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Business Finance · Corporate governance and the regulation of companies

Governance Codes and Regulation of Companies in India

Updated 11 October 2026 · Fact-checked

Governance codes set good-practice standards for boards. Companies law and listing rules make some of them binding. Under comply-or-explain, a company follows a code provision or discloses and justifies its departure. Regulators enforce the rules, and auditors give independent assurance on the accounts. In India, the Companies Act 2013 and SEBI LODR form the core.

Understand Governance Codes and Regulation of Companies

A company is run by directors but owned by shareholders. This gap creates risk. Directors may act in their own interest, hide bad news or take poor risks. Rules exist to reduce this risk and to protect shareholders, lenders, employees and the wider market.

There are three layers of rules. Company law is binding on all companies of the relevant type. Listing rules are binding only on companies whose shares trade on an exchange. Governance codes are best-practice guidance. A code may be voluntary, or it may be made binding through listing rules.

Codes usually work on comply or explain. The company either follows each provision or tells shareholders where it does not and why. This is a principles-based approach. It gives flexibility and suits companies of different sizes and sectors. A rules-based approach sets detailed, mandatory requirements with penalties for breach. It is clear and easy to enforce, but it can encourage box-ticking and may not fit every company. Most systems mix both.

In India, the main sources are the Companies Act 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, called SEBI LODR. The Act covers matters such as board composition, independent directors, audit committees, related-party dealings, director duties, and audit and auditor rotation. SEBI LODR adds requirements for listed companies, for example on board and committee structure, disclosures and treatment of related-party transactions. Indian governance is therefore more rules-based than the UK model, though it still draws on international principles. Check the exact thresholds in your IAI study material.

Regulators supervise and enforce. In India these include SEBI for listed companies and securities markets, the Ministry of Corporate Affairs for company law, and sector regulators such as IRDAI for insurers and RBI for banks. Auditors are independent of management. They report whether the accounts give a true and fair view, which helps shareholders rely on what directors say. Auditor independence is protected by rules on appointment, rotation and limits on non-audit work.

Key rules to remember

Comply or explain
Follow the provision, OR disclose the departure and give reasons
Principles-based. The explanation must be specific and meaningful, not a bare statement of non-compliance.
Hierarchy of rules
Company law (binding) > Listing rules (binding for listed companies) > Codes (guidance unless made binding)
Use this to say which rules apply to which company.
Rules-based vs principles-based
Rules: detailed, mandatory, penalties. Principles: broad, flexible, disclosure-driven
Be ready to give one advantage and one disadvantage of each.
Audit opinion test
Accounts give a true and fair view of the company's position and results
This is the auditor's key assurance. It is not a guarantee of no fraud or of future success.

How to solve Governance Codes and Regulation of Companies questions

Use this method for any question on codes, company law, listing rules or regulators.

  1. 1Read the command word. Describe, explain, discuss and evaluate need different depth.
  2. 2Identify the layer asked about: company law, listing rules, a code, a regulator or the auditor.
  3. 3State the purpose in one line, such as protecting shareholders or improving transparency.
  4. 4Give the specific mechanism, for example comply or explain, independent directors, audit committee or auditor rotation.
  5. 5Apply it to the company in the question. Say who is affected and how.
  6. 6Give a balanced view: one benefit and one limitation, such as flexibility against weak enforcement.
  7. 7Close with a short conclusion that answers the question asked.

Quickest way: Layer, purpose, mechanism, limit

When to use it: Use for MCQs and for short written parts when time is tight.

  1. Name the layer: law, listing rule, code, regulator or auditor.
  2. Match it to its job: bind, disclose, guide, enforce or assure.
  3. Check whether it is binding or comply-or-explain.
  4. Add one limitation in a line to earn the evaluation mark.

Common mistakes in Governance Codes and Regulation of Companies

  • Saying comply or explain means a company may ignore the code.

    The word 'explain' sounds optional.

    Fix: State that the company must give a clear, reasoned explanation, and shareholders judge it.

  • Treating all governance codes as legally binding.

    Students mix codes with company law.

    Fix: Say a code is guidance unless law or listing rules make it mandatory.

  • Describing India as purely principles-based.

    Students learn the UK model first.

    Fix: Say India relies heavily on binding rules in the Companies Act 2013 and SEBI LODR, with principles behind them.

  • Saying auditors prevent fraud or guarantee accuracy.

    The audit report sounds like a certificate.

    Fix: Say auditors give reasonable assurance on a true and fair view, based on sampling and judgement.

  • Listing rules without explaining their purpose.

    Students memorise rather than reason.

    Fix: Link each rule to a problem it solves, such as independence reducing conflicts of interest.

  • Giving only advantages of one approach.

    Students forget evaluation questions need balance.

    Fix: Give at least one strength and one weakness of rules-based and of principles-based regulation.

Worked examples

Example 1

Explain what is meant by comply or explain and give one advantage and one disadvantage.

Show the solution
  1. Define it: the company follows each code provision or discloses where it does not and gives reasons.
  2. Say it is a principles-based approach, usually linked to a code or listing rules.
  3. Advantage: flexibility. A small or unusual company can adopt a different practice if it is better for it.
  4. Disadvantage: weak enforcement. Explanations may be vague, and shareholders may not challenge them.
  5. Conclude that it works best where investors actively scrutinise explanations.

Answer: Comply or explain requires a company to follow a code or openly justify departing from it. Its advantage is flexibility. Its disadvantage is that poor explanations may go unchallenged.

Example 2

A listed Indian company has a board of executives only, and no audit committee. Which of these helps most: (A) a voluntary code, (B) binding company law and listing rules, (C) a longer annual report, (D) a higher dividend? Explain your choice.

Show the solution
  1. Identify the gap: no independent oversight and no audit committee.
  2. Option A is guidance only and may not be followed.
  3. Option B includes binding requirements on board composition and committees for companies of the relevant type, so it directly fixes the gap.
  4. Option C adds length, not oversight.
  5. Option D is a payout decision and does not affect governance structure.

Answer: B. Binding company law and listing rules can require independent directors and an audit committee for companies of the relevant type, which addresses the weakness directly.

Exam tips

  • Always state whether a rule is binding or guidance. Examiners reward that distinction.
  • Use Indian examples where asked: Companies Act 2013, SEBI LODR, and sector regulators such as IRDAI.
  • For evaluation questions, give a benefit and a limitation, then conclude.
  • Do not quote section numbers or thresholds unless you are certain of them. Explain the principle instead.
  • In MCQs, watch absolute words such as 'always' or 'guarantees'. They are often wrong.

Practice questions from Corporate governance and the regulation of companies

Governance Codes and Regulation of Companies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Governance Codes and Regulation of Companies: frequently asked questions

What does comply or explain mean?

A company must either follow each provision of a governance code or disclose where it does not and explain why. Shareholders then decide whether the explanation is acceptable. It is a principles-based approach.

What is SEBI LODR?

It is the set of SEBI regulations that govern listed companies in India. They cover disclosures, board and committee structure and related-party dealings. They work alongside the Companies Act 2013.

Is Indian corporate governance rules-based or principles-based?

It is mixed, but leans towards rules. The Companies Act 2013 and SEBI LODR contain many binding requirements. Principles from international codes sit behind them.

What is the role of the auditor in governance?

The auditor independently checks the accounts and reports whether they give a true and fair view. This gives users more confidence in management's reports. It is not a guarantee against fraud.