Query on applicability of Small company, CARO and IFC

[Ca usha Aggarwal]

A private company is a subsidiary of a company incorporated outside India and its turnover is only Rs 40000 and paid up capital is Rs 1 lakh . 

A small company excludes a subsidiary company so it means it is not a small company . 

For caro since it is a pvt company and satisfies the condition of exemption so caro will not apply. 

For IFC(Internal financial control) also satisfies the exemption limit so IFC also does not apply. 

Being a subsidiary of foreign company does not affect the exemption of CARO and IFC .

Kindly confirm if the above understanding is correct for the purpose of the Audit Report.

CA Usha Garg

Partner at Aggarwal Garg & Associates

[Finava & Associates]

1. CARO (Companies (Auditor's Report) Order) Applicability:

• CARO applies to certain categories of companies, including private companies, subject to meeting specific criteria.

• Exemption under CARO for a private company occurs if:

  • It has a turnover of less than Rs. 1 crore in the preceding financial year.

  • OR, it is a subsidiary of a foreign company, provided the foreign parent company is not required to comply with CARO in its jurisdiction.

In your case:

• Turnover of Rs. 40,000: This is below Rs. 1 crore, which would typically exempt the company from CARO requirements.

• Subsidiary of a foreign company: Even though your company is a subsidiary of a foreign company, this does not automatically exempt it from CARO. The foreign company being a parent does not override the exemption based on turnover. If the company's turnover is below Rs. 1 crore, CARO will not apply, regardless of the foreign parent status.

So, CARO will not apply because the turnover is less than Rs. 1 crore, even though the company is a subsidiary of a foreign company.

2. Internal Financial Controls (IFC) Applicability:

• The requirement to report on Internal Financial Controls (IFC) applies to certain companies, as per Section 134(5)(e) and Rule 8(5)(v) of the Companies (Accounts) Rules, 2014.

• Private companies are exempt from IFC reporting if they meet the following criteria:

  • The company does not have a paid-up capital of more than Rs. 50 crore.

  • The company’s turnover is below Rs. 50 crore.

In your case:

• Paid-up capital of Rs. 1 lakh and turnover of Rs. 40,000: This clearly means that the company does not meet the threshold for IFC applicability. Even if it is a subsidiary of a foreign company, the IFC requirements are based on the company’s own turnover and capital, not its parent company’s status.

So, IFC does not apply either, because both the paid-up capital and turnover are well below the exemption limits.

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