Whistleblowing mechanisms under the Companies Act, 2013

Whistleblowing Provisions in the Corporate Sector By Suprotik Das Whistle-blowing as the term suggests is a practice by which employees or directors of a company can raise issues pertaining to misconduct, violation of compliance mechanisms and fraud to internal committees in an organisation or to an ext ernal body, such as the government or law regulatory bodies. Around the world, mainly in the United States and in the t he United Kingdom, whistleblowing  provisions are mandatorily followed by the private sector and whistleblowers whistleblowers are protected. The USA has the Sarbanes-Oxley Act of 2002 and the recent Dodd-Frank Act. Some of the features of the Dodd-Frank Act are –  are –  1. 2. 3. 4.

Financial rewards to the whistleblower; Strong confidentiality provisions for whistleblowers; Whistleblowers are allowed to report fraud anonymously; and By law, employers are not allowed to terminate, demote, threaten or coerce a whistleblower.

Further, the Securities and Exchange Commission Office of the Whistleblower was established under this act to help, guide and handle complaints. The United Kingdom has the Public Interest Disclosure Act, 1998 that prevents employers from discriminating against whistleblowing employees. India, however does not a have a law to protect whistleblowers and most people who expose alleged fraud within companies are often victimised, threatened, terminated or even murdered. The new Companies Act, 2013 has expanded its safety net to whistle blowers by including a number of provisions. Firstly, as per Section 177(1), “The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee” and as  per 177(2), “The Audit Committee shall consist of a minimum of of three directors with inde pendent directors forming a majority: Provided that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial st atement.” atement.” As per Section 177(9): “Every listed company or such class or class  or classes of companies, as may be  prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.” Section 177(10) reads: “The vigil mechanism under sub-section sub -section (9) shall provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases:

Provided that the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board‟s report.” This means that now 1. Companies must have a strong vigil mechanism for employees with a policy against victimisation of people using that mechanism. 2. The vigil mechanism should operate through the internal audit committee of a company, comprising of its board of directors. 3. For exceptional cases, there must be access to the Chairperson of the audit committee. 4. The whistle blowing policy should be displayed on t he company‟s website. 5. The vigil mechanism is to be included in the Board‟s report. There are some terms that need clarity however. The words „genuine concerns‟ in Section 177(9) has not been defined. The mechanism which companies have to follow are al so not discussed under the act. Leading Indian companies usually include this mechanism on their websites and in the board‟s report. Commonly accepted practices which companies use are 1. Having a hotline number to report grievances. 2. Website reporting. 3. Reporting grievances to an email ID. In 2012, as per the KPMG India Fraud Survey, companies which have whistleblower norms in  place have had a reduction in fraud. With the advent of the whistleblowing provisions under the new companies act, companies must now mandatorily adhere to stricter vigil guidelines, ensure the y have a transparent whistleblowing  policy and must have simple mechanisms to report instances of frauds. Companies must also incentivise whistleblowers for exposing potential hazards within the organisation. A company‟s overall performance in a financial year  may increase through effective whistleblowing policies, employees reporting instances of fraud and the company addressing these issues while following a non-retaliation policy toward the whistleblowers. As a conclusion, I leave you with some questions Will a whistle-blowing protection law like the Dodd-Frank Act in the United St ated have an effective implementation in India? Would it be advantageous or detrimental to merely „import‟ laws from the United States? Is it pragmatic to induce a law of a developed nation into a developing nation, wherein corruption is so rampant?