The Companies (Auditor’s Report) Order, 2020 (CARO 2020), notified under Section 143(11) of the Companies Act, 2013, extends the scope of reporting responsibilities for statutory auditors. However, the law also recognizes that not all companies warrant such detailed reporting — hence a well-defined exemption framework exists.
Below is a structured and analytical guide to when CARO 2020 applies, and when it does not, in the context of private companies, small companies, and subsidiaries.
Exemption Criteria for Independent Private Companies
A private company, provided it is not a subsidiary or holding of a public company (i.e., an independent private company), can avail exemption from CARO 2020.
But such exemption is conditional, and all three conditions must be satisfied simultaneously:
-
Condition 1 – Capital & Reserves Test
Paid-up share capital plus reserves & surplus ≤ ₹1 crore (as on the balance-sheet date). -
Condition 2 – Borrowing Test
Total borrowings from banks/financial institutions ≤ ₹1 crore (at any point of time during the financial year). -
Condition 3 – Revenue Test
Total revenue (including income from discontinuing operations) ≤ ₹10 crores (during the financial year).
Interpretation: Even if one of these thresholds is breached, CARO 2020 becomes fully applicable. For example, a private company with revenue of ₹9 crores but borrowings of ₹1.5 crores will fall under CARO applicability.
Small Company Definition and Exemption
Section 2(85) of the Companies Act, 2013 (amended w.e.f. 15 September 2022) revised the criteria for a Small Company:
-
Paid-up share capital ≤ ₹4 crores AND
-
Turnover ≤ ₹40 crores
⚖ Legal Position: Every company qualifying as a Small Company is automatically exempt from CARO 2020, irrespective of borrowings, reserves, or revenue break-ups. No additional conditions (like in private companies) need to be tested.
Subsidiary Company Definition
As per Section 2(87) of the Companies Act, 2013, a company becomes a subsidiary if:
-
Its holding company controls >50% of its paid-up share capital, or
-
Its holding company controls the composition of its board, or
-
It is a subsidiary of another subsidiary of the holding company (deemed subsidiary).
Can a Subsidiary Be a Small Company?
This is a nuanced issue often misunderstood.
-
The Act explicitly excludes public companies and their subsidiaries from being treated as Small Companies.
-
However, a subsidiary of a private company may still qualify as a Small Company, provided it independently meets the thresholds (capital ≤ ₹4 crores and turnover ≤ ₹40 crores).
Practical Caution: If the subsidiary is of a public company, the exemption is lost (since such a company is considered public by definition under Section 2(71)).
Analytical Comparison – Independent Private vs Small Company
| Criteria | Independent Private Company | Small Company |
|---|---|---|
| Eligibility | Only if not subsidiary/holding of public company | Any private company not excluded by law |
| Exemption Tests | Must satisfy all three tests: Capital+Reserves ≤ ₹1 crore, Borrowings ≤ ₹1 crore, Revenue ≤ ₹10 crores | Automatic exemption if Capital ≤ ₹4 crores and Turnover ≤ ₹40 crores |
| Borrowing Limit Impact | Borrowings > ₹1 crore → CARO applicable | Borrowings irrelevant; exemption continues |
| Subsidiary Treatment | If subsidiary of public company → no exemption | If subsidiary of public company → no exemption; if subsidiary of private company → exemption possible |
Key Takeaways
-
Independent private companies → CARO exemption is conditional and restrictive; all three limits must be satisfied together.
-
Small Companies → enjoy absolute exemption once thresholds are met; borrowings or reserves don’t matter.
-
Subsidiaries → status as a subsidiary does not per se disqualify, but subsidiary of a public company cannot claim exemption.
-
Threshold monitoring → Companies close to the limits (especially on borrowings and reserves) must carefully track their year-end and peak figures, since even a minor breach triggers applicability.
Professional Insight:
For compliance planning, many private companies prefer ensuring Small Company status, since the exemption is broader and unconditional compared to the narrow three-point test for independent private companies. However, as companies grow, movement across these thresholds is inevitable, and auditors must document the exemption logic in their working papers.
