Corporate governance refers to the set of procedures and practices used by organizations to regulate their internal affairs. Effective corporate governance not only enhances a company’s reputation but also instills investor confidence while strengthening relationships with key stakeholders. In this context, whistleblower policies play a pivotal role in fostering a healthy corporate governance framework.

The term “whistleblower” typically refers to individuals who disclose or report information about misconduct within an organization, especially when it is of public interest. Legislators and regulatory agencies must proactively promote and protect the role of whistleblowers. Notably, the US Securities and Exchange Commission recently made history by awarding a whistleblower $279 million, underlining the importance of incentivizing and safeguarding whistleblowers.

CHALLENGES IN THE CURRENT FRAMEWORK

India’s Whistle Blowers Protection Act of 2014 is a significant piece of legislation that outlines reporting and protection procedures for whistleblowers. Furthermore, several other legislative provisions exist for whistleblowers. For example, listed companies are mandated to establish a vigil system (whistleblowing policy) as per Section 177 of the Companies Act, 2013, and Regulation 22 of the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2018 (LODR).

Additionally, Schedule V of the LODR requires listed companies to disclose in their annual reports the implementation of a whistleblower policy and the extent of compliance with it. This move by SEBI is commendable as it enhances trust among stakeholders, potential investors, and shareholders in the corporate governance framework and the company’s risk management system. The Ministry of Corporate Affairs has also mandated certain private enterprises to provide whistleblower report details to auditors. Unfortunately, this order lacks provisions for protecting whistleblowers within private companies.

Furthermore, Clause IIIA of the SEBI (Prohibition of Insider Trading) Regulations, 2015 introduced provisions for the protection of whistleblowers who voluntarily provide SEBI with original information regarding violations of insider trading laws. This amendment not only incentivizes whistleblowers to report actual or potential insider trading violations but also provides protection from reprisals. Notably, the whistleblower can receive compensation from the regulator even if they initially report the information to their organization’s internal legal compliance committee before notifying SEBI.

However, the current system has its limitations. It grants immunity to the officer in charge who retaliates against the whistleblower, both civilly and criminally. Moreover, it vests discretionary authority with SEBI for rewarding whistleblowers. This means that even if a whistleblower voluntarily discloses original information in good faith, resulting in successful enforcement, they may not receive a reward, unlike the mandatory reward system in the US for whistleblowers meeting all legal requirements.

PROPOSED MEASURES: A PATH FORWARD

India must enact legislation that provides robust protection to whistleblowers in both public and private companies. This legislation should establish a supervisory body to which whistleblowers can appeal if the internal mechanisms of their company fail to address their concerns in a timely or appropriate manner. Similar to international whistleblowing laws, this supervisory authority should offer guidance, information, and support to whistleblowers in the public interest, enhancing public confidence in whistleblowing.

The authority should have the discretion to refer whistleblower allegations to relevant regulatory authorities for thorough investigation when deemed necessary. The law should also include provisions for financial rewards for informants providing firsthand information about violations in public or private organizations, leading to successful enforcement actions. Anyone taking adverse actions against a whistleblower due to their public interest whistleblowing should be held accountable under civil or criminal law.

While there is already a mechanism for reporting misconduct in the securities market, its application is limited. Whistleblowers should be allowed to report violations of other securities regulations directly to SEBI, expanding their avenues for disclosing suspicious activities while benefiting from SEBI’s protection.

Moreover, SEBI should introduce incentive provisions for voluntary reporting of original information related to violations of any securities laws in India, leading to successful enforcement. The Investor Protection and Education Fund could be utilized for rewarding whistleblowers in such cases. Currently, SEBI provides incentives for whistleblowing in insider trading cases, but incentives are lacking in other cases.

In conclusion, addressing the challenges faced by whistleblowers in India requires comprehensive legislative reforms and stronger protective measures. By enacting laws that encourage and safeguard whistleblowers, India can strengthen its corporate governance framework, enhance transparency, and promote a culture of integrity and accountability.