CARO's clause 3(xvi) requires the auditor to report whether the company is required to be registered under Section 45-IA of the Reserve Bank of India Act, and if so, whether such registration has been obtained. It further requires reporting whether the company has conducted any non-banking financial activities without obtaining a valid Certificate of Registration, and whether any core investment company within the group is exempted from registration and, if so, whether the group's net asset structure meets the exemption conditions. The test driving this clause is activity-based — financial activity constituting a company's principal business, measured by specific financial-asset and income ratios — not a company's own description of what it does.
The activity test, in outline
| Measure | Test |
|---|---|
| Financial assets | Financial assets exceed 50% of the company's total assets |
| Income from financial assets | Income from financial assets exceeds 50% of total income |
A company that primarily describes itself as a trading or manufacturing business, but has accumulated substantial intercompany loans and investments over time such that both ratios above are now crossed, may have drifted into NBFC-activity territory without the company itself, or the audit team working from habit, recognising that the registration question is now live.
What audit review actually checks
- 01Compute both ratios from the current year's financial statementsNot assumed unchanged from a prior year's conclusion — a company's balance sheet composition can shift materially year to year, particularly where group lending and investment activity grows.
- 02Check for an existing valid Certificate of Registration, where the ratios are crossedConfirming registration exists and remains valid, not simply that the company believes it to be registered.
- 03Check core investment company exemption conditions, where claimedA group holding company claiming exemption as a Core Investment Company has specific net asset and group-structure conditions to satisfy — the exemption is conditional, not automatic for any holding entity.
Common practice, not a requirement
This is a clause worth recomputing every year rather than carrying forward last year's conclusion by default — the financial-asset and income ratios can cross the 50% threshold gradually, through ordinary intercompany lending growth, well before anyone deliberately decides to run an NBFC-type business.
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 clause on loans, advances and investmentsTesting loans, advances and investments given by the company for CARO reporting, including the overdue-loan-renewal pattern the clause is designed to surface.
- Bank, cash & treasuryLoans and borrowings audit checklistSanction letter checks, charge verification against ROC filings, covenant compliance, interest testing, and current/non-current classification.
- Related parties & disclosuresCommon-control entities: why they raise audit riskA promoter running several unlisted entities under common control creates a structure where money, not just transactions, can move without much friction. That is the risk to test for.
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