Harshad Mehta, Nirav Modi, Mehul Choksi and countless officials of the
government have become household names for purely one reason: Fraud. A
significant commonality across these incidents have been the method by which
they were discovered, that is whistleblowing.
The author believes that whistleblowing is crucial aid available to organisations and individuals to
identify and reduce instances of fraud to help in the creation and sustenance of
more legally compliant and progressive companies. The corollary of this
proposition is that whistle-blowers must receive adequate support and protection
in order to confidently uncover and reveal instances of fraud. In lieu of the
same, forming company policy regarding whistleblowing must be a mandate and it
must be effectively enforced.
Doing so is the key to encourage people to report
fraudulent activity or unethical conduct when they identify it, be it at an organisational level or in an individual role. Therefore, this paper seeks to
understand, firstly, the significance of whistleblowing in companies from an
Indian perspective and importance of protecting whistle-blowers and, secondly,
the efficacy of the supporting legal framework.
The concept of whistleblowing is not new. It can be dated back to the Treta Yug,
when Vibhishan, younger brother of the king of Lanka, Ravana, informed Lord Ram
about the whereabouts of Sita and joined Ram's army to fight against his own
brother. Later he was made the king of Lanka the younger brother of Ravan, ruler
of modern-day Sri Lanka, Vibhishan revealed to Lord Ram the location of Sita
whom Ravam had kidnapped. He then joined Lord Ram's army to fight against his
From this we can understand that whistleblowing is essentially the making of a
disclosure, based on facts and not speculative in nature.  In the
corporate world, this disclosure may refer to a concern of an employee or group
of employees or a third-party who, on noticing unethical or illegal behaviour of
an organisation, give out details of the act in writing and in good faith, the
objective being to stop the unethical practices by either notifying the
management or any external authorities.
The most accepted definition of
whistle-blowing comes from an American consumer activist, Ralph Nader, who said
whistleblowing is 'An act of man or woman who, believing that public interest
overrides the interests of the organisation he serves, blows the whistle that
the organization is involved in corrupt, illegal, fraudulent or harmful
In terms of whistleblowing, the Indian Constitution merely provides for the
enforcement of public law remedy through public interest litigation. There exist
certain laws for creation of a mechanism that deals with genuine concerns as
under the Companies Act, 2013 and SEBI rules for Listed Companies, however,
private companies are not bound by any such law. As the paper will further
discuss, due to a rise in whistle-blower complaints in India, the need for a
strong, air-tight legal regime is felt necessary.
This research paper seeks to analyse and understand the concept of
whistleblowing in companies from an Indian perspective. It aims to validate the
existence of such a concept by undertaking a qualitative study with the aid of
To further the study, the author lays down two hypotheses:
- Whistleblowing is an important mechanism to implement better corporate
governance in any company and thus there is a need to protect whistle-blowers.
- Current Indian legal machinery does not adequately ensure whistleblowing
nor does it efficiently protect whistle-blowers.
||Companies' Use of
Whistleblowing to Detect Fraud:
An Examination of Corporate Whistle-Blowing Policies, 2012.
||This study took upon the task of analysing
various forms of whistle-blowing disclosures. It concluded that there is
a direct positive relationship between disclosures and support and
conducive environment of the organisation, suggesting that it is the
duty of the management, auditors and external directors to create such
||A Study on Whistle Blowing Mechanism in
Corporate India, 2018.
||IOSR Journal of Business and Management
||This paper showed the value of whistleblowing as
a way of corporate governance which is vital in strengthening every
organization's credibility and transparent functioning. Clause 49 of the
SEBI was highlighted and it proved that companies ought to ensure that
the organisation gives the whistle blowers a positive,
conducive atmosphere in which these whistle-blowers can feel confident
and safe in speaking out about the malpractices that come to their
||Nimsha Bhargava & Mani Madalaa
||An Overview of Whistleblowing: Indian
||International Journal of Innovative Research
in Science, Engineering and Technology
||This paper, as frequently referenced in the
current study as well, is an important insight into the requirement for
a regime for the protection of whistle-blowers. It describes the
consequences of whistleblowing in India and brings light to the fact
that till adequate protection is offered to whistle-blowers, scams will
continue to take place, echoing the sentiments of Ms. Sucheta Dalal as
||Monica Makhija & Dr Sweta Kulshreshtha
||A Qualitative Study on Impact of
Whistle-Blowers on Performance of Organisation, 2018.
||International Journal of Engineering Sciences
& Research Technology
||The study researches the impact of
whistleblowing on an organisation and discusses its advantages and
limits. It concludes that a welfare protection programme must be
incorporated in every organisation for the safety of whistleblowing
employees. This culture of reporting of fraud and misconduct must be
Need For Whistleblowing
To understand the link between good corporate governance and whistleblowing, one
must first understand the concept of corporate governance. As was said rightly
by the former President of the World Bank, 'Corporate governance is about
promoting fairness, transparency and accountability
ICSI had further
When it [Corporate Governance] is practiced under a well laid out
system, it leads to the building of a legal, commercial and institutional
framework and demarcates the boundaries within which these functions are
In this sense, whistle-blowers not only expose the irregularities
in the functioning of a company to the general public, but also give the
Directors of the company as well as the employers a chance to find out potential
fraudulent activities and rectify their mistakes beforehand saving them from the
eventual slew of legal issues and possible public disgrace. Corporate Conscience
is often clubbed with Corporate Social Responsibility; however, it is more than
Corporate Conscience is a dual faceted notion:
- Corporate Governance deals with the promotion of fairness, transparency
and accountability in displaying fair treatment towards all stakeholders and
not just focusing on profit-making.
- Recognizing the ideology that businesses have a social duty towards the
society and citizens
Therefore, it can be rightly be said that whistle-blowers are indeed the
keepers of corporate conscience.
Need for protecting whistleblowers
The instances of whistleblowing in India in the corporate world are plentiful.
It is the lack of transparency and flawed reporting to the agencies concerned
that has become the primary cause of rising corporate corruption. When there is
misconduct in an organization, it cannot escape the eye of every single
employee, invariably, some employees are privy to such information. However,
despite being aware of such activities, they choose to remain silent and turn a
blind eye in fear of retaliation from the ones in charge.
Following are the
certain instances that exemplify the fear of whistleblowing and emphasize the
need for protection of whistle-blowers:
2002: Golden Quadrilateral ProjectIn the present matter, the NHAI director, Satyendra Kumar noticed certain
financial irregularities in the Golden Quadrilateral project post which he sent
anonymous messages to the PMO giving factual information about the contractors
who submitted forged and misleading documents in order to secure the bids for
contracts. This letter was forwarded to the Ministry of Road, Transport and
Highways subsequent to which Mr. Kumar was found shot dead.
2010: Malabar Cements LimitedMr. Saseendran was an employee of Malabar Cements Ltd. which was a loss making.
On noticing instances of corruption within the company management, Saseendran
informed the Chief Minister of Kerala. He tried to prove that the managing
director of the company was selling vital confidential information about the
company. In a 2007 audit, he became the prime witness stating that the company
registered a loss of about 400 crores due to corruption. Unfortunately, in 2011,
Saseendran was found hanging in his house along with his two sons.
2018: Punjab National Bank (PNB) ScamA Bangalore based entrepreneur, Hari Prasad, had written multiple letters to the
PMO including balance sheets that showed clear signs of fraud by PNB,
implicating Mehul Choksi. However, no action was taken and Prasad lost hope.
However, in pursuit of a personal fight against the Bank involving 13 crores,
Prasad filed an FIR and the matter reached the CBI. This led to all the previous
letters being publicised. In lieu of this, Prasad felt extremely threatened and
made the following statement: I am sure the alleged people are influential
enough to close the case even after my repeated complaint to the authorities at
the highest level. I am afraid of the consequences now.
Sucheta Dalal, the whistle-blower in the infamous Harshad Mehta Scam believes
that the banking industry specifically would have lesser scams if there were was
a greater culture of whistleblowing and thinks that a collective whistleblowing
exercise would have more impact as there is more strength in numbers. In her
blog, she goes ahead to say that the biggest fear of whistle-blowers is that the
system offers them no protection. Companies not only sack whistle-blowers, but
also sue them, threaten them and tarnish their reputations. This personal cost
of whistleblowing must be reduced and legal protection must be offered.
Existing Legal Framework
Arguendo, existing legislation on whistleblowing must be analysed:
Whistle Blowers Protection Act, 2011This Act was introduced with the aim of protecting anyone that provides reports
about unethical government activities. Unfortunately, the Act has several
inconsistencies, one of them being that it does not include corporate
Companies Act, 2013:Section 177 stipulates that each company listed must provide a vigil mechanism
to monitor the reporting of fraud or misappropriation by the directors and
employees as prescribed. The corporation therefore has developed a code of
ethics, which sets the rules for their code of conduct, for their senior
management executives and other top management members.
Clause 49 of the SEBI Listing Agreement
A 26-8-2003 SEBI Circular modified the corporate governance standards as
included in the listing agreement via Clause 49. The revised rule required a
company to devise its own whistleblowing policies. This process encourages
employees to expose any irregularities in the business and bring it to
the management's notice. This provision was first under the non-mandatory
segment and then was later shifted to mandatory.
SEBI (LODR) RegulationsSince the suspension of Clause 49, Regulation 18 of the SEBI Regulations 2015
(SEBI (LODR)), all listed companies have to set up a vigilance mechanism for
directors and personnel to report their concerns about non-ethical conduct, real
or suspected fraud or violations, known as a Whistle-blower Policy. In the
simplest terms, it should be recognised that whistleblowing is an activity to
highlight or warn that some kind of illegal, criminal or wrong behaviour occurs
within an organisation. This knowledge must be transmitted to all staff
thereafter. Within the rules provided for under Regulation 18, staff of an
organisation have to be enlightened about the fact that it is their right
and duty or obligation to be vigilant. The corollary of this is that the
corporation must affirm that it would defend those employees from any
repercussion including termination of employment, so that the employees may
exercise this right freely.
Companies (Auditor's Report) Order, 2020The Order extends to all companies, including a foreign corporation, as
described in the Companies Act, 2013. CARO 2020 calls for increased due
diligence and disclosure by auditors of qualifying companies and was intended to
make the financial state of affairs of those undertakings more transparent.
These reforms have also placed more of an importance on the business to disclose
information to the auditor, specifically about the whistle-blower's complaints
received who generally then demands to know how it dealt with those allegations,
including their scope, and quantum implications etc.
Lacunae In The Law
In 2019, a Tata Consultancy Services employee questioned the effectiveness of
the vigil mechanism as mandated by Section 177. Being a whistle-blower himself
in the EIC Software case, Phillippe Guionnet doubted the protection he would be
offered by TCS for his courageous act. This instance itself proves that there
exist loopholes in the whistle-blowing mechanism in India. The main issue
with the current whistleblowing mechanism, firstly, is that companies, when
faced with a whistle-blower complaint, do not know how to proceed. Such
procedure is inherently policy driven and an issue arises when the organisation
has not devised a policy.
Secondly, even though the management is tasked with the resolution of such
complaints, they may find themselves ill equipped in the absence of a modus
operandi set by the policy. Even though Section 177 of the Companies Act, 2013
mandates the devising of a vigil mechanism, the same is considered is quite
narrow. This provision is applicable solely to listed companies. Several
unlisted, private companies therefore escape this requirement unless they fall
in the prescribed specific class. Although CARO 2020 seeks to resolve this
issue, it has inherently restricted itself to financial matters.
Thirdly, what the corporate investigation protocol for whistle-blower cases
should be, is still vague. While the Companies Act, 2013, and its regulations
require a surveillance system and sufficient protection to protect
whistle-blowers, there is no provision for the operation of such a mechanism and
inquiries into allegations. Again, a move to remedy CARO 2020 can be taken to
ensure that the statutory auditor examines the way in which each complaint is
Fourthly, this mandate of compulsory disclosure is considered vague and unclear.
Although the purpose of law is laudable, the way in which whistle-blowers are
investigated and regulation enforcement is ambiguous. There is confusion as to
what extent of the gravity of the complaint is to be reported or what stage of
the investigation must the disclosure be made.
Fifthly, a discussion into the Whistle-blowers Protection Act, 2011 is required.
This Act only covers within its ambit corruption within the government and
extends protection to government employees. So, not only does it actively
exclude corporate employees, it creates a grey area for employees of a
public-private partnership organisation. Even its applicability to public sector
units is in question.
Whistleblowing, undoubtedly, is a courageous and applause worthy act. It takes
immense strength to disclose secrets and wrongdoings of powerful people since
there is always a great fear of retaliation. Thus, when an individual risk
personal safety for the greater good, extra and precise effort must be taken to
protect their interest. The present legislation although tries hard to impose a
practice of protecting whistle-blowers, it falls short in the implementation
Thus, the author offers the following suggestions:
- Legislature must provide clear and precise rules for the devising of a
whistle-blower policy and include every form of company within its ambit.
The mandate of creating such a policy must be imposed and non-compliance
must be penalised in monetary terms.
- The process of making a disclosure should be straightforward, clear and
precisely defined and the aim should be to provide an opportunity for the
disclosure at the earliest possible moment.
- Incentives should be provided to whistle-blowers and compensation must
be offered if there is loss of job or any other financial loss.
- The scope of Whistle-blowers Protection Act must be better defined and
must be made all inclusive.
- Section 17 of the Whistle-Blowers Protection Act, 2014 provides a
penalty for wrong disclosure, however, this penalty should be excused if the
complaint was made in good faith.
The author believes that whistle-blowers are the keepers of corporate conscience
and the ensuring of morality of a company rest upon them. In conclusion, the
author would like to borrow the words of Edmund Bruke, 'All that is necessary
for the triumph of evil is for good men to do nothing.'
Written By: Ananya Agarwal
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, Symbiosis Law School, Pune