diff --git a/application/src/main/kotlin/application/BackwardCompatibilityCheckCommand.kt b/application/src/main/kotlin/application/BackwardCompatibilityCheckCommand.kt
index 3268c626e..231e97222 100644
--- a/application/src/main/kotlin/application/BackwardCompatibilityCheckCommand.kt
+++ b/application/src/main/kotlin/application/BackwardCompatibilityCheckCommand.kt
@@ -6,10 +6,12 @@ import `in`.specmatic.core.git.GitCommand
 import `in`.specmatic.core.git.SystemGit
 import `in`.specmatic.core.testBackwardCompatibility
 import `in`.specmatic.core.utilities.exitWithMessage
+import kotlinx.serialization.json.Json
 import org.springframework.stereotype.Component
 import picocli.CommandLine.Command
 import java.io.File
 import java.util.concurrent.Callable
+import java.util.regex.Pattern
 
 @Component
 @Command(
@@ -17,7 +19,7 @@ import java.util.concurrent.Callable
     mixinStandardHelpOptions = true,
     description = ["Checks backward compatibility of a directory across the current HEAD and the main branch"]
 )
-open class BackwardCompatibilityCheckCommand(
+class BackwardCompatibilityCheckCommand(
     private val gitCommand: GitCommand = SystemGit(),
 ) : Callable<Unit> {
 
@@ -120,13 +122,17 @@ open class BackwardCompatibilityCheckCommand(
         println()
     }
 
-    internal fun filesReferringToChangedSchemaFiles(schemaFiles: Set<String>): Set<String> {
-        if (schemaFiles.isEmpty()) return emptySet()
+    internal fun filesReferringToChangedSchemaFiles(inputFiles: Set<String>): Set<String> {
+        if (inputFiles.isEmpty()) return emptySet()
 
-        val schemaFileBaseNames = schemaFiles.map { File(it).name }
+        val inputFileNames = inputFiles.map { File(it).name }
         val result = allOpenApiSpecFiles().filter {
-            it.readText().let { specContent ->
-                schemaFileBaseNames.any { schemaFileBaseName -> schemaFileBaseName in specContent }
+            it.readText().trim().let { specContent ->
+                inputFileNames.any { inputFileName ->
+                    val pattern = Pattern.compile("\\b$inputFileName\\b")
+                    val matcher = pattern.matcher(specContent)
+                    matcher.find()
+                }
             }
         }.map { it.path }.toSet()
 
diff --git a/application/src/test/kotlin/application/BackwardCompatibilityCheckCommandTest.kt b/application/src/test/kotlin/application/BackwardCompatibilityCheckCommandTest.kt
index 71bc9b104..b57ea19f0 100644
--- a/application/src/test/kotlin/application/BackwardCompatibilityCheckCommandTest.kt
+++ b/application/src/test/kotlin/application/BackwardCompatibilityCheckCommandTest.kt
@@ -40,10 +40,36 @@ class BackwardCompatibilityCheckCommandTest {
         assertEquals(setOf("file1.yaml"), result)
     }
 
+    @Test
+    fun `filesReferringToChangedSchemaFiles returns set of files which are referring to a changed schema that is one level down`() {
+        val command = spyk<BackwardCompatibilityCheckCommand>()
+        every { command.allOpenApiSpecFiles() } returns listOf(
+            File("file1.yaml").apply { referTo("schema_file1.yaml") },
+            File("schema_file2.yaml").apply { referTo("schema_file1.yaml") }, // schema within a schema
+            File("file2.yaml").apply { referTo("schema_file2.yaml") }
+        )
+        val result = command.filesReferringToChangedSchemaFiles(setOf("schema_file1.yaml"))
+        assertEquals(setOf("file1.yaml", "file2.yaml"), result)
+    }
+
     @AfterEach
     fun `cleanup files`() {
-        listOf(File("file1.yaml"), File("file2.yaml")).forEach {
-            it.delete()
+        listOf("file1.yaml", "file2.yaml", "file3.yaml", "file4.yaml", "schema_file1.yaml", "schema_file2.yaml").forEach {
+            File(it).delete()
         }
     }
+
+    private fun File.referTo(schemaFileName: String) {
+       val specContent = """
+           openapi: 3.1.0  # OpenAPI version specified here
+           info:
+             title: My API
+             version: 1.0.0
+           components:
+             schemas:
+               User:
+                 ${"$"}ref: '#/components/schemas/$schemaFileName' 
+       """.trimIndent()
+        this.writeText(specContent)
+    }
 }
\ No newline at end of file
diff --git a/version.properties b/version.properties
index b6d155129..e8bce3fbb 100644
--- a/version.properties
+++ b/version.properties
@@ -1 +1 @@
-version=1.3.22
+version=1.3.23