The US Securities and Exchange Commission’s record payout of $279 million to a single whistle-blower a few days back has brought into focus the whistle-blower policies being followed in India.
The Securities and Exchange Board of India mandates all listed entities to have a whistle-blower policy. It has a dedicated office to receive and process such complaints. In 2019, it introduced a mechanism for informants to file complaints directly with Sebi. In 2021, Sebi raised the compensation for whistle-blowers in insider trading cases to Rs 10 crore from Rs 1 crore.
“Sebi’s whistle-blower policy has evolved over time. The policy now encompasses a wider range of violations, including corporate fraud, insider trading, and accounting irregularities. It provides mechanisms to protect the confidentiality and anonymity of whistle-blowers, empowering them to come forward without fear of retaliation,” said Nikhil Varma, managing partner, MVAC Advocates & Consultants.
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Whistle-blower complaints are becoming common. In 2021, a large pharma company paid Rs 56 lakh to settle a case involving whistle-blower complaints that alleged the company and its subsidiary were diverting funds through its sole distributor. Earlier this year, a healthcare company initiated a forensic investigation on allegations made by an anonymous whistle-blower on lapses by some employees.
“While there are lacunas, Sebi is moving towards incentivising whistle-blowers and making companies aware that violations cannot be hidden,” said Sumit Agrawal, founder, Regstreet Law Advisors.
A 2003 Sebi circular sought an amendment to the standard listing agreement which mandated companies to formulate a whistle-blowing policy. Clause 49 of the Listing Agreement was amended to include the said requirement, which is now encapsulated in regulation 18 of the Sebi (LODR) regulations.
Later, 9A (6) of Sebi (Prohibition of Insider Trading) Regulations, 2015 created an obligation on listed companies to formulate a whistle-blower policy. In 2019, Chapter IIIA of the LODR 2015 regulations provided for a system of incentives to encourage informants to report insider trading. This was further enhanced in 2021.
Section 177 (9) of the Companies Act, 2013 provides for a ‘vigil mechanism’ for directors and employees of listed companies to report genuine concerns. Sub-section 10 provides for adequate safeguards against victimisation of persons who use such mechanism.
“The regulations offer sufficient safeguards against victimisation of the people who use the system along with facilitating direct access to the audit committee chairman. The regulation 30 of the LODR also mandates listed companies to report significant developments to the stock exchanges as part of a new corporate governance regime,” said Sandeep Bajaj, managing partner, PSL Advocates & Solicitors.
Gaps in regulations
India currently lacks a statutory whistleblower policy that provides legal protection to whistle-blowers in general. Statutory protection is only granted to public servants and officials, according to experts.
The legal framework on whistle-blowing has largely been geared towards listed companies. Unlisted, private companies can use their discretion in applying the whistle-blower’s policy and vigilance committees are dominated by internal members of an organisation.
“The Indian version of the Sarbanes-Oxley Act does not have the necessary penalties and effective enforcement mechanisms in place. It is crucial to fill the existing gap in current laws to ensure the protection of whistle-blower anonymity,” said Archana Balasubramanian, partner at Agama Law Associates.
“While whistle-blowers are required to submit a voluntary information disclosure form to the Sebi’s information protection office through their legal representative, they have the option to exclude any information from the VIDF that could reveal their identity. However, submissions can never be anonymous,” said Pratik Bakshi, counsel (ESG), BTG Legal.
The problem of confidentiality and whistle-blower protection could become especially acute when it comes to small and mid-sized companies. “On paper, there are many provisions to protect a whistle-blower. But in Indian managed companies and also the state of law as it exists, a whistle-blower cannot be too hopeful for protection from persecution. Also, it is not clear as to what level of evidence needs to be provided to convince the company or the audit committee chairman of a particular wrongdoing,” said Jayant Thakur, a chartered accountant.
Past episodes, like that at Infosys, show that whistle-blowers may not reveal their identity and instead make complaints public to force regulators to investigate.
“US regulators allow anonymous complaints to be filed directly and offer uncapped financial incentives. In India, whistle-blowers’ identities must be disclosed, which may deter them from coming forward. There is a fear of regulator itself not taking action and possibility of systemic leak of identity,” said Agrawal, a former Sebi official.
Informants in the US get 15-30% of the amount the regulator collects from the company. This percentage is much lower in India.
Sebi on an average receives around 30,000 whistle-blower complaints every year, Sebi chief vigilance officer Yatri Dave Vitekar said late last year. These include several anonymous, irrelevant, poorly analysed and motivated complaints that seek to settle personal scores. The regulator has a mechanism, Public Interest Disclosure and Protection of Informers, which can help protect the whistle-blower’s identity, she had said.
“Whistle-blowers fear retaliation and harassment, and companies may not take up the complaint. Sebi should create awareness about what constitutes a valid whistle-blower complaint and deal strictly with complaints that seek to settle personal scores,” said Agrawal.
Sebi can waive the requirement for whistle-blowers to disclose their identity when a legal representative files a complaint, incentivise whistle-blowers with awards linked to the amount to be received, and tie awards to the veracity of information and the total penalty or unlawful profit, considering Sebi’s low recovery rate, he added.
“Independent investigations and analysis of information disclosed to the stock exchanges and other relevant sources should be conducted before dismissing a complaint. This can be achieved by leveraging AI-based technologies,” said Balasubramanian.
“Just like the SCORES platform, whistle-blower complaints that satisfy the basic requirements of evidence could be tracked by Sebi on whether they are being given due consideration by the company, its audit committee and whether the closure was formally recorded. That would put a possible disincentive on erring companies,” said Thakur.