The term ‘whistle-blowing’ is a rather a recent entry into the vocabulary of corporate and financial affairs, although the concept itself is not new. A Whistle-blower in a layman’s language can be defined as an individual (employee/former employee) who exposes information or practice of a wrongdoing, fraud, corruption, deviation from the set rules or mismanagement.
Many large corporate frauds have come to limelight only through an insider’s revelation or a confession, not through an audit report or a regulatory investigation. It thus, becomes very essential to provide to the whistle-blower a smooth route for his revelation through an efficient whistle blower policy.
The organisation needs to ensure that there is an easy route to raise concerns, otherwise either the workforce will become silent, or if the scandal comes out in the public, it will come out in the most destructive way.
Sections 206 to 229 of the Companies Act 2013 incorporate in detail all the provisions relating to inspection, inquiry and investigation under the head of a single chapter. Section 208 of the Act, empowers an Inspector apart from the Registrar to inspect records unlike the provisions of the old act of 1956. Also the Registrar/Inspector may furnish any recommendations to conduct investigations in such a matter.
Section 210 on the other hand states that the Central Government may order an investigation into the affairs of the company either: a) on the receipt of a report of the registrar or inspector of the company b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or c) in public interest. But where an order is passed by a Court or Tribunal stating that the affairs of a company ought to be investigated the Central Government shall order an investigation into the affairs of that company. Moreover, The Serious Fraud Investigation Office (SFIO) is now a statutory body established under section 211 of the Act with the power to arrest for offences specified as fraud.
Also it is important to note that previously, auditors did not have to legally ascertain whether fraud had occurred or not. They were to primarily report material related to fraudulent reporting and/ or misappropriation of assets. There is now onerous responsibility on auditors to act as whistle-blowers by reporting directly to the Central Government if they have reason to believe a fraud is being, or has been committed against the company by its officers or employees.
The companies act 2013 under draft rule no. 12.5 read with section 177(9) has made it mandatory for: a) listed companies b) companies that accept deposits from public and c) companies which have borrowed money from banks or public financial institutions in excess of rupees 50 crores to establish a vigil mechanism for directors and employees to report their genuine concerns. As per the said provisions, the companies which are required to constitute a vigil committee shall operate the vigil mechanism through its audit committee and in case of other companies the board of directors are obligated to nominate a director to play the role of an audit committee.
Schedule IV read with section 149(8) of the Companies Act 2013 lays down the code to professional conduct for independent directors. The duties of independent director elaborated in part III of schedule IV include ascertaining and ensuring that the company has an adequate and functional vigil mechanism and that the interests of the persons using it are not harmed.
The independent directors are also entrusted with the task of reporting concerns over unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. Such changes made by the Act with regard to governance, transparency, disclosures, the position of the serious fraud investigation office etc. under section 211 of the Act is expected to make companies shift from being complacent to playing compliant roles.
The Securities and Exchange Board of India (‘SEBI’) vide its circular dated August 26, 2003 amended the Principles of Corporate Governance incorporated in the standard Listing Agreement. Clause 49 of the Listing Agreement to the Indian stock exchange now also mentions the formulation of a Whistle-blower policy for companies. Following is the text from Annexure I D of the Clause 49 of the Listing Agreement:
“The company may establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. This mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization.”
Whistle Blowers Protection Act, 2011 is an Act of the Parliament of India which 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. The wrongdoing might take the form of fraud, corruption or mismanagement.
The Act, under section 3, provides that any public servant or any other person including a non-governmental organization may make a public interest disclosure to a Competent Authority.
According to the Act, the term “Public Interest Disclosure” is meant to be any disclosure by a public servant or any other person including any non-governmental organization before the Competent Authority notwithstanding anything contained in the provisions of the Official Secrets Act, 1923 in Public interest. Any disclosure made under this Act shall be treated as public interest disclosure for the purposes of this Act and shall be made before the Competent Authority and the complaint shall be received by such authority as may be specified by regulations made by the Competent Authority.
The Competent Authority has been empowered to give proper direction to the concerned authorities for the protection of complainant or witness either on an application by the complainant or based on its own information. It can also direct that the public servant who made the disclosure may be restored to his previous position.
The Vigilance Commission has to protect the identity of the complainant and related documents, unless it decides against doing so, or is required by a court to do so. Furthermore, the Commission is empowered to pass interim orders to prevent any act of corruption continuing during inquiry.
If any person is being victimised or likely to be victimised on the ground that he/she had filed a complaint or made disclosure or rendered assistance in inquiry than he/she may file an application before the Competent Authority seeking redress in the matter, and such authority shall take such action, as deemed fit and may give suitable directions to the concerned public servant or the public authority, as the case may be, to protect such person from being victimised or avoid his victimization.
The Act amends the Whistle-blowers Protection Act, 2014. The Act provides a mechanism for receiving and inquiring into public interest disclosures against acts of corruption, wilful misuse of power or discretion, or criminal offences by public servants.
The Act prohibits the reporting of a corruption related disclosure if it falls under any 10 categories of information. These categories include information related to: (i) economic, scientific interests and the security of India; (ii) Cabinet proceedings, (iii) intellectual property; (iv) that received in a fiduciary capacity, etc.
The Act permits disclosures that are prohibited under the Official Secrets Act (OSA), 1923. The Bill reverses this to disallow disclosures that are covered by the OSA.
Any public interest disclosure received by a Competent Authority will be referred to a government authorised authority if it falls under any of the above 10 prohibited categories. This authority will take a decision on the matter, which will be binding.