ROC & Company Law
CARO and Cash Flow Statement Not Applicable for FY 2025-26: What the New Small Company Limits Change
Reviewed by CA Neeraj Rohilla, FCA — Chartered Accountant, Startup Advisory, Saket, New Delhi.
In short
By G.S.R. 880(E) dated 1 December 2025, the MCA raised the "small company" limits under Rule 2(1)(t) from ₹4 crore to ₹10 crore paid-up capital and from ₹40 crore to ₹100 crore turnover. Because the amended rule was in force on 31 March 2026, a large number of private companies are small companies for FY 2025-26 — and for them the auditor issues no CARO 2020 annexure, the financial statements carry no cash flow statement, there is no auditor rotation and no internal financial controls opinion. What does not change: the statutory audit itself, the audit trail and Rule 11(g) reporting, AOC-4 and MGT-7A, and consolidation under Section 129(3). Note the abbreviation: here CFS means the cash flow statement — consolidated financial statements are untouched by this amendment.
Most FY 2025-26 audit files being finalised in Delhi NCR right now were scoped in early 2026 on the old thresholds. That scoping is out of date. A single rule change in December 2025 moved the small company boundary by 150% on capital and 150% on turnover, and CARO 2020 is written to follow the definition rather than a fixed number. The practical effect is that companies which have carried a 21-clause CARO annexure for years will not carry one this year — and a few auditors will attach it anyway out of habit.
What exactly changed on 1 December 2025
The Ministry of Corporate Affairs notified the Companies (Specification of Definition Details) Amendment Rules, 2025 through G.S.R. 880(E) dated 1 December 2025, amending Rule 2(1)(t) of the Companies (Specification of Definition Details) Rules, 2014. The substituted rule reads:
"For the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2 of the Act, paid up capital and turnover of the small company shall not exceed rupees ten crores and rupees one hundred crores respectively."
Rule 2(1)(t) is the prescribing rule that fills in the blanks left by Section 2(85). Section 2(85) itself sets the outer statutory ceiling — "such higher amount as may be prescribed which shall not be more than ten crore rupees" for capital and "not more than one hundred crore rupees" for turnover. The MCA has now used up that headroom entirely. Any further widening of the small company net needs an amendment to the Act itself, not just a rule. That is a useful planning fact: this is the last threshold move for the foreseeable future.
The threshold history at a glance
| In force from | Paid-up capital | Turnover | Instrument |
|---|---|---|---|
| 1 April 2014 | ≤ ₹50 lakh | ≤ ₹2 crore | Original Rules, 2014 |
| 1 April 2021 | ≤ ₹2 crore | ≤ ₹20 crore | Amendment Rules, 2021 |
| 15 September 2022 | ≤ ₹4 crore | ≤ ₹40 crore | G.S.R. 700(E), Amendment Rules, 2022 |
| 1 December 2025 | ≤ ₹10 crore | ≤ ₹100 crore | G.S.R. 880(E), Amendment Rules, 2025 |
Who still cannot be a small company — no matter how small
This is where most of the wrong answers come from. The thresholds are only half the test. The proviso to Section 2(85) puts four categories permanently outside the definition, and the December 2025 amendment did not touch them:
- Any public company — including a private company that is a subsidiary of a public company, which is treated as a public company under the proviso to Section 2(71).
- A holding company or a subsidiary company — of any company. A ₹5 lakh capital private company with one wholly-owned subsidiary is not a small company. This is also why the amendment has no bearing on consolidation.
- A company licensed under Section 8 (not-for-profit).
- A company or body corporate governed by any special Act.
Group structures gain nothing from this change. If your client is a holding or subsidiary company, CARO and the cash flow statement continue exactly as before, regardless of how far below ₹10 crore and ₹100 crore it sits.
The two tests, and the dates they are read on
Section 2(85) is not symmetrical, and this catches people out:
- Paid-up share capital — read as at the reporting date, i.e. 31 March 2026 for FY 2025-26. A rights issue in March 2026 that takes paid-up capital past ₹10 crore destroys the status for the whole year.
- Turnover — Section 2(85)(ii) says turnover "as per profit and loss account for the immediately preceding financial year". For FY 2025-26 accounts that is the FY 2024-25 turnover, not FY 2025-26.
Read together, a company whose FY 2024-25 turnover was ₹92 crore and whose FY 2025-26 turnover jumped to ₹140 crore, with paid-up capital of ₹6 crore and no holding or subsidiary relationship, is a small company for FY 2025-26 and loses the status only in FY 2026-27. Conversely, a company that shrank sharply in FY 2025-26 does not become small until FY 2026-27. Document this working in the audit file — it is the single most reviewed judgement in a small-company file.
Does it apply to FY 2025-26? Yes. Does it reopen FY 2024-25? No.
The amended rule came into force on 1 December 2025 and was in force on 31 March 2026, the reporting date for FY 2025-26. Status under Section 2(85) is a fact about the company as at the reporting date for the year being reported on, not a fact about the date the auditor signs or the date AOC-4 is filed. So:
- FY 2025-26 (year ended 31 March 2026) — new limits apply. This is the first year of relief.
- FY 2024-25 (year ended 31 March 2025) — old ₹4 crore / ₹40 crore limits apply, even for accounts adopted, signed or filed after 1 December 2025. A late FY 2024-25 filing does not retrospectively acquire small company status.
Uncomfortable point for anyone still clearing a backlog: if you are filing pending FY 2023-24 or FY 2024-25 accounts under a compliance facilitation window, you cannot use the new limits to justify dropping CARO from those years' audit reports. See our note on CCFS-2026 and clearing ROC defaults.
Effect 1 — CARO 2020 falls away
Paragraph 1(2) of the Companies (Auditor's Report) Order, 2020, issued under Section 143(11), lists the companies the Order does not apply to:
- a banking company;
- an insurance company;
- a company licensed to operate under Section 8;
- a One Person Company and a small company as defined in clause (85) of section 2; and
- a private company (not a subsidiary or holding company of a public company) with paid-up capital plus reserves and surplus not exceeding ₹1 crore as at the balance sheet date, borrowings from banks or financial institutions not exceeding ₹1 crore at any point during the year, and total revenue not exceeding ₹10 crore.
The crucial drafting point: CARO refers to the definition, not to a figure frozen in 2020. When Rule 2(1)(t) moved, the CARO carve-out moved with it automatically. No separate CARO amendment was needed, and none should be waited for.
For a company that qualifies, the auditor's report for FY 2025-26 simply does not carry the CARO annexure — all 21 clauses, including the ones that generate the most client friction: title deeds of immovable property, physical verification of inventory, quarterly stock statements filed with banks reconciling to books, loans and advances to related parties under Sections 185 and 186, statutory dues arrears, and reporting on whether the company is a declared wilful defaulter.
Watch the fifth limb. Some private companies that were already outside CARO under the ₹1 crore / ₹1 crore / ₹10 crore test are now outside it for a different reason. The conclusion is the same; the reasoning in the audit file should be updated so it is defensible on review.
Effect 2 — the cash flow statement drops out
"Financial statement" is defined in Section 2(40) as a balance sheet, a profit and loss account, a cash flow statement, a statement of changes in equity where applicable, and any explanatory notes. The proviso then carves out:
"Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement."
A private company that is a start-up is also covered by the MCA's exemption notification of 13 June 2017. So a company that becomes a small company on the new limits can present FY 2025-26 financial statements without a cash flow statement. Everything else stays: balance sheet, profit and loss account, notes to accounts, and the full set of Schedule III disclosures, including the ratios, ageing schedules and the CSR, crypto and benami-property disclosures.
A caution before you drop it. Removing the cash flow statement is a legal option, not an obligation. Where the company has bank facilities, is preparing for a fundraise, or is going through due diligence, lenders and investors will still ask for it. Several banks make a cash flow statement a condition of the annual review irrespective of the Companies Act. Dropping it to save a page can cost you a week later.
"CFS" — two different things. In practice, CFS is used both for cash flow statement and for consolidated financial statements. Only the first is affected here. Consolidation is governed by Section 129(3) and Rule 6 of the Companies (Accounts) Rules, 2014, which carry no small company exemption at all. And a holding company can never be a small company anyway. Where a small company holds an associate or a joint venture — which the Section 2(85) proviso does not exclude — the Section 129(3) consolidation obligation and Form AOC-1 continue. Do not let the headline "CFS not applicable" travel into a group audit file.
Effect 3 — four more reliefs that arrive with the status
| Relief | Provision | What it means for FY 2025-26 |
|---|---|---|
| No auditor rotation | Sec 139(2) read with Rule 5, Companies (Audit and Auditors) Rules, 2014 | Small companies and OPCs are outside mandatory rotation. A firm approaching its 5 or 10-year limit may no longer have to go. |
| No IFC opinion in the audit report | Sec 143(3)(i), exempted by MCA notification G.S.R. 583(E) dated 13 June 2017 | A private company that is a small company is exempt — conditional on not having defaulted in filing financial statements under Sec 137 or the annual return under Sec 92. |
| Two board meetings a year | Sec 173(5) | One in each half of the calendar year, with a gap of at least 90 days, instead of four meetings. |
| Abridged filings and half penalties | Sec 92(1) proviso, Rule 8A & Rule 11, Sec 446B, Sec 233 | Annual return in Form MGT-7A, abridged Board's report, penalties at one-half (capped at ₹2 lakh for the company and ₹1 lakh for an officer), and the fast-track merger route. |
The IFC exemption is the one with a trap in it. It is conditional on a clean filing record. A company sitting on a pending AOC-4 or MGT-7 does not get it, and the auditor must then still report on internal financial controls with reference to financial statements even though CARO has gone. Check the MCA master data before concluding.
What does NOT change — read this before you cut anything
- The statutory audit itself. Every company under the Companies Act, 2013 is audited every year, whatever its size, turnover or level of activity. "Small company" has never meant "no audit". Our FY 2025-26 statutory audit checklist still applies in full.
- The audit trail. The proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 requires every company using accounting software to keep an audit trail (edit log), switched on all year. The auditor's reporting duty under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 applies to the audit report of every company using such software, irrespective of size or class. Losing CARO does not remove this — and a mid-year activation is still a reportable exception.
- The rest of Rule 11. Reporting on pending litigation, foreseeable losses on long-term contracts, transfer to the IEPF, and the management representations on onward lending, funding from outside parties and dividend compliance all remain in the main audit report.
- Consolidation. Section 129(3), Rule 6 and Form AOC-1, as explained above.
- ROC filings. AOC-4 within 30 days of the AGM and MGT-7A within 60 days. The ROC compliance calendar is unchanged.
- Internal audit under Sec 138. The Rule 13 thresholds for a private company — turnover of ₹200 crore or more, or outstanding borrowings from banks or public financial institutions of ₹100 crore or more — are independent of small company status.
- Ind AS. Driven by net worth of ₹250 crore and listing status, not by Section 2(85).
- Tax audit and the income tax return. Section 44AB of the Income-tax Act runs on its own thresholds. See the 30 September 2026 tax audit deadline.
- MSME / Udyam classification. A completely separate regime with its own investment and turnover limits. Being a Companies Act small company says nothing about MSME status, and vice versa.
One interaction to watch: MGT-8. Section 92(2) read with Rule 11(2) requires a Practising Company Secretary's certificate in Form MGT-8 where paid-up capital is ₹10 crore or more or turnover is ₹50 crore or more. Because a small company can now have turnover of up to ₹100 crore, a company can simultaneously be entitled to the abridged MGT-7A and be over the MGT-8 turnover trigger. The rules have not been aligned. Until the MCA clarifies or the V3 form logic settles it, take a conservative view on a company with turnover between ₹50 crore and ₹100 crore and discuss it with the PCS before filing.
Worked examples for FY 2025-26
| Company | Facts as at / for FY 2025-26 | Small company? | CARO & cash flow |
|---|---|---|---|
| A Pvt Ltd | Paid-up ₹1 crore; FY 2024-25 turnover ₹62 crore; no holding/subsidiary | Yes (was not small last year) | Both drop for FY 2025-26 |
| B Pvt Ltd | Paid-up ₹12 crore; FY 2024-25 turnover ₹30 crore | No — capital over ₹10 crore | CARO and cash flow continue |
| C Pvt Ltd | Paid-up ₹25 lakh; turnover ₹9 crore; wholly-owned subsidiary of D Pvt Ltd | No — it is a subsidiary | CARO and cash flow continue |
| E Pvt Ltd | Paid-up ₹5 crore; FY 2024-25 turnover ₹92 crore; FY 2025-26 turnover ₹140 crore | Yes for FY 2025-26 (preceding-year test) | Both drop this year; return in FY 2026-27 |
| F Pvt Ltd | Paid-up ₹2 crore; turnover ₹40 crore; holds 30% of an associate | Yes | CARO and cash flow drop; consolidation under Sec 129(3) continues |
| G Ltd (unlisted public) | Paid-up ₹50 lakh; turnover ₹3 crore | No — public company | CARO and cash flow continue |
What to do now — a six-step action list
- Re-run the classification for every company in the portfolio as at 31 March 2026, using FY 2024-25 turnover and 31 March 2026 paid-up capital, and screen out public, holding, subsidiary, Section 8 and special-Act entities first.
- Put the working on file. A one-page note recording both figures, both tests, the four exclusions and the conclusion. This is what a peer reviewer or the NFRA/ICAI file review will ask for.
- Re-scope the audit programme and the engagement letter. If CARO is out, the CARO-specific procedures — title deeds, physical verification of inventory, bank stock statement reconciliation, wilful defaulter confirmations — come out of the plan and out of the fee basis. Tell the client before the fee conversation, not after.
- Do not touch the audit trail work. Rule 11(g) reporting stays. So does the rest of Rule 11.
- Check the MCA filing record before dropping the IFC opinion — the Section 143(3)(i) exemption is conditional on no default under Sections 92 and 137.
- Decide the cash flow statement commercially, not just legally. Ask the lender and the board before removing it.
Two ways this goes wrong
- Attaching CARO when it does not apply. Not a reporting failure, but it is a signal to the client that the file was not re-scoped — and every clause you report on is a clause you must have evidence for.
- Dropping CARO when it does apply. The far more serious error. Omitting a report required under Section 143(11) is a reporting deficiency, and it is exactly the kind of thing that surfaces in a quality review. Group companies, deemed public companies and companies with a March 2026 capital increase are the usual casualties.
The safest posture is simple: nobody drops CARO or the cash flow statement on memory. It comes out only after the one-page working is signed off.
How Startup Advisory Can Help
Startup Advisory is a CA-led firm in Saket, New Delhi working with private limited companies and LLPs across Delhi NCR. On the FY 2025-26 audit and filing cycle we:
- Run a small company classification review across your group and give you a signed working for the file — including the holding/subsidiary and deemed-public traps.
- Re-scope the audit and the financial statements correctly: CARO in or out, cash flow statement in or out, IFC opinion in or out, audit trail always in.
- Prepare audit-ready books through our bookkeeping service, with a compliant audit trail and clean Schedule III disclosures.
- File the full ROC chain — ADT-1, AOC-4 and MGT-7 or MGT-7A — on time, and flag the MGT-8 question early where turnover is above ₹50 crore.
- Provide ongoing finance leadership through our Virtual CFO service where the company is growing through these thresholds.
Call 9311972982 or book a free consultation to get your FY 2025-26 classification confirmed before the audit report is signed.
This article is general information, not professional advice. Thresholds, notifications, forms and due dates are set by the MCA / Government of India and can change — confirm the current position for your company's specific facts with a Chartered Accountant before acting.
