Non-transparency and irregular reporting to Government and market regulators has been the primary cause of corporate corruption around the world. In any corporate set-up, invariably some of the employees are well versed with the workplace activities and are also aware of any kind of misconduct taking place. Despite being the first people to become aware of the wrongful deeds of the corporates, most of the times they choose to exercise a studied silence due to the apprehended retaliation that may follow by the powerful people in charge.
For any country to build on corporate governance, whistleblower protection must be given the highest priority. Corporate governance refers to ensuring the interests of all the stakeholders and taking efficient strategic decisions. Whistle-blowing mechanism is essential for proper administration and working of companies. Presently, there is no separate piece of legislation that addresses the issue of corporate whistleblowing in India. The Whistle Blowers Protection Act, 2011 came into being in the year 2014, which protects all those who give information regarding any corrupt practices related to the Government. Though this Act was the need of the hour, it has many discrepancies, one of them being, non-inclusion of corporate whistleblowing.
Whistleblowing is directly correlated to enhancing corporate governance in an economy. Whistleblowing mechanism ensures that the corporates do not take personally beneficial (to a selected few) decisions at the expense of other stakeholders. Despite being a non-mandatory provision, whistleblowing mechanism as per erstwhile Clause 49 of the Securities and Exchange Board of India (SEBI) Listing Agreement plays an extremely instrumental role in enhancing the corporate governance standards of the company.
Post the discontinuance of Clause 49, Regulation 18 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 [SEBI (LODR) Regulations] inter alia provides for a mandatory requirement for all listed companies to establish a vigil mechanism called “whistleblower policy” for directors and employees to report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. In simplest terms, whistleblowing must be recognised as the practice of highlighting or alarming that some kind of unlawful, felonious, or wrongful act is taking place inside a company.
Whistleblowing Policy Framework in India
A SEBI Circular dated 26-8-2003 amended the principles of corporate governance as incorporated in the standard listing agreement. The amended principle made it mandatory for companies to have their own whistleblowing policy. This mechanism allows any irregularity prevailing in the company to be exposed by the employees wherein the same can be brought to the attention of the management. SEBI included these guidelines for companies in an amendment to Clause 49 of the Listing Agreement in August 2003.
The substance of Clause 49 can now be found in Regulation 18 of SEBI (LODR) Regulations. Regulation 18 is an agreement between stock exchanges and listed companies. The Listing Agreement makes it mandatory for all listed companies to establish a mechanism called whistleblower policy. It provides a platform for its employees to report any kind of misappropriation, fraud or actual and any unethical behaviour to the Board.
As per these clauses, an employee wanting to report any kind of fraudulent activity or malpractice in the company must be given access to the company’s Audit Committee. The company must thereafter transfer this information to all the employees working in it. The guidelines under Regulation 18 aim to create a sense of responsibility amongst the employees of a company and enlighten them about the fact that it is their right and privilege to be vigilant. As an extension to the right of the employees to blow whistle against the illegal acts, the company also affirms to protect such an employee from any kind of aggravation or termination.
Moreover, Section 177 of the Companies Act, 2013 provides that every listed company needs to establish a vigil mechanism for the directors and employees to report any frauds or misappropriations in the prescribed format. Accordingly, a code of conduct has been laid down by the company for its senior management executive and other top management members, which states the guidelines for their code of conduct.
Whistleblowing mechanism aims to create a balance between law and morality by compelling the employees to realise their responsibility towards the society. An effective policy could bridge the gap created by the fear of retaliation by powerful people upon unsavory disclosures. Employees often are at the risk of losing their job and are threatened and exploited if they decide to speak up against wrongful acts of companies. This fear of retaliation is further extended due to the confidentiality clauses in their employment contracts.
More often than not, employees are also afraid of speaking up due to the fear of defamation in the event of the information disclosed is not eventually true. The problems of whistleblowers are evident from the cases wherein several individuals have lost their life in India due to them standing up against unlawful acts of their companies.
Strengthening the Mechanism in India
The increasing number of corporate scams make a strong whistleblowing mechanism the need of the hour. There are several stakeholders in the efficient functioning of a company and its proper administration is instrumental for the economy. The primary shortcoming of the Whistle Blower Protection Act, 2011 is its limited framework. The present Act only covers those whistleblowers that have exposed irregularity or corruption related to Government. While it ensures a healthy framework for government officials to blow the whistle, it is not applicable to corporate employees. It is essential for the law to have a broad coverage wherein it is applicable to public and private sector employees. The rationale behind the law is to protect any individual who upon disclosing any kind of misconduct of the organisation may be subjected to retribution outside the employer-employee relationship.
Another issue that needs a conclusive declaration is the defining scope of the Whistle Blower Protection Act, with respect to its applicability to public sector undertakings (PSUs). The Act provides a mechanism to investigate alleged corruption and misuse of power by public servants and also protect anyone who exposes alleged wrongdoing in government bodies, projects and offices. Presently, the Act allows disclosures that are prohibited by the Official Secrets Act, 1923 and extends only to public servants.
Therefore, ordinarily it is not applicable to PSUs however, it may be argued that they fit the definition of public servants and hence fall under its ambit. While dealing with this question, the Supreme Court held that the protection by way of sanction under Section 197 CrPC is not applicable to the officers of government companies or the public undertakings even when such public undertakings are “State” within the meaning of Article 12 of the Constitution on account of deep and pervasive control of the Government. Applicability of whistleblowing mechanism to PSUs shall further the interests of corporate governance in India.
When an individual decides to keep the societal interests above the interests of the company, he has to bear a substantial risk of retaliation. Therefore, the Government should provide incentives to these employees to encourage them to reveal the corrupt practices that they know about. These employees often put their job at risk and there should be compensation for coming out with the revelations. The compensation must include all losses and must replace the individual back in an identical position as before the disclosure. These individuals must also be provided protection against misguided disclosures made in good faith. Section 17 of the Whistle-Blowers Protection Act, 2014 provides punishment for mala fide or knowingly wrong/false reporting. However, in order to encourage employees to take risk, they must not be punished for wrong disclosures that are bona fide in nature.
Moreover, a systematic procedure must be present for ensuring an early disclosure of misconduct. The procedure for disclosure must be easily comprehensible and straightforward. The law should provide for reasonable procedures to invigorate and facilitate intramural procedures to disclose wrongdoing. The procedure should allow for easy access to legal advice to facilitate disclosures and reduce misunderstandings. The aim of the law should be to facilitate disclosures at the earliest stage to minimise the damage caused for big corporate scams. Further, in order to enhance transparency and promote corporate democracy, the disclosure should be published in reports for greater awareness. A special committee must be created for the disclosures to be made, giving the whistleblowing mechanism a separate institutional framework.
Over the years, several big corporate scams have shocked the global economy. Whenever we look back as to how we could have deterred these scams from taking place, the questions of corporate governance is always discussed. Looking at the various scams that have occurred over the last few years, it can be stated that if there was a proper whistleblowing mechanism in place for the employees to disclose the crookedness and misconduct, there was a strong probability that few of these scams could have been prevented. The lack of proper protection could have acted as a hindrance for the limited few who would have the courage to blow the whistle against their companies.
Scams such as Punjab National Bank, ICICI Bank, Satyam, Kingfisher, Enron among others have had drastic effects on millions of people. These corporates impact the life of these people on a daily basis and their interests must also be taken care of in the administration of big corporates. While it is a personal choice of the employees on their decision to blow the whistle against illegal activities taking place in companies, it is the duty of the Government to ensure a healthy and protective environment to encourage and allow them to do so. It would be interesting to see if we see a separate Whistle Blower Protection Act for the private sector in addition to the SEBI Regulations and Section 177 of the Companies Act, 2013.
*Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at email@example.com. **Abhisar Vidyarthi is a Student Researcher with Corp Comm Legal (4th-year student, Maharashtra National Law University, Mumbai).
 Clause 49 of the Listing Agreement on corporate governance.
 (2011). Whistle Blowing and Whistle-Blowers – A Diagnostic Approach to Human Resource Management Dimensions of Whistle Blowing Studies. Corporate Governance- Millennium Challenges, 253-269.