This article is written by Madhavi Bohra and the article has been edited by Khushi Sharma (Trainee Associate, Blog iPleaders).
Table of Contents
Introduction
Brief background
The term vigil means the purposeful surveillance to guard and observe. So, the purpose of vigil mechanism policy works on the meaning of vigil.
Every company should adhere to a code of conduct and some commitment while operating its business. Some essential commitments such as maintaining the higher standards of moral, legal, and ethical conduct in its business operation. In order to maintain these standards, usually, companies attempt to protect their employees, directors and members against any victimization or harassment at the workplace. Every company make sure that not a single employee, member of the company suffers from any misconduct, unfair treatment or discrimination. And thus, companies encourage them to speak out their concern without any hesitation or fear of any unfair treatment or whatsoever. Therefore, companies are required to comply with certain rules and regulations on the moral, ethical, and legal grounds.
Types of whistle-blowers
There are eight types of whistleblowing which are mentioned below-
- Internal: When a whistle-blower reveals wrongdoings to higher-ranking authorities in the firm. Disloyalty, improper conduct, indiscipline, insubordination, and disobedience are common topics for internal whistleblowing.
- External: whistle-blowing occurs when wrongdoings are disclosed to those outside the organisation, such as the media, public interest groups, or law enforcement agencies.
- Alumni: When a former employee of the organisation acts as a whistle-blower, it is referred to as Alumni whistleblowing.
- Open Whistle Blowing: This type of whistleblowing occurs when the whistle-blower’s identity is revealed.
- Personal: When an organization’s wrongdoings solely affect one person, whistleblowing is referred to as personal whistleblowing.
- Impersonal: When the wrongdoing is done with the intent of harming others, it is referred to as impersonal whistle-blowing.
- Government: When information is made public about wrongdoings or unethical activities by government officials.
- Corporate: When a disclosure regarding wrongdoings in a business corporation is made, it is referred to as corporate whistle blowing.
Whistle-blowing policy : An overview
History of term “whistleblowing”
The idea of whistleblowing had been in the practice since long back. During the time of Kautilya, the idea similar to the whistleblowing had appeared. Although the term whistle-blowing is recent word added in the vocabulary but the phenomenon is not new one. The strategy of kautilya resembled with the vigil mechanism. The strategy of Kautilya states that- “Any witness who supplies data about extortion and on the off chance that he/she prevails with regards to demonstrating it, will get the reward of one-6th of the sum being referred to; or if the source is an administration worker, he/she might get one-twelfth of the sum for a similar demonstration.”
Whistleblowing had also been discussed in ancient Greece for generations. In his speech against Leokratis, Lykourgos, the Athenian orator, said: “Neither laws nor judges can bring any results until someone condemns the lawbreakers.”
The word whistle-blowing was coined by Ralph Nadar, a civil activist in the 1970’s. Officially, Whistleblowing is defined as “making a public-interest disclosure.” It usually occurs when an employee reports to a public entity, usually the police or a regulatory commission, that their employer is engaging in illegal behaviour. A whistleblower discloses information about workplace malpractice that he believes violates the law or jeopardizes the well-being of others, and speaks out in order to expose corruption or threats to the public or the environment.
Brief discussion of Sarbanes-Oxley Act, 2002
The Sarbanes-Oxley Act of 2002 was enacted by the United States Congress on July 30, 2002, to enable investors protect themselves from misleading financial reporting by corporations.
This Act is also called as SOX Act of 2002 and corporate responsibility Act of 2002. This Act brought new strict reforms for existing securities regulations and imposed resilient penalties on lawbreakers.
The Act of Sarbanes-Oxley Act of 2002 came into existence after the financial scandals in the early 2000s. The companies include in the scandals were publicly traded companies such as Enron corporations, Tyco international plc, and WorldCom. As a result of these high-profile scams, many investors have lost faith in the reliability of company financial statements, and many have called for a rewrite of decades-old legal requirements. The name of the Act was derived from the two names- Sen. Paul S. Sarbanes and Rep. Michael G. Oxley
This act mandates to every listed companies in US to have whistle-blowing policy in place. The main objective of the Act was to protect the investors through improving the transparency, disclosure norms, and reliability of every information of the companies.
Similarly, The UK has also enacted the public interest disclosure Act, 1998 to prevent the companies’ employees from discriminating against the whistle-blowing employees.
Applicability of Sox Act in India
This Act is followed by Indian companies with two-folds.
- First of all, Indian companies which are listed in US stock exchanges, are required to comply with the requirement of this Act.
- Secondly, Section 404 of the Sox Act is also incorporated in the provision of corporate governance in India. And section 404 requires Management’s appraisal of the effectiveness of the internal control framework must be included in all annual financial reports.
Process of whistle-blowing
There is no procedure provided under Indian law for companies when faced with such situations. It is driven by the policy, where such policy exists. However, when a whistle-blower complaint is received, it is generally evaluated and investigated basis the nature of issues raised. In a general manner, companies follow the procedure which is explained below-
Procedure
- Concerns should be raised voiced as soon as they arise. Concerns can be expressed verbally, but they should better be expressed in writing or via email, together with any relevant background and history, as well as any witnesses.
- The concern is immediately forwarded to the compliance officer.
- After that, an investigation will be conducted. It is not advisable to conduct one’s own investigation because this may result in the destruction or contamination of evidence, as well as putting one’s own safety at danger. If the matter is serious and grave in nature, the investigation officer is appointed in that case.
- Following the inquiry, the whistleblower will be informed of the findings and the next steps, which may include doing nothing or following the disciplinary procedure in its entirety. However, due to the necessity for confidentiality, one may not be given much information.
- If the whistleblower believes that his/her complaint has not been effectively addressed or that wrongdoing is still occurring, he/she should contact an Executive Director, the Head of Internal Audit, or the Audit Committee Chair.
Steps followed
- To create a policy and a monitoring system.
- If applicable, publish the details of the vigil mechanism on its website and in the board’s report.
- To appropriately protect persons who use the whistle-blowing mechanism from being victimized.
- In the event of repeated frivolous allegations, the audit committee or the nominated director (as applicable) will be empowered to take appropriate action.
Some important points while complying with this policy
- Whistleblowers are urged to sign their names to any disclosures they make. Concerns reported anonymously will be examined by the compliance officer at its discretion, considering the following factors:
- The seriousness of the issues raised.
- The concern’s trustworthiness.
- The chance of attributable sources corroborating the accusation.
- The compliance officer will regard all such disclosures as private and confidential. The identity of the person making the claim may be kept secret as long as it does not obstruct or obstruct any investigation. The investigation process, on the other hand, may expose the source of the information, and the person who made the disclosure may be obliged to submit a statement as part of the evidence.
- Individuals who make malicious charges, i.e. ones that are untrue, may face formal action under this policy (such as disciplinary action for employees or volunteer status review process for volunteers).
Importance of whistle-blowing
- Encourage employees to report any ethical or legal infractions they become aware of to an internal authority so that quick action can be taken to address the issue.
- To reduce the risk of damage to the company that can occur when employees evade internal controls
- To demonstrate to employees that the company is serious about following the rules of conduct.
Some cases of whistle-blowers in India
There are some cases of whistleblowing in India. But, due to the lack of appropriate legislation for the whistle-blowers, they were murdered.
Satyendra Dubey
Facts of the case-
The first Indian whistle-blowing case was seen in the NHAI project. The whistle-blower, Satyendra Dubey was 31 years old IIT Kanpur engineer graduate and IES officer, who was employed at the National Highway Authority of India (NHAI). While he was engaged in the “golden quadrilateral” national project and was given the charge of releasing funds for constructing the highway. The contract of construction was based on forged documents and the contracting firm, L&T had been sub-letting the contract to the local mafia with lacked and low technology. And everyone seemed to be engaged in “loot of public money”.
In the year 2002, Satyendra Dubey wrote a letter to the project director of NHAI and supervisor of contract but they overlooked it. Then, he wrote the same letter to PM and requesting anonymity while taking into account the threat and trouble he may face; in the second letter.
But, the PMO handed over those two letters to the ministry of highway and road transport without any investigation. More than 8 officials scanned and passed to NHAI. Unfortunately, NHAI did not respond to it and Satyendra Dubey was shot dead in the year 2003.
Aftermath-
Nearly 50,000 citizens filed petitions demanding to investigate the case. In 2004, the Supreme Court of India urged the Central government to put in place “administrative machinery for acting on allegations from whistleblowers till a legislation is enacted” in response to a petition filed following the infamous murder of an NHAI official.
In response, the government issued the ‘Public Interest Disclosure and Protection of Informers Resolution (PIDPIR)’ . The Central Vigilance Commission (CVC) was given the authority to act on allegations from whistleblowers as a result of this resolution. But the jurisdiction of this committee was limited only to the extent of central government employees, companies and authorities owned by the government.
ICICI Bank and Chanda Kochhar case
Recently, in the year 2012, the ICICI bank and the business dealings of Kochhar family had come under the regulatory glare of SEBI and other agencies after a report made by the whistleblower to the government agencies. The main issue was that Kochhar family had some quid pro quo in its dealings with the now-bankrupt Videocon group.
Facts of the case-
The CEO and Managing director, Chanda Kochhar was part of sanctioning loan to the Videocon group as well as recommending committee in the proposals made by Videocon. Finally, the group was granted a loan worth 1875 cr. And most of these loans were in complete violations of banking regulations and ICICI bank policies. Out of the loan of 1875 Crore, worth 64 Cr. Loan to kochhar firm was part of a quid pro quo deal.
The whistleblower-
The shareholder, Arvind Gupta was the whistleblower in this case and said- “although many companies that received loans from ICICI Bank went bankrupt, Ms Kochhar found a “new way” to profit from the situation. “As a shareholder, I felt that these are things people must know. So I informed everybody. I would like the government to look into foreign funding in Indian companies because Chanda Kochhar’s case is just the tip of the iceberg,”
Aftermath-
Furthermore, he filed an FIR against the Chanda Kochhar, who was alleged to commit the fraud. This was one of the most widely publicised complaints in the country, prompting multiple law enforcement agencies, including the Enforcement Directorate, the Central Bureau of Investigation, and income tax authorities, to initiate civil and criminal proceedings against the then-Chairman. Finally, in the year 2020, the Chanda Kochhar resigned from the post.
Sun pharma
Facts of the case
In another case, a whistleblower at a major pharmaceutical firm complained to the SEBI about possible financial irregularities at the firm. The claims were eventually found to be without merit by SEBI. However, the company’s price experienced significant swings as a result of the lawsuit. Whistleblower accusations have also plagued a number of other institutions, including private banks, financial institutions, auditing firms, and consulting firms. All of this is in the public domain, and it’s most likely just the tip of the iceberg.
Aftermath-
The Securities and Exchange Board of India said in a series of statements that Sun’s senior management, led by billionaire founder Dilip Shanghvi, will pay a total ₹2.36 crore ($323,886) “without admitting or denying the findings of fact and conclusions of law.” Shanghvi himself will pay ₹62 lakh.
Provisions of the whistleblowing/vigil mechanism in India
Legal reforms relating to whistleblowing
- For public servants-
In 2001, the Indian Legislation Commission proposed that a law protecting whistleblowers be enacted in order to combat corruption. It had also written a bill to address the problem.
In the year 2004, the government notified the resolution, “Public Interest Disclosure and Protection of Informers Resolution (PIDPIR)’ and in response to this resolution, the Central Vigilance Commission (CVC) was established only to protect the government employees.
The Second Administrative Reforms Commission’s report from 2007 also urged that a separate statute be enacted to protect whistleblowers.
India has enacted the Whistle Blowers Protection Act, 2014 (“Whistle Blowers Act”), which is applicable only to public servants. It was enacted with the intent to establish a mechanism to:
- receive complaints relating to disclosure of any allegation of corruption, wilful misuse of against any public servant;
- to inquire or cause an inquiry into such disclosure; and
- to provide adequate safeguards against victimization of the person making such complaint.
The Whistle Blowers Act may be utilized by any person to make a public interest disclosure. An amendment to the aforementioned Act was proposed in the form of the Whistleblowers Protection (Amendment) Bill, 2015 (“Amendment Bill”). The Amendment Bill sought to, inter alia, incorporate necessary safeguards against disclosures that may prejudicially affect the sovereignty and integrity of the country, security of the State, etc. However, the Amendment Bill was not passed by the Rajya Sabha and consequently, it lapsed.
- For listed companies-
- Companies Act-
It is mandated by Section 177 of the Companies Act, 2013 and Companies Rules 2014, that every listed business establishes a surveillance mechanism for directors and employees to report any frauds or misappropriations in a stipulated. As a result, the corporation has established a code of conduct for its senior management executives and other top management personnel, which outlines the criteria for their code of behaviour.
The purpose of the whistleblowing mechanism is to strike a balance between law and morality by forcing employees to recognize their societal responsibilities. A good policy could close the gap created by the fear of punishment from powerful people if unfavourable information is revealed. Employees are frequently threatened with losing their jobs and exploited if they choose to speak out against corporate wrongdoing. Due to secrecy requirements in their job contracts, they are even more afraid of reprisal.
Applicability-
According to sub-Section (9) of Section 177 of Companies Act, 2013 along with Rule 7 of companies (meeting of board and its power) Rules, 2014 following companies are required to follow these provisions and establish the vigil mechanism/whistleblower policy-
- Every listed company;
- Every other company which accepts deposits from the public;
- Every company which has borrowed money from banks and public financial institutions in excess of Rs. 50.00 (Fifty) Crores.
- Vigil mechanism/whistle blower policy facilitates the employees and directors to approach the chairman of the audit company in case of any grievance.
Companies that are required to form an audit committee must use the audit committee to carry out the vigil mechanism, and if any of the committee members have a conflict of interest in a given issue, they must withdraw themselves and the rest of the committee will handle the situation.
For other corporations, the Board of Directors shall appoint a director to serve as the audit committee, which will serve as a vigil mechanism to which other directors and employees can submit their concerns. It includes suitable safeguards against victimization of employees and directors who use the Vigil mechanism, as well as direct access to the chairperson of the Audit Committee or the director chosen to act as the Audit Committee in extreme circumstances. The presence of the mechanism can then be properly conveyed within the organization once it has been developed.
The corporation must disclose the details of the Vigil mechanism’s establishment on its website if one exists, and in its annual report.
If a director or employee files many frivolous complaints, the audit committee or a director has chosen to serve on the audit committee may take appropriate action against them, including reprimand.
- SEBI regulations-
The Securities Exchange Board of India (“SEBI”) has mandated that every listed company should have a whistle- blower policy and make employees aware of such policy to enable employees to report instances of leaks of unpublished price sensitive information. Listed companies are required to make a disclosure of material events to the stock exchange(s) pursuant to Regulation 30 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”).
In August 2003, SEBI amended Clause 49 of the Listing Agreement to incorporate these recommendations for companies.
Regulation 18 of the SEBI (LODR) Regulations contains the substance of Clause 49. All publicly listed corporations are required by the Listing Agreement to adopt a whistleblower policy. It gives employees a way to report any type of misappropriation, fraud, or actual and unethical behaviour to the Board.
Moreover, an employee who wants to report any form of fraudulent behaviour or malpractice in the company must be granted access to the company’s Audit Committee, according to these clauses. Following that, the corporation must communicate this information to all of its personnel.
Moreover, the company must affirm that it has not denied any person to access the audit committee and protected the whistle-blowers from unfair treatment. Such affirmation shall form the part of the annual report of corporate governance.
The Regulation 18 standards are intended to instil a sense of responsibility in a company’s employees and to inform them that it is their right and privilege to remain vigilant. Employees have the right to blow the whistle against illegal acts, and the company promises to safeguard such employees from any type of harassment or termination.
With effect from December 2019, the SEBI has also introduced a reward mechanism for incentivizing ‘Informants’ to report violations of insider trading laws to SEBI.
In the year 2021, SEBI has also increased the reward for whistle-blowers on insider trading to make it more attractive. SEBI has increased the reward payable to whistle-blowers under its prohibition of insider trading regulation from 1 crore to 10 crores in order to encourage whistleblowers to come forward to the regulator.
It includes adequate protections against victimisation of employees who use the system, as well as direct access to the Chairman of the Audit Committee in extraordinary circumstances. The presence of the mechanism can then be properly disseminated within the organisation once it has been formed.
- For private employees-
There is no specific law on whistle-blowing applicable to private employers in India. Some progressive companies have incorporated whistle-blowers policy or vigil mechanism scheme as part of extending their global policies which include individual employees or groups of employees and in some cases even third parties. The purpose of any whistleblower policy is to encourage employees to report matters without the risk of subsequent victimization, discrimination or disadvantage.
Conclusion
Conclusive remarks
- Despite being regarded as one of the best methods for ensuring corporate governance, whistleblowing in India has yet to move forward. Although, Clause 49 of Regulation 18 under SEBI (LODR) 2015, and Companies Act, 2013 mandates the listed companies in India to formulate whistle-blowing policy in place. But these authorities have still not elucidated the concrete format for constructing the vigil mechanisms.
- Moreover, there is no mandatory provision for private companies. As a result, only few private companies set up the vigil mechanism at their discretion and thus, private companies’ employees are deprived of the whistleblower policy and have a high probability of being treated unfairly if they act as whistle-blower, in absence of a vigil mechanism.
- Furthermore, the whistleblowers Act, 2014, though passed in Lok Sabha but could not approved in Rajya Sabha. Thus, it could not come into force. Therefore, we need a strong and concrete law for the protection of whistleblowers.
Suggestions
- Appropriate legislation must be enacted to protect innocent whistleblowers, and the 2015 Amendment Bill’s proposed dilution of the act must be abandoned.
- Strengthening the whistle-blower protection mechanism will help to ensure that democracy’s integrity is protected, cherished, and upheld.
- The government should now need to pass the Whistleblowers Act and develop a solid regulatory regime to safeguard whistleblowers in order to sustain this balance.
References
https://www.congress.gov/107/plaws/publ204/PLAW-107publ204.pdf
https://engineersindia.com/storage/2019/03/PIDPI.pdf
https://legislative.gov.in/sites/default/files/A2014-17.pdf
https://prsindia.org/files/bills_acts/bills_parliament/2015/Whistle_Blowers_(A)_bill,_2015_1.pdf
https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
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