Whistle Blowing in India

Subject – Company Law II

Semester VI
- The word whistle blower originates from ‘whistle’ as used by a referee to indicate
an illegal or foul play. It was coined by civil activist Ralph Nader in early 1970’s.
- Whistleblowing is officially defined as “making a disclosure that is in the public
interest”.
- It will usually occur when an employee discloses to a public body, usually the police
or a regulatory commission that their employer is partaking in unlawful practices.
- A whistle blower discloses information about misconduct in the workplace that
violates the law or endangers the welfare of others and speaks out with an intention
to expose corruption or dangers to the public or environment.
- Whistleblowing is an efficient and effective way of curbing unlawful practices.
- According to Koehn “whistle blowing occurs when an employee informs the public
about inappropriate activities going on inside the organization”
- According to Kloppers, 1997 “whistle blowing entails information about criminal
activity, a contravention of any statue, improper or unauthorized use of public and
other funds, miscarriage of justice, abuse of power, misadministration, danger to
the health or safety of an individual and any other misbehavior or malpractice”.
- A whistle blower can report things that aren’t right, are illegal or if anyone at work is neglecting
their duties, including: Danger to health, safety, legal rights, disregarding the law, malafide cover
up of wrongdoings, criminal offences, damages of varied nature.
- The term whistleblower was also discussed by Doggett, J., in the case of Winters v. Houston. It has
its origin in United Kingdom. The term can be attributed to the action of the ‘English bobbies
(police constables)’ who blew their whistle when they noticed the commission of a crime. The
purpose behind whistleblowing is always to make the public as well as the authorities alert
regarding the illegal activity or crime i.e to safeguard the public good
- Whistleblowing can be defined as an act of disclosure of information by people within or outside
an organisation and that which are not otherwise accessible to public, generally of activities of
organisation that are against public interest.
- A whistle-blower is defined as someone who divulges wrongdoing, fraud, corruption or
mismanagement. The objective of a whistleblower is to put out all those malpractices, corruption
or any other frauds inside a company and thereby safeguarding the public interest
- a whistleblower is considered as any individual who makes a ‘disclosure’. Broadly,
a disclosure refers to a concern, usually raised by an employee or group of employees of the
Company or even a third party, in writing and in good faith, which discloses or demonstrates
information about an unethical or improper activity with respect to the Company and based on
actual facts and which complaint is not speculative. The intent has always been to give the
terms ‘whistleblower’ and ‘disclosure’ the widest possible amplitude
FEATURES OF WHISTLE BLOWING:
- It relates to an action that takes place with an organisation.
- Whistle blowing can be done by a member of an organisation.
- The information is generally evidence of some significant kind of misconduct on
the part of an organisation or some of its members.
- Release of information must be something that is done voluntarily, as opposed
to being legally required although the distinction is not always very clear.
- Whistle blowing must be undertaken as a moral protest
Whistleblowing can be classified into:
a. internal whistleblowing - Internal whistleblowers are those who report the
mismanagement or misconduct to superior officers within the company. Internal whistle
blowing is often helpful to company because it helps them to correct their differences
internally and save themselves from mortification before the public.
b. external whistleblowing - external whistleblowers are those who report the same to law
enforcement authorities or media.
c. Alumni: When the whistleblowing is done by the former employee/associate of the
organization it is called alumni whistle blowing.
d. Open: When the identity of the whistleblower is revealed, it is called Open Whistle Blowing.
e. Personal: Where the organizational wrongdoings are to harm one person only, disclosing
such wrong doings it is called personal whistle blowing.
f. Impersonal: When the wrong doing is to harm others, it is called impersonal whistle
blowing.
g. Government: When a disclosure is made about wrong doings or unethical practices
adopted by the officials of the Government.
h. Corporate: When a disclosure is made about the wrongdoings in a business corporation, it
POPULAR INSTANCES OF WHISTLEBLOWING IN INDIA
1. Satyendra Dubey, an IIT Kanpur graduate in his mid thirties was supervising
construction of the golden quadrilateral project in Jharkhand. He had a
reputation for being an honest and upright officer. He was promoted as project
director and was likely to be posted there. Dubey exposed mishandling of funds
by three of his engineers which led to the suspension of the contractor. He had
written to the National highway authority of India (NHAI) and to the prime
minister’s office (PMO) describing the financial irregularities in the project. Dubey
was shot dead on November 26, 2003. He had arrived at Gaya railway station
from Varanasi. He did not find his driver at the Gaya station. When he called up
his home he was told that the vehicle has some mechanical problem. He asked
his driver to stay at home and took a rickshaw. When he did not reach home, the
driver went at looking for him, and found him dead near AP colony in Gaya.
2. The incidence of murder of Manjunath Shanmugham, an IIM graduate and a sales
manager of the Indian Oil Corporation on November 19, 2005 once again shocked
India. He got killed for exposing the racket of adulteration of petrol and the mafia
behind it.
3. one of India’s largest multi-national company in the IT sector dealt with disclosures
pertaining to a whistleblower complaint to the Bombay Stock Exchange.
- In September 2019, the company received a whistleblower complaint signed by
‘Ethical Employees’ alleging that its CEO and CFO, inter alia, were not adhering to
accounting standards pertaining to revenue recognition.
- In October 2019, the company released a statement wherein it noted that these
complaints were placed before the Audit Committee, which retained a law firm and
an independent internal auditor to investigate into the allegations.
- The Bombay Stock Exchange sought a clarification for not making a disclosure
pursuant to Regulation 30 of the LODR with reference to receiving a whistleblower
complaint.
- Subsequently, the company released a statement in response to the request by BSE
stating that before the conclusion of the investigation of the generalized allegations
in the complaints, a disclosure under Regulation 30 of the LODR was not required.
- In January 2020, the IT giant issued a statement that the Audit Committee has
concluded a rigorous investigation and found no wrong doing by the company and
4. In October 2013, Infosys agreed to an $8 million settlement offer by a US federal
court after a former IT manager with the firm filed a whistleblower lawsuit against it.
The manager alleged that he was sidelined and victimized by the firm’s top bosses
after he refused an internal settlement offer. The episode showed the need for strict
rules to protect whistleblowers. Subsequently, in 2014, Parliament approved the
Whistle Blowers Protection Act. The Infosys board then amended its vigil mechanism
in line with the new law.
5. In another instance, a whistleblower in a leading pharmaceutical
company approached the SEBI complaining about alleged financial irregularities in
the company. Eventually, SEBI did not find any merit in the allegations. However, the
stocks of the company witnessed several fluctuations due to the complaint. Similarly,
several other institutions including private banks, financial institutions, audit and
consultancy services have grappled with whistleblower complaints.
6. Arvind Gupta, a shareholder activist, exposed the alleged loan fraud and quid pro
quo between the bank’s then CEO Chanda Kochhar and her family and the Videocon
group. Kochhar stepped down following the allegations and CBI has now opened a
probe into the matter and subsequently matters relating to the same are being
Vigil Mechanism/ Whistle Blower Policy
Companies Act 2013 introduced the concept of Vigil Mechanism in India.
Both these terms carry different meaning although they are invariably used
simultaneously.
A Vigil mechanism provides a channel to employees and Directors of a Company
to report to the management concerns about unethical behavior, actual or
suspected fraud or violation of the Codes of Conduct or any Policy of the
Company.
Whistle Blowing is nothing but calling the attention of top level management to
some malafide activities happening within an organization.
A Whistleblower is a person who comes forward and shares his/her knowledge
on any wrongdoing which he/she thinks is happening in the organization or in a
specific department.
A Whistleblower could be an employee, contractor, or a supplier who becomes
aware of any illegal activities.
LEGAL REGIME IN INDIA:
Public Servants:
- 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, willful misuse
of power/discretion 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, 2019 (“Amendment Bill”).
- The Amendment Bill sought to, inter alia, incorporate necessary safeguards against disclosures
which 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.
Law applicable to Listed Companies:
- The Companies Act, 2013, and rules thereunder, provide that certain companies
should establish a ‘vigil mechanism’ to report genuine concerns. Further, the
Companies Act states that such mechanism should be accompanied by adequate
safeguards against the victimization of persons who use the mechanism. There is an
additional requirement of publishing the details of the mechanism on the company’s
website and in the report of the board of directors.
- The Companies and (Meetings of Board and its Powers) Rules, 2014 further provides
that in case of repeated frivolous complaints being filed by a director or an
employee, the audit committee or the director nominated to play the role of audit
committee may take suitable action against the director or the employee including
reprimand.
- 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 leak of unpublished price sensitive
information. With effect from December 2019, the SEBI has also introduced a reward
mechanism for incentivizing ‘Informants’ to report violation of insider trading laws to
- 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”).
- Under regulation 30 - a listed entity shall disclose to stock exchange(s) all events or
information, which are material, as soon as reasonably possible and not later than
twenty four hours from the occurrence of event or information.
- The Companies (Auditor’s Report) Order, 2020 was issued (“CARO 2020”) by the MCA,
in line with its objective of strengthening the corporate governance framework under
the Companies Act, 2013. The Order applies to every company, including a foreign
company as defined in the Companies Act, 2013:
CARO 2020 necessitates enhanced due diligence and disclosures on the part of auditors
of eligible companies and has been designed to bring in greater transparency in the
financial state of affairs of such companies.
The revisions have also put greater onus on companies to share information with the
auditors, especially on whistleblower complaints received during the course of the year,
for the consideration of the auditor, who usually then seeks to know the manner in
which the company has dealt with such complaints, including nature of complaint and
Provisions Under the Companies Act, 2013:
A) Section 177 of the Companies Act, 2013 read with Rules made thereunder mandates following Companies to
establish Vigil mechanism in their Company:
• Listed Company;
• Every Company which accepts deposits from the public; and
• Every Company which has borrowed money from Banks and Public Financial Institutions in excess of Rupees 50 crores.
B) Companies which are required to constitute an Audit Committee shall operate the Vigil mechanism through the audit
Committee. If any of the members of the Audit committee have a conflict of interest in a given case, they should recuse
themselves and the other members of the Audit Committee shall deal with the matter on hand.
C) For the Companies which are not required to constitute the Audit Committee, the Board of Directors shall nominate
a director to play the role of audit committee for the purpose of Vigil mechanism. All the employees and other Directors
shall report their concerns to such appointed Director.
D) Vigil mechanism Policy of the Company shall provide for adequate safeguards against victimization of
director(s)/employee(s) who avail of the Vigil Mechanism and to make provisions for direct access to the Chairman of
the Audit Committee or the director nominated to play the role of Audit Committee (as the case may be).
E) The details of establishment and framing of Vigil Mechanism Policy shall be disclosed by the Company on its website,
if any, and in it’s Board’s report.
F) The Independent Directors of the Company (wherever applicable) shall ascertain and ensure that the Company has
an adequate and functional Vigil mechanism and that the interests of a person who uses such mechanism is not
prejudicially affected on account of it’s use.
G) In case of repeated frivolous complaints being filed by a Director or an employee, the audit committee or the
director nominated to play the role of audit committee has the right and power to take suitable action against the
concerned director or employee.
Private Employers:
- no specific law on whistleblowing applicable to private employers in India.
- Some progressive companies have incorporated a whistleblower policy as part of
extending their global policies which include individual employees or group of
employees and in some cases even third parties.
- The purpose of any whistleblower policy is to encourage employees (or any
other person for that matter) to report matters without the risk of subsequent
victimization, discrimination or disadvantage.
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”).
- 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.
- 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.