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PROMOTING TRANSPARENCY: WHISTLEBLOWER PROTECTION AND REPORTING MECHANISMS

1 Comment / Publications, Research paper

ABSTRACT

The pace of corporate growth and reconstruction is at an all-time high. As the world of corporate is expanding, it is important to keep an eye on what takes place behind closed doors of the companies. A whistle-blower is a person, who is an employee, a Director of the company, or any authority appointed by the government to look into the internal matters of the company when there is a suspicion of fraud, corruption, embezzlement, or any illegal act. The person can approach any higher authority upon witnessing any wrongdoing in the organization. Along with companies, a whistle-blower can expose any misconduct or abuse of power by public authorities and governmental bodies as well. Today, many companies have policies and committees dedicated to whistleblowing. However, whistle-blowers often face backlash in the form of threats to life, termination from the job, transfer from a post, etc. Hence the interest of these whistle-blowers must be protected for safeguarding the truth otherwise they will retract or become indifferent to such situations in the future. By making policies on the subject matter, the company promotes the idea of transparency and accountability. This research paper aims to give an overview of the concept of whistleblowing; its types and its importance by analyzing the existing laws in the country, the vigil mechanism committee, and methods to strengthen the process. The author contends to highlight the need to protect the whistle-blowers and promote transparency for the public interest.  

Key Words

Whistle Blower, Vigil Mechanism, Transparency, Whistleblowing, Policies

INTRODUCTION

The motto “Satyamev Jayate” – the truth alone triumphs an integral principle of Independent India. However, in the quest for truth and justice, people have to pay heavy prices. The term “whistle-blowing” originates from the practice of British policemen who blew their whistles whenever they observed the commission of a crime.[1] Whistle-blowing is when an employee, Director, Manager, or any other person alarms the higher authority or the government about the malpractices of any employee of the company or the company itself. A company could indulge in crimes such as fraud, white-collar crimes, money laundering, or violation of law. Whistle-blowers act as catalysts for change, bringing to light hidden information that may have far-reaching consequences for individuals, organizations, and society as a whole. According to Commonwealth Human Rights Initiative, from 2005 to 2018, there have been 315 attacks on Indian whistle-blowers who have exercised the RTI Act to expose scams and corruption.  [2]

Types of Whistleblowing:

  • Internal – Internal whistle-blowers are people who report misconduct, fraud, or indiscipline to senior management or higher authority in the organization, such as to the Human Resources Department, Directors, or the CEO.
  • External – The external whistle-blower is when people disclose misconduct to people outside the organization, such as the media, senior officials, the police, or the Government.
  • Alumni Whistleblowing – When a former employee of the company discloses or exposes information about any malpractices or illicit activities taking place in the organization.
  • Open Whistleblowing – Where the whistle-blowers agree to reveal their identity to the public.
  • Personal Whistleblowing -When any person attempts to harm a specific person through his/her activities. Calling out on such a person is personal whistleblowing.
  • Impersonal Whistleblowing -When the person intends to cause harm to the entire organization from acts like money laundering.
  • Government Whistleblowing -When the whistle-blower reports the misconduct to Government officials about any illegal or wrong practices in an organization.
  • Corporate Whistleblowing – When a disclosure is made regarding any suspicious activity going on in any company which is against the public safety and interest.


RESEARCH METHODOLOGY

This study uses a descriptive approach to investigate Whistle-blower Protection and Reporting Mechanisms. This approach aims to provide a detailed and comprehensive understanding of this subject by describing and analyzing existing practices, laws, and regulations. The author has referred to secondary sources like websites, articles, journals, and newspapers.

REVIEW OF LITERATURE

In India, there is no specific or written definition of “whistle-blower” per se but Statues like the Whistle Blower Protection Act, of 2014 touch upon this topic. The Companies Act, 2013 also provides for the constitution of a Vigil Mechanism Committee which would be discussed further in this paper.

Importance of Whistle Blowing Mechanism

  1. To promote transparency – When a company is intolerant of misconduct and illegal activities, it gains the confidence of the public and the shareholders of the company. It develops trust in the public eye and promotes the idea of good corporate governance.
  2. To promote a healthy work environment – Standing up to injustice is the right thing to do. Where the company safeguards the interest of the employee by encouraging them to report a violation, they can freely exercise this power.
  3. To prevent future harm – When a person is aware of the consequences of engaging in fraud, embezzlement, money laundering, etc. he would refrain from doing anything that would result in the violation of the company’s policy.
  4. Internal Accountability – Any misconduct must be dealt with within the company. It provides a platform for the employees to report these matters internally rather than exercising this power externally through the media, police, or the press.

History of Whistle-Blowers in India

The need for protection of the whistle-blowers first emerged in the case of Satyendra Dubey, the first whistle-blower in India, who was an Assistant Project Manager at a construction project led by the National Highway Authority of India (NHAI). Upon suspecting malpractices in the Central government’s “Golden Quadrilateral Corridor Project”, he approached his higher official which resulted in his transfer from that site. He later wrote a letter to the former Prime Minister of India and requested for his name to be kept anonymous. Despite this request, his name was highlighted and disclosed everywhere in the process of inquiry after which he was shot dead in Gaya, Varanasi. He was posthumously awarded the ‘Whistle Blower of the Year’ award by the London-based group organization Index on Censorship.[3] Many whistle-blowers namely Lalit Mehta, Shanmugam Manjunath, and IPS Narendra Kumar Singh have been dead or attacked for exposing illicit activities.

Infamous Cases of Whistleblowing:

  1. Lalit Mehta – Lalit Mehta was an engineer, who suspected loopholes and fraud in the implementation of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) Scheme in Jharkhand. He conducted an audit of the scheme through an economist but was brutally murdered before he could reach out to any higher officials.
  2. IPS Narendra Kumar Singh – He was an IPS Officer who launched a complaint against the mining mafia. During the course of his service, he received many threats for his actions. In 2012, he received information about mining, upon reaching the spot, a tractor carrying the mined sand ran over him where he lost his life.
  3. Ravinder Balwani – a member of an NGO ‘Parivartan’ led by CM Arvind Kejriwal, was a 61-year-old man who filed cases of corruption against Delhi Transco Ltd, the state transmission utility for the NCR region. He had also filed a complaint against the Delhi Electricity Regulatory Commission over the revision of tariffs involving several senior officials of the Electricity Board. He was hit by a car and was declared dead in Delhi on 26th April 2012.
  4. Yallalinga Kuruba – aged 17 was a 1st-year college student whose dead body was found on the railway tracks of Koppal, Karnataka. He had informed a news channel about the corruption that was hindering the implementation of government schemes in his village resulting in the lack of roads and drainage systems. On January 10th, he reportedly filed an RTI seeking details about the development work being subcontracted under the Mahatma Gandhi National Rural Employment Guarantee scheme from the local Panchayat Development Officer. He was killed on 10th January.

There are multiple other cases where the consequences of seeking honesty and demanding justice were equally terrifying. These cases demand a strict reporting mechanism and protection for whistle-blowers in the country.

Legislative Framework – Whistle-Blower Protection Act, 2014

A bill for the protection of Whistleblowers was first initiated in 1993 by Mr. N. Vittal former Chief Vigilance Commissioner.

In 2001, the Indian Law Commission recommended that a law safeguarding the whistle-blowers be enacted to encounter cases of corruption and drafted a bill to address the problem.

In 2003, the tragedy of Satyendra Dubey was mourned by the whole country, the Government of India was blamed and highly criticized for disclosing his identity despite Dubey’s request for maintaining anonymity. Several petitions demanding strict laws regarding protection of the whistle-blowers were filed in the Supreme Court of India. The apex court directed the formation of an interim administrative body till a separate law is made for the protection of whistle-blowers. The Central Vigilance Committee (CVC) was given the power to act on the complaints received by the whistle-blowers under an administrative order known as the Public Interest Disclosure and Protection of Informer (PIDPI) issued by the Government. It covered complaints of fraud, corruption, and misuse of power against the Central Government employees or public companies. The jurisdiction did not extend to State Government employees or private companies. However, the CVC did not register an anonymous complaint, the details such as the name and address of the complainant were to be annexed to the complaint letter.

The Second Administrative Reforms Commission Report was published in the year 2007, which mentioned the need for protection for whistle-blowers. As per the 2nd ARC Report “Acts of harassment or victimization of or retaliation against a whistle-blower should be criminal offenses with substantial penalty and sentence.” Also, the report suggested covering corporate whistle-blowers within its ambit. [4]

The Whistleblower Protection Bill 2011 received the President’s assent in May 2014. The Act aims to secure the interest of whistle-blowers who disclose information in the public interest acting as a shield against exploitation of whistle-blowers. Section 6 (4) of the WBP Act, 2014 overrides the Official Secrets Act, 1923 therefore no federal employee claim immunity from disclosure under this Act. The only exemption provided for in the Act is the ‘Special Protection Group’ established under the Special Protection Group Act of 1988. 

Limitations of the Act

  1. The Act does not provide for a precise definition of “whistleblower” or “whistle-blowing” nor does it specify what constitutes “victimization of whistleblower”. Wherein the legislations of foreign countries such as Canada and the U.K. have a clear mention of these definitions in their Acts.
  2.  One of the major disadvantages of the Act is not registering anonymous complaints, and no action is taken in such cases. Having complete secrecy of identity might encourage more employees and people to redress fearlessly.
  3. The Act provides for the setting up of a Competent Authority at the Central level. However, there is no integral system at the local, regional, or State level.
  4. The center focus of the WBP Act 2014 is corruption, failing to address greater issues like money laundering, fraud, embezzlement, etc.

In 2015, there was an amendment bill introduced, the Whistleblower Protection (Amendment) Bill in Lok Sabha. The Bill demanded the non-disclosure of 10 categories of information, which could affect the sovereignty of India or its relations with a foreign country, similar to the information safeguarded under Section 8 of the Right to Information Act, 2005.

Proposed Amendments – Whistleblower Protection (Amendment) Bill, 2015:

  1. Section 4(1) of the WBP Act, 2014 overrides the Official Secrets Act of 1923 whereas the Bill proposed that 10 categories of information be exempted from disclosure.
  2. Section 5 of the WBP Act, 2014 grants power to the competent authority to take effective measures concerning complaints received under public disclosure. The Bill restricts the power of the competent authority to exercise complaints regarding 10 categories of exempted information.

The Bill was highly criticized by various scholars since the prohibition of disclosure of certain categories of information defeats the sole purpose and objective of the 2014 Act. It is still pending and has not been passed by the Parliament of India.

Whistle-Blower protection under the Companies Act 2013

The Vigil Mechanism Committee is an integral part of the Audit Committee formed under Section 177 of the Companies Act.

Section 177(9) read with Rule 7 of the Companies (Meetings of Boards and its Power) Rules, 2014 provides for the following Companies to establish a Vigil Mechanism Committee to safeguard the interest of Directors and employees to report any suspicious activity inside the organization.

  1. Every listed company
  2. Companies that accept deposits from the public
  3. Companies that have borrowed from a public financial institution or bank a sum of more than fifty crore rupees. [5]

Section 177 (10) of the Companies Act, 2013 provides for the protection of the employees and Directors under sub-section (9). It states that “the vigil mechanism under sub-section (9) shall provide for adequate safeguards against the victimization of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases.”[6]

Limitations of the Companies Act, 2013

The Companies Act 2013 does not provide for a mandatory vigil mechanism committee for companies other than mentioned in 177(9). However, these companies are recommended to form such grievance committees as a practice of good corporate governance and protection of shareholder’s interests.

Although the Act mentions safeguarding a whistle-blower against victimization, it does not touch upon the need to maintain the confidentiality of the whistle-blower. The assurance of non-disclosure of a person’s identity is missing. Confidentiality is promised at the discretion of the company’s policy. The whistle-blower policy of Infosys[7], promises complete confidentiality in the reporting matters. Similarly, the policy of HCLTech[8] also accepts anonymous complaints made under any suspicion.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The provisions of the SEBI regulation Act bind all the Companies listed on a recognized stock exchange in India. Clause 49 of the Listing Agreement provides for the formation of a policy for the protection of the whistle-blowers for the companies. Earlier the creation of a whistle-blower policy was not mandatory for the companies. But recently the Securities and the Exchange Board of India replaced the Listing Agreement with the Listing Obligations and Disclosure Requirement Regulation (LODR) 2015 which made it mandatory for the listed companies to draft a whistle-blower mechanism policy under Regulation 22. Similar to Section 177 of the Companies Act, 2013, the regulation provides for a vigil mechanism committee for employees and directors of the company.

 ‘Discussion Paper’ SEBI (Prohibition of Insider Trading) Regulations, 2015 to provide for an informant mechanism [9]– Insider trading is a criminal offense and when a case of insider trading is reported by the SEBI, it becomes a task to prove it. Often, these cases are reported by internal witnesses to the violation. Hence SEBI established a mechanism that provides for absolute confidentiality. It announced the setting up of the Office of Informant Protection (OIP) which will receive the information and check its authenticity. Upon satisfaction that the information provided is true, complete, credible, and original, the informant will be granted a reward in the form of a gratuitous monetary reward.  Also, it ensures maintaining the confidentiality of the informant through the OIP.

In December 2019 inserted Chapter IIIA to SEBI (Prohibition of Insider Trading) Regulations, 2015, the regulations concerning the whistle-blower reporting mechanism and protection provided the whistle-blower a platform to report cases of insider trading violations directly to the SEBI instead of going through the extensive internal mechanism of a company. An informant is exposed to various hierarchies of the company while exposing a matter, risking his confidentiality the matter. This attempt of SEBI would ensure a safer reporting mechanism for the whistle-blower.

SUGGESTIONS

After in-depth research on whistle-blower protection, the author would like to make some suggestions and comments. Firstly, the Companies Act 2013, should widen the scope of whistle-blowing mechanisms. Currently, the Act only provides for the formation of a Vigil Mechanism Committee as an integral part of the Audit Committee under Section 177 rather it should have specific provisions dedicated to whistle-blowers and their rights and protection. Currently, Section 177(9) is only applicable to certain classes of companies wherein it should be a mandate for all the companies registered under the Act. The suggestion of the Amendment Bill, 2015 to include the private sector within the ambit of the Act should be taken into consideration. Many reputed companies like Infosys and Wipro promote the idea of having a strict policy of whistleblowing.

Secondly, the Act should prescribe a specific procedure for the implementation of policies within the company. The reach of a whistle-blower in a company should not be constrained to the management level, rather it should extend to the ROC of the company or the Regional Director of the company at the Central level in case of retaliation or indifference by the management. They should be rewarded for putting the organization’s interest ahead of their own.

Lastly, any risk should be assessed before taking it therefore the whistle-blower before reporting or exposing any scandalous activity must go through the policies of the company, whether the company provides for robust mechanisms and confidentiality in such matters.

CONCLUSION

The main object of this study was to analyze the situation of whistle-blowers in India and a strong reporting mechanism to protect and safeguard their interests. The protection of the whistle-blowers throughout the process of inquiry is the only way to encourage them to step forward and promising confidentiality is a crucial step in this process. There is a need for a robust reporting mechanism in both the corporate and the legislature as well. 20 years after the death of Satyendra Dubey, India has not yet adopted laws to improve the protection of whistleblowers. The country has witnessed a vast number of cases threatening the very existence of whistle-blowers still certain provisions of the Whistleblower Protection Act 2014 have not been enforced, which limit the effectiveness of the Act. There is a wide scope for future research in the subject matter since the effectiveness of the Act will be measured after all the Sections and provisions are implemented.

Author:

Samiksha Pande

Ajeenkya D.Y. Patil Univeristy – School of Law

[1] CS M. Kurthalanathan, Whistle-Blowing/ Vigil Mechanism under Companies Act, 2013,TaxGuru,https://taxguru.in/company-law/whistleblowing-vigil-mechanism-companies-act-2013 (last visited June 12, 2023).

[2] Mid-Day Online Correspondent, Six times Indian whistle blowers uncovered scams and made headlines, Mid-day (Oct. 18, 2021), https://www.mid-day.com/lifestyle/culture/article/six-times-indian-whistleblowers-uncovered-scams-and-made-headlines-23197139 (last visited June 11,2023)

[3] Mid-Day Online Correspondent, Six times Indian whistle blowers uncovered scams and made headlines, Mid-day (Oct. 18, 2021), https://www.mid-day.com/lifestyle/culture/article/six-times-indian-whistleblowers-uncovered-scams-and-made-headlines-23197139 (last visited June 11,2023)

[4] Government of India, “Ethics in Governance” (The Second Administrative Reforms Commission, 2007), https://darpg.gov.in/sites/default/files/ethics4.pdf  (last visited June 12, 2023).

[5] The Companies Act, 2013, 177 (1), the Gazette of India, pt. II sec. 177 (9) (August 30, 2013).

[6] Section 177. Audit Committee | Companies Act Integrated Ready Reckoner|Companies Act 2013|CAIRR, https://ca2013.com/177-audit-committee/#:~  (Last visited June 12, 2023).

[7]InfosysGermanyhttps://www.infosys.com/investors/corporate-governance/documents/whistleblower-policy.pdf  (last accessed June 12, 2023).

[8] Whistle Blower Policy, Investors – HCL Infosystems, https://hclinfosystems.in/wp-content/uploads/2016/09/Whistleblower_Policy_.pdf  (last accessed June 12, 2023).

[9] SEBI | Discussion Paper on amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 to provision for an informant mechanism, Securities and Exchange Board of India, https://www.sebi.gov.in/reports/reports/jun-2019/discussion-paper-on-amendment-to-the-sebi-prohibition-of-insider-trading-regulations-2015 (last visited June 13, 2023).

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