending to its own members, under the Nidhi Rules. For a Nidhi company, the clause requires reporting on whether it has complied with the net owned funds to deposits ratio prescribed under the Nidhi Rules, and whether it has maintained ten per cent unencumbered term deposits as prescribed, to meet the liability on deposits outstanding. For every other company — the overwhelming majority of statutory audits — the clause is simply not applicable, but reaching that conclusion requires actually confirming the company's registration status, not assuming it from the company's apparent business activity.
What makes a company a Nidhi
A Nidhi is a company incorporated specifically under Section 406 and the Nidhi Rules, carrying on the business of borrowing and lending among its own members for mutual benefit — a distinct regulatory category, not simply a description of a company that happens to make inter-member loans informally. Confirming applicability means checking the company's certificate of incorporation and registration status, not inferring Nidhi status from the nature of transactions alone.
What's actually checked where the clause does apply
- 01Compute the net owned funds to deposits ratioNet owned funds (paid-up capital and free reserves, less accumulated losses and certain intangible items) compared to total deposits outstanding, against the ratio prescribed under the Nidhi Rules.
- 02Check the unencumbered term deposit requirementConfirming the company has set aside the prescribed percentage of deposit liabilities in unencumbered term deposits with a scheduled bank, specifically to meet repayment obligations.
- 03Check compliance with lending and deposit-acceptance restrictionsThe Nidhi Rules place specific limits on loan amounts per member and deposit-acceptance practices, distinct from ordinary company lending.
Common practice, not a requirement
Because this clause touches such a small population of companies in practice, the real risk in most audit files isn't getting the substantive test wrong — it's never documenting the applicability check at all, leaving a reviewer unable to tell whether "not applicable" was a reasoned conclusion or simply an unexamined default.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- CARO & Companies ActCARO 2020 reporting checklist for statutory auditorsThe topic areas CARO reporting covers, what evidence each one needs, and how the clauses fit together across the audit file.
- CARO & Companies ActSecretarial compliance checklist for a statutory auditorBoard meeting frequency, statutory registers and ROC filing timeliness, read as evidence of compliance culture rather than a secretarial checklist in its own right.
- CARO & Companies ActBooks of account compliance under the Companies ActWhat proper books of account require under the Companies Act, the audit-trail-software requirement, and how to test whether it is actually switched on.
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