Legal regime of whistleblowing in India

Legal regime of whistleblowing in India
18 Nov 2022

Whistleblowing law in traditional India

From ancient times, the concept of whistleblowing was in existence. In Ancient India, Kautilya proposed that any suchaka which means informant who provides information about fraudulent activities under perpetration, will receive one-sixth of the amount in question as a reward if he is successful in proving it; if he is a bhritaka which means government servant, he will receive one-twelfth of the amount for the same act. Whistleblowing was also discussed by the Ancient Greeks decades ago.
 

What is Whistleblowing?

The term "whistleblowing" is relatively new in public and corporate affairs, although the concept is present for centuries. Whistleblowers are the people who report corruption and fraud in organizations by filing a lawsuit or complaining to the concerned authorities in the organization to prompt action against the wrongdoer. 
The term "whistleblower" was first coined by the US Civic Activist Ralph Nader in the early 1970s. The phrase was termed to distinguish it from the negative connotations such as "informers" or "snitches." 
In simple words, a whistleblower is an employee who raises his voice to the top management against the wrongdoings that are believed to be illegal or unethical. In case of inaction from the top management, a whistleblower can also notify the authorities outside the organization.
 

Importance of Whistleblowing

  • Whistleblowing has made a significant impact in the cases of corporate fraud and misconduct.
  • The most common way of reporting fraudulent activity is whistleblowing.  It highlights the need for encouragement in the employees to report the malpractices.
  • The best way to encourage employees to report misconduct is to make them remain anonymous and protect against any retaliation.
  • Whistleblowers are often employees within the organization. As whistleblowers are so close to the crime, they have vital "inside information," which is essential to uncover the malpractice.
  • Whistleblowers help the organization to pursue its vision and mission.

Legal regime of whistleblowing in India

Law applicable to Public servants
  • The WhistleBlower Protection Act,2014 authorize a mechanism to receive complaints related to allegations of corruption or wilful misuse of power or discretion, against any public servant.
  • The act also provides adequate safeguards against exploitation of the person making such complaints.
  • This act allow any person, including a public servant, to make a public interest disclosure before a Competent Authority. The law has defined various competent authorities. For instance,  Competent authorities can complain against any union minister like the Prime Minister.
  • The law does not allow undesignated complaints to be made and clearly states that no action will be taken by a competent authority if the complainant does not set up his/her identity.
  • The maximum time period for file a complaint is 7 years.
  • Exemptions: The act is not applicable to the Special Protection Group (SPG) personnel and officers that are constituted under the Special Protection Group Act, 1988.
  • Court of Appeal: Any person aggrieved by any order of the Competent Authority can make an appeal to the High Court within a period of 60 days from the date of the order.
  • Penalty: Any person who reveals the identity of a complainant will be punishable with imprisonment for a period extending up to 3 years and a fine which may extend up to Rs. 50,000.
  • If the disclosure is done deceitful and knowingly that it was incorrect or false or misleading, the person will be punishable with imprisonment for a period extending up to 2 years and a fine which is extending up to Rs. 30,000.

Whistle mechanism as per Companies Act,2013

Under the Companies Act, 2013, as per section 177, it is stated that certain companies need to establish a "vigil mechanism" which will be utilized to report genuine concerns. The mechanism needs to be accompanied by adequate safeguards that will safeguard the person using the mechanism.
The details of the mechanism also need to be published on the company's website and in the board of directors' report. Under the Companies and (Meetings of Board and its Powers) Rules, 2014, it is stated that if an employee or a director files repeated pointless complaints, the audit committee or the director nominated for the audit committee's role needs to take suitable action against him. 
 
Role of SEBI
The Securities Exchange Board of India(SEBI) has made it compulsory for all the listed companies to have a whistle-blower policy. The whistleblower policy needs to be mandatorily made aware to all the employees, enabling employees to report instances of leak of unpublished price sensitive information. 
 
From December 2019 onwards, the SEBI has introduced a reward system for the 'informants' reporting violation of insider trading laws. From 29 june ,2021 SEBI increased the reward payable to whistleblowers under its prohibition of insider trading regulations from 1 crore to 10 crore to  encourage whistleblowers to come forward to the regulator.
SEBI LODR (Listed Obligations and Disclosure Requirements) 2015 has made it mandatory for all the listed companies to disclose the material events to the stock exchange under Regulation 30 of the SEBI.
 
Guidelines in CARO
CARO or Companies Auditor's Report Order was issued in 2020 by the Ministry of Corporate Affairs. It was enacted to strengthen the corporate governance framework under the Companies Act, 2013. This order applies to every company, including foreign ones.
As per sub clause iii of clause xi of CARO 2020 makes it mandatory to enhance due diligence and disclosures on the part of auditors of eligible companies. CARO 2020 is designed to provide transparency in the financial state of affairs of such companies.
Due to the revisions, the companies are now bound to share information with the auditors, especially on the whistle-blower complaints received during the year. This will enable the auditor to know about the way of dealing with the complaints by the company along with the nature of complaint and quantum involved.
 
Law applicable to Private employees
As of now, there isn't any specific law on whistleblowing for private employees in India. Some big MNCs have incorporated a whistle-blower policy that is a part of their extension of global policies.

Is the law applicable effectively? 

The law applicable to Listed Companies and various other classes of companies needs to be mandatorily followed, including framing a whistleblower policy and the protection of whistleblowers.
The absence of the mandatory requirement for private or unlisted companies to adopt a whistle-blower policy has failed to safeguard the whistleblowers. However, few MNCs have international best practices, including whistleblower policies, but such policies are voluntary, and non-compliance doesn't lead to legal action.  Indeed, CARO 2020 is a step ahead to address the issue, but still, it has a long way to go.
The intention of legislation and regulations framed is indeed laudable. However, it is still unclear about the manner of investigation regarding the whistle-blower complaints and ensuring compliance with laws.
There is also an unclarity looming over the procedure for conducting an internal investigation into whistleblower complaints. Though in the Companies Act, 2013, it is stated that a vigil mechanism needs to be enacted along with providing adequate safeguards to the whistle-blower, but the way of operating the mechanism isn't prescribed. The method of investigating the complaints is also missing.
 
Conclusion
With the steep increase in employee vigilance and whistle-blower complaints, handling such complaints becomes essential for every company. The law currently in place is still unclear about handling the complaints alongside safeguarding the whistleblowers. It emphasizes the importance of having a robust whistleblower policy in every workplace. Though, companies should be aware of the several nuances involved in the framing of whistleblower policies.
The companies need to adopt a proper mechanism for investigating and resolving whistleblower complaints and providing adequate protection to the whistle-blower. Companies need to focus on the need of the hour for employees, i.e., to give them a safe, ethical environment to work.

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