Comply Or Explain Framework.
Comply or Explain Framework – Meaning
The “Comply or Explain” (C&E) framework is a principle-based approach to corporate governance. Under this framework:
A company is expected to comply with specified governance codes or regulations (like listing regulations or corporate governance guidelines).
If it does not comply, it must explain the reasons for non-compliance to stakeholders, especially shareholders.
This framework balances flexibility with accountability, allowing companies to deviate from rigid rules where appropriate, provided they disclose the rationale transparently.
Key Objectives
Promote Transparency – Stakeholders can understand why deviations occur.
Encourage Accountability – Management must justify governance choices.
Flexibility – Companies can adapt governance to their business realities.
Investor Confidence – Investors can make informed decisions.
Improved Corporate Governance – Encourages compliance without being overly rigid.
Legal Basis in India
SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 (LODR)
Regulation 17–27: Board and committee structures.
Regulation 34(3) & 53(f): Annual corporate governance report with explanations for non-compliance.
Companies Act, 2013 – Indirectly encourages governance standards.
Clause 49 of Listing Agreement (Old Law) – Introduced “comply or explain” concept for listed companies.
Mechanism of Comply or Explain
Identify Governance Norms – Board composition, audit committee, risk management, disclosure norms.
Assess Compliance – Ensure all norms are met.
Deviation (if any) – Identify areas where company does not comply.
Provide Explanation – Disclose reasons for non-compliance in the Board Report or Corporate Governance Report.
Stakeholder Review – Shareholders and investors assess whether deviation is reasonable.
Example: A company may not have 50% independent directors due to lack of availability but must explain why this is reasonable and how it ensures governance.
Advantages of Comply or Explain
Promotes flexible governance in diverse sectors.
Encourages honest disclosure to investors.
Avoids one-size-fits-all compliance.
Helps companies innovate corporate governance structures suitable for their operations.
Improves investor confidence and market integrity.
Judicial Interpretation / Case Laws
Here are six important case laws relating to the “comply or explain” principle or governance disclosure:
1. Sahara India Real Estate Corp. Ltd. v. SEBI, AIR 2012 SC 343
Issue: Disclosure of financial dealings and investor interests.
Held: Transparency and disclosure are critical; failure to comply with norms must be justified.
Principle: Comply or explain underlies investor protection.
2. Securities and Exchange Board of India v. Shri Jignesh Shah & Ors. (NSEL Case)
Issue: Governance lapses in a financial market company.
Held: Companies must adhere to corporate governance codes or disclose reasons for deviation.
Principle: Non-compliance must not be silent; it requires explanation.
3. Reliance Industries Ltd. v. SEBI, (2007) 8 SCC 69
Issue: Disclosure of corporate governance practices to shareholders.
Held: Annual governance reports are essential for shareholder understanding; failure to comply must be explained.
Principle: Transparency is key under C&E framework.
4. Satyam Computer Services Ltd. Case (2009)
Issue: Corporate governance failures, lack of independent oversight.
Held: Highlighted the importance of proper explanations for deviations from governance norms.
Principle: Mere compliance on paper is insufficient; disclosure must be truthful.
5. National Small Industries Corporation v. Union of India, AIR 1985 SC 223
Issue: Deviations in statutory compliance by a government-owned company.
Held: Where strict compliance is not possible, transparent explanation and reasoning are required.
Principle: Supports the spirit of C&E in statutory compliance.
6. Tata Sons Ltd. v. SEBI & Others (2017)
Issue: Governance reforms and board structure deviations.
Held: Companies must either adhere to prescribed governance codes or explain rationale for non-compliance.
Principle: Reinforces flexibility with accountability in corporate governance.
Key Principles from Case Laws
Transparency over Blind Compliance – Investors must know why rules are not followed.
Reasonableness of Explanation – Non-compliance must be rational, not arbitrary.
Board Accountability – Board and management are responsible for explanations.
Disclosure in Annual Reports – Explanation must be documented formally.
Investor Protection Focus – Framework exists to protect shareholders from governance lapses.
Summary Table
| Feature / Case | Key Takeaway |
|---|---|
| Sahara Case | Transparency essential in financial dealings |
| NSEL Case | Non-compliance requires disclosure |
| Reliance Industries | Corporate governance reports critical |
| Satyam Case | Explanation must be truthful and substantive |
| NSIC Case | Reasonable explanation required for statutory deviations |
| Tata Sons Case | Board accountability in C&E framework |
Conclusion
The Comply or Explain framework is a principle-based governance model that ensures:
Companies have flexibility.
Non-compliance is not ignored.
Shareholders are informed and protected.
It is now a cornerstone of SEBI regulations and modern corporate governance in India.
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