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Whistleblowers: Keeper's of Corporate Conscience

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.

Introduction
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 own brother[1].

From this we can understand that whistleblowing is essentially the making of a disclosure[2], based on facts and not speculative in nature. [3] 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.[4]

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 activity.'[5]

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[6], 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.

Research Objective
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 secondary sources.

To further the study, the author lays down two hypotheses:
  1. Whistleblowing is an important mechanism to implement better corporate governance in any company and thus there is a need to protect whistle-blowers.
  2. Current Indian legal machinery does not adequately ensure whistleblowing nor does it efficiently protect whistle-blowers.

Literature Review
S.N. Author(s) Title Journal Findings
1 Gladys Farger Companies' Use of
Whistleblowing to Detect Fraud:
An Examination of Corporate Whistle-Blowing Policies, 2012.
Springer 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 an environment.
2 Dr. Sunita 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 notice
3 Nimsha Bhargava & Mani Madalaa An Overview of Whistleblowing: Indian Perspective, 2015 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 discussed ahead.
4 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 promoted.
Analysis

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'.[7]

ICSI had further observed:
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 performed.[8]

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 that.

Corporate Conscience is a dual faceted notion:
  1. 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.
  2. Recognizing the ideology that businesses have a social duty towards the society and citizens[9]

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[10].

Following are the certain instances that exemplify the fear of whistleblowing and emphasize the need for protection of whistle-blowers:

  1. 2002: Golden Quadrilateral Project

    In 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.[11]
     
  2. 2010: Malabar Cements Limited

    Mr. 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.[12]
     
  3. 2018: Punjab National Bank (PNB) Scam

    A 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.[13]
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.[14]

Existing Legal Framework

Arguendo, existing legislation on whistleblowing must be analysed:

  1. Whistle Blowers Protection Act, 2011

    This 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 whistleblowing.[15]
     
  2. 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.[16]
     
  3. 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[17]. This provision was first under the non-mandatory segment and then was later shifted to mandatory.[18]
     
  4. SEBI (LODR) Regulations

    Since 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.[19] 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.[20]
     
  5. Companies (Auditor's Report) Order, 2020

    The 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.[21] 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[22].

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 handled.

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.[23]

Conclusion
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 department.

Thus, the author offers the following suggestions:
  1. 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.
  2. 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.
  3. Incentives should be provided to whistle-blowers and compensation must be offered if there is loss of job or any other financial loss.
  4. The scope of Whistle-blowers Protection Act must be better defined and must be made all inclusive.
  5. 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.'

End-Notes:
  1. Vol. 4, Issue 2, Nimisha Bhargava & Dr. Mani K. Madala, An Overview of Whistleblowing: Indian Perspective, (International Journal of Innovative Research in Science, Engineering and Technology, 2015).
  2. Karin Henrikkson, Worldwide: What Is Whistleblowing? Mondaq, (May 9, 2021, 9:08am),
    https://www.mondaq.com/whistleblowing/783628/what-is-whistleblowing.
  3. Bhavana Sunder, Payel Chatterjee & Sahil Kanuga, Whistleblowing in India: Are We There Yet? Nishith Desai Associates, (May 8, 2021, 11am), https://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/whistleblowing-in-india-are-we-there-yet.html
  4. R.M. Green, 1994
  5. Whistle Blowing Blancing on a Tight Rope, Knowledge Paper Series 5, ICSI, ( May 8, 2021, 11:15am), https://www.icsi.edu/media/webmodules/45th_nc/WhistleBlowing_BalancingonaTightRope.pdf
  6. Supra, at 3
  7. Magdi R. Iskander & Nadereh Chamlou, Corporate Governance: A Framework for Implementation, The World Bank Group, (May 7, 2021, 6:30pm),
    http://documents1.worldbank.org/curated/pt/831651468781818619/pdf/30446.pdf
  8. Supra, at 5.
  9. Vol. 9, Issue 3, Ajay Sharma, Whistleblowing as a Tool to Corporate Good Governance-An Indian Perspective. (Res. J. Humanities and Social Sciences, 2018).
  10. Bhumesh Verma & Abhisar Vidyarthi, Whistleblowing in India: The Way Forward, The SCC Online Blog, (May 9, 1:30pm), https://www.scconline.com/blog/post/2019/09/07/whistleblowing-in-india-the-way-forward/
  11. Dubeys Murder Moves People. What About The System, The Financial Express, Dec 7 2003.
  12. CBI files charge sheet in Saseendran case, The Hindu, June 16, 2013.
  13. Tasmayee Laha Roy, Whistle-blower Hari Prasad SV had alerted PMO of possible PNB scam in a 2016 letter, MoneyControl, Feb 16, 2018,
    https://www.moneycontrol.com/news/india/whistleblower-hari-prasad-sv-had-alerted-pmo-of-possible-pnb-scam-naming-mehul-choksi-in-a-2016-letter-2509137.html
  14. Sucheta Dalal, Whistleblowing in Banks: How Can it be Effective? Whistleblowing: Can it Work? (May 8, 11:30am),
    http://www.suchetadalal.com/?id=5c01cf4a-8629-9cbc-492e8bd101cc&base=sections&f&t=Whistleblowing%3A+Can+it+work%3F
  15. Supra, at 10
  16. Section 177, Companies Act, 2013.
  17. Supra at 10,
  18. Supra, at 9
  19. Whistle Blowing and Whistle-Blowers A Diagnostic Approach to Human Resource Management Dimensions of Whistle Blowing Studies. Corporate Governance- Millennium Challenges, 253-269 (2011).
  20. Regulation 18, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
  21. Raghu Krishnan & Reena Zachariah, TCS vigil mechanism is under Sebi watch, Economic Times, Jul 30, 2019.
  22. Supra, at 3.
  23. Supra, at 10
Written By: Ananya Agarwal, Symbiosis Law School, Pune

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