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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 external body, such as the government or law
regulatory bodies.
Around the world, mainly in the United States and in the United Kingdom, whistleblowing
provisions are mandatorily followed by the private sector and 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
1. Financial rewards to the whistleblower;
2. Strong confidentiality provisions for whistleblowers;
3. Whistleblowers are allowed to report fraud anonymously; and
4. 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 three directors with independent
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 statement.

As per Section 177(9): Every listed company or such 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 (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 Boards 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 the companys website.
5. The vigil mechanism is to be included in the Boards 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 also not discussed
under the act. Leading Indian companies usually include this mechanism on their websites and in
the boards 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 they 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 companys 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 Stated 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?