This article has been written by Spriha Smith pursuing a Diploma in US Corporate Law and Paralegal Studies course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

The term whistle-blowing originates from the 19th century, when a whistle-blower was simply a person who blew a whistle. Sports referees were also referred to as whistle-blowers. In the corporate world, making a disclosure in the public interest is known as blowing the whistle. The act of uncovering illicit, unethical, illegal, or immoral activity occurring within a private or public organisation is called corporate whistle-blowing. The objective of whistle-blowing is to ensure that action can be taken swiftly to fix the problem, to reduce the risk that an employee could take advantage of internal controls and cause the organisation harm, and to ensure that the organisation is serious about adherence to codes of conduct. Whistle-blowers are often an employee’s, a customer’s, a contractor’s, or any individual with dubious information about misconduct. 

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Kinds of whistleblowing

There are different kinds of whistle-blowing like government whistle-blowing and corporate whistle-blowing; internal whistle-blowing and external whistle-blowing, where an organisation is reported outside to the general public through newspapers, news channels, media, or an enforcement agency. Alumni whistle-blowing is when a former employee discloses information about wrongdoing. Open whistle-blowing, where the whistle-blower is prepared to reveal their identity to the public. Personal whistle-blowing, where only one person in particular has been wronged; and impersonal whistle-blowing, when the objective of the wrongdoing is for the entire organisation. 

Whistle-blowing by corporations can shield shareholders, customers, and employees from harm. However, as most organisations forbid the publication of institutional information, retaliation against whistle-blowers frequently takes the form of physical harm, demotion, harassment, or even job termination. Misconduct may take the form of embezzlement, fraud, waste, dangers to public health and safety, or corruption against the law. They first notify top management, a government agency, or a supervisor reporting their concerns. They may also approach the government, police, or the media about an organisation’s unlawful activities. Strict methods for whistle-blowing are required due to the growing number of corporate scams. Whistle-blowers are crucial in making sure that businesses remain in check at all times. It differs from country to country, but the legislation provides protection for whistle-blowers from retaliation and gives them some legal rights, like prohibiting companies from firing them or taking other negative action against them. To protect them from potential retaliation, whistle-blowers can be granted the right to report any misconduct anonymously. Occupational Safety and Health Administration (OSHA) is a federal agency in the United States focused on safeguarding worker health and safety and environmental health and safety breaches, while the Securities and Exchange Commission (SEC) is focused on securities law violations. In India, the Whistle-Blowers Protection Act, 2014, provides a legal mechanism for reporting malpractices by members of an organisation. The Companies Act, 2013 and Securities Exchange Board of India regulations make it mandatory for companies to address whistle-blower complaints. There are organisations that give rewards for impactful information and provide various ways to submit information. Although a minimum amount must be recovered to qualify for a reward, the information provided must be unique and not previously reported. Likewise, it takes disciplinary action against those who make false speculations or disclosures with bitter or spiteful intent.

Pros and cons of whistleblowing

Pros of whistleblowing

Some of the advantages of corporate whistle-blowing are that it serves as an anti-corruption tool, exposes malpractices, and ensures an effective system of internal control. It is a good corporate governance practice with a risk management strategy. A whistle-blowing culture could be made better by the management developing a policy for non-retaliation, clear reporting channels, getting top management to endorse the cause, publishing the organisation’s commitment, setting up an impartial committee to investigate reports, and following up and assessing the organisation’s internal whistle-blowing system by training employees and management on whistle-blowing and how to handle reports. With the right kind of whistle-blower structure, the team can be encouraged to speak up before a situation escalates. This increases everyone’s sense of accountability, loyalty, and trust while also securing the workplace and business. 

  1. Protection of public interest: Whistleblowers often bring to light critical information that might otherwise remain hidden, exposing corruption, fraud, or other illegal activities that harm the public. This can lead to investigations, legal action, and corrective measures, safeguarding the public’s well-being and trust in institutions.
  2. Accountability and transparency: Whistleblowers play a crucial role in holding organisations and individuals accountable for their actions. By exposing wrongdoing, they promote transparency and ensure that those responsible are held accountable. This can foster a culture of integrity and deter future misconduct.
  3. Policy improvements: Whistleblowing can lead to positive policy changes and reforms. When a whistleblower reveals systemic problems, it often prompts regulatory agencies, legislators, or organisations to address the issues and implement better policies and safeguards.
  4. Protection of whistleblowers: In many countries, laws and regulations have been established to protect whistleblowers from retaliation or persecution. This includes measures like confidentiality, legal assistance, and whistleblower protection offices, which provide support and ensure the safety of those who come forward with information.

Cons of whistleblowing

  1. Potential retaliation: Whistleblowers often face significant personal and professional risks, including the possibility of retaliation, harassment, job loss, and social isolation. This can deter potential whistleblowers from coming forward, hindering the exposure of wrongdoing.
  2. Loss of privacy and confidentiality: Disclosing sensitive information can compromise the privacy of whistleblowers and those involved. Maintaining confidentiality is challenging, and leaks or unauthorised disclosures can result in reputational damage or legal consequences.
  3. Emotional and psychological impact: Whistleblowing can take a significant emotional and psychological toll on individuals. Facing backlash, criticism, and potential threats can lead to feelings of isolation, anxiety, and depression.
  4. Limited impact: In some cases, whistleblowing may not lead to immediate or desired outcomes. Organisations might resist change, investigations can be lengthy or inconclusive, and legal processes can be complex and time-consuming.
  5. Potential misuse: Whistleblowing can be misused for personal gain or to settle scores, leading to false or malicious allegations. It’s crucial to ensure that whistleblowers have the necessary safeguards and that their disclosures are handled ethically.

Balancing the pros and cons of whistleblowing requires a thoughtful approach. While whistleblowers play a vital role in revealing wrongdoing, it’s essential to protect their rights, provide adequate support, and address the potential risks associated with their actions. Creating a culture that encourages responsible whistleblowing while safeguarding individuals is necessary to ensure transparency, accountability, and the public’s trust in institutions.

Case study and related laws with corporate whistle blowing in India

In the Harshad Mehta Scam in 1992, journalist Sucheta Dalal uncovered one of the biggest stock market scams, Harshad Mehta’s modus operandi, in an article in the Times of India. He was also known as the “Big Bull.” He exploited the loopholes in the banking and stock market systems. To finance his buying, he was dipping illegally into the banking system, using fake bank receipts to manipulate the stock prices of certain companies by hiking up their share prices. He started buying large quantities of certain stocks with this borrowed money, which created a high demand for those stocks, hence increasing their market prices. For example, companies like ACC (share prices rose from around Rs. 200 to nearly Rs. 9,000 during this period), Sterlite Industries, and Videocon’s shares were bought to hike prices, then sold off, passing on a part of the proceeds to the bank and keeping the rest of the profit for himself. To secure massive profits, he sold those shares at increased prices. In Ready Forward (RF) deals, parties are provided with ready cash flow as government securities are traded concurrently. He used these RF transactions to artificially hike up the value of particular equities. Scammers usually spread false or misleading information to incite a purchasing spree that will raise the price of stocks. They then proceed to sell their own shares of the stocks at the inflated price, making huge profits. Mehta plotted with the banks and other brokers to establish a network that would help him direct enormous sums of money to particular equities, inflating their values to unimaginable heights. This procedure is referred to as “pump and dump”.

However, he could not repay the banks, which led to the discovery of the scam. Investors’ confidence in the Indian securities market was severely damaged. For Indian regulators, it was alarming. There was a necessity for the significant need of proper regulatory methods. The Harshad Mehta scam is relevant in two ways:

In the Companies Act, 2013, Section 195 states the prohibition of insider trading, meaning any person who has unpublished price-sensitive information and uses it to trade in securities, if found guilty, can be punished with imprisonment and a fine. Section 447 of the act states punishment for fraud, which means any person with the intention to gain undue advantage or cause loss to another person by any act of deception or misrepresentation, found guilty of such fraud, can be punished with imprisonment and a fine.

SEBI Act 1992 – According to the Securities and Exchange Board of India (SEBI) Act 1992, Section 12A states the power to investigate and impose penalties for market manipulation, which means it empowers SEBI to investigate and impose penalties on those who manipulate the market using unfair trade practices. Section 15G states a prohibition on insider trading, barring an insider who has access to unpublished price-sensitive information from buying or selling securities. And Section 24, prohibition on fraudulent and unfair trade practices, forbids any person from engaging in such prohibited practices in the securities market. Fake bank receipts showed that he had more funds than he originally had to buy more stocks and manipulate the market further, and this was in violation of the SEBI Act of 1992.

After the controversy, the country’s securities regulator – the Securities and Exchange Board of India (SEBI), implemented several other measures to enhance corporate governance and safeguard investors, like buoying up insider trading regulations, improving disclosure standards for listed companies, and making stock trading more transparent, among other implementations.

The Whistle Blower Protection Act, 2011

The Whistle Blower Protection Act, 2011, is landmark legislation enacted to safeguard individuals who courageously disclose information about wrongdoing, corruption, or illegal activities in the public sector. It recognises the critical role of whistleblowers in exposing malpractices and promoting transparency and accountability in governance.

Key provisions and objectives:

  • Protection from retaliation:
    The Act provides comprehensive protection against retaliation and discrimination faced by whistleblowers. It prohibits any form of adverse action, including termination of employment, transfer, demotion, or harassment, taken against individuals for making disclosures.
  • Safeguarding whistleblower identities:
    The Act ensures the confidentiality of whistleblowers’ identities to encourage them to come forward without fear of reprisals. Disclosures can be made anonymously or under the protection of confidentiality to designated authorities.
  • Investigation and redressal mechanism:
    The Central Vigilance Commission (CVC) is empowered to investigate whistleblower complaints promptly and thoroughly. The CVC can recommend appropriate action against those found responsible for wrongdoing and suggest measures to prevent future instances of corruption or misconduct.
  • Whistleblower rewards:
    In certain cases, the Act provides for rewards to whistleblowers who provide valuable information leading to the detection and recovery of ill-gotten wealth or the prevention of significant financial loss to the government.
  • Raising public awareness:
    The Act aims to create public awareness about the importance of whistleblowing and encourage a culture of integrity and accountability in the public sector. It recognises the vital role of media and civil society organisations in safeguarding whistleblowers and promoting transparency.
  • Challenges and implementation:
    While the Whistle Blower Protection Act is a progressive step, its effective implementation remains a challenge. There have been instances of whistleblowers facing retaliation despite the legal protections in place. Strengthening institutional mechanisms, ensuring timely investigations, and providing adequate support to whistleblowers are crucial for the successful implementation of the Act.

The Companies Act, 2013

  • Section 177 of the Act mandates the establishment of a vigil mechanism or whistle blowing channel in every listed company and public sector undertaking.
  • Requires companies to create a framework for receiving, recording, and investigating whistleblower complaints.
  • Ensures the confidentiality of whistleblowers’ identities and prohibits companies from retaliating against them.

The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

  • Regulation 21A requires listed companies to establish a whistleblowing mechanism for reporting potential violations of securities laws.
  • Companies must provide adequate safeguards to protect whistleblowers from victimisation.
  • SEBI has the authority to investigate whistleblower complaints and take appropriate action against non-compliant companies.

Challenges and considerations

  • Anonymous reporting: Whistleblowers often prefer to remain anonymous to avoid retaliation or social stigma. However, it can be challenging for companies and regulators to investigate anonymous complaints effectively.
  • Lack of awareness: Many employees may not be aware of their rights and protections as whistleblowers. Companies need to raise awareness and educate their employees about the importance of whistleblowing.
  • Fear of retaliation: Retaliation against whistleblowers remains a significant concern. Companies must create a culture where whistle blowing is encouraged and retaliation is not tolerated.
  • Robust investigation mechanisms: Companies and regulatory authorities need to have robust investigation mechanisms in place to promptly and thoroughly investigate whistleblower complaints.

Conclusion

Large scale corporate scams, over the decades, have appalled the worldwide economy. As numerous scams and frauds have transpired in recent years, many of them could have been avoided had there been a suitable whistle-blowing system in place for employees to report them. The absence of appropriate protection prevented a few brave people from coming forward against their corporations, causing harm and loss to the public at large.

Scams like Satyam, Kingfisher, Saradha Group in 2013, 2G Spectrum in 2011, Punjab National Bank in 2018, and ICICI Bank, among others, have had some severe effects on millions of people. Whistle-blowers like Hari Prasad, Somen Mitra, and Sucheta Dalal are among the few brave people who have over the years striven to expose frauds and scams within Indian companies, even as agencies and executives charged with that task failed to do their duty diligently. Additionally, the Securities Exchange Board of India (SEBI) has approved amendments to corporate government guidelines that increase the audit committee’s authority in listed companies and mandate that they implement a mandatory whistle-blower programme for minority shareholders. Section 177 of the Companies Act, 2013 provides the classes of companies that are required to establish a vigil mechanism but it would be interesting to see if there is a separate Whistle-Blower Protection Act for the private sector in addition to the SEBI Regulations and the Companies Act.

References

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