The Indian Disposition on Whistleblowing in a Private Company

ESG: implementing a robust and effective whistleblowing program

A key element of an effective ESG-compliant entity is one that incorporates a corporate culture that encourages voices to speak out and doesn’t just set forth policies with a check-the-box approach. This is especially true when it comes to the practice of whistleblowing. The effectiveness of whistleblowing as a tool to shine the spotlight on underlying wrongs and frauds within a company is well known. The absence of an effective and robust whistleblowing policy speaks to the manner in which human rights and overall corporate culture are upheld, amongst other critical ESG criteria. In this article, we understand what ails effective whistleblowing in private companies in India.  

A whistle blower is usually an insider, who has first hand information of fraud and other kinds of misbehaviour taking place in a company. This information is in the overall larger interest of the company and all its stakeholders. A whistle blower will only come forward and report such conduct if the whistle blower is assuaged that the information will be treated in the correct spirit (i.e. an effective and complete investigation will be conducted basis which the loophole will be plugged) and the safety and security of the whistle blower is assured. A reward for the whistle blower is usually the cherry-on-the-top.

As one can imagine, in the Indian context, the effectiveness of whistleblowing in private companies does not lie merely on the letter of law or the policy that it flows from, but rather, from the manner in which each individual company implements it.

The Existing Whistleblowing Regime in India

Despite the passing of the Whistle Blowers Protection Act, 2014 (“Act”), by both Houses of Parliament, the Whistle Blowers Protection Act, 2014 has yet not been notified. The Act provided for the legislative intent to provide a legal mechanism for the reporting of illegal, unethical and illegitimate practices by members of an organisation. However, the scope of the Act is limited to public servants and public sector undertakings. The Act provides for the whistle blower to disclose his/her identity, however, such a requirement at time may create discomfort for such whistle blower, as such persons usually prefer to remain anonymous in order to protect themselves against any discrimination at their respective work place or any adverse actions that may be taken against them, due to them reporting any malafide actions.

The legal framework in India pertaining to whistleblowing, protection of whistleblowers and its enforcement has largely been geared towards listed companies. The Companies Act, 2013¹ provides for a ‘vigil mechanism’ for directors and employees of listed companies and other companies prescribed therein², to seek recourse for the reporting of malfeasance and prevent victimisation.

An audit committee serves the dual purpose of scrutinising, reviewing and analysing a company’s financial activities, while also serving as an ethics watchdog. Its creation is mandated³ for every listed company and such other class or classes of companies, as may be prescribed only.  

The Securities and Exchange Board of India (“SEBI”) requires the listed companies to have incentive-based whistle blower policies that rewards employees for reporting insider trading taking place within the company. SEBI recently strengthened this monetary incentive to ₹10 crores⁴, with the aim of empowering whistle blowers and strengthening its resolve against insider trading.

Amidst increasing cases of unlawful practices being exposed by employees in listed companies, the status of whistleblowing policies in unlisted, private companies, has become all the more pertinent to address. For private companies, the whistleblowing regime remains mostly policy-driven.  

This regime is supplemented by the Companies (Auditor’s Report) Order, 2020, which facilitates enhanced financial transparency in the running and day-to-day affairs of a company, by virtue of increased cooperation with auditors, with an emphasis on whistle-blower complaints and their disposal in particular. The implementation of the same by private companies remains largely inconsistent.

Private companies: The Current State of Affairs

M. Venkaiah Naidu, India’s Vice-President, earlier this year suggested that companies implement whistle-blowing mechanisms and ensure that necessary safeguards for the protection of whistle-blowers are established⁵. This highlights the unfortunate state-of-affairs and the overall uncertainty towards private, unlisted corporates, when it comes to utilizing whistleblowing as an effective tool to blow the lid on suspicious and unfair practices and the flouting of law. In such private companies, the existence and adherence to whistleblowing policies remains largely discretionary.

Companies which have implemented such mechanisms, are fraught with an inherent conflict of interest as members of whistleblowing committees are employees of the company and suffer from prejudices, which impairs their objectivity in the handling of internal complaints. As a result, it is not unusual to find that certain complaints, which could prove to be detrimental to the public image and reputation of the company, are preferred to be brushed under the carpet.

How should the Board of Directors of a private company deal with whistleblower complaints?

The Board of Directors are obliged⁶ to act in good faith and promote the objects of the company in a manner which benefits the members as a whole and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. They are to exercise their duties with due and reasonable care, skill and diligence and shall exercise independent judgment⁷.

In a legal chasm, the proactive role played by the board of directors in the constitution and functioning of a robust and effective whistleblower mechanism can be harmoniously construed within the ambit of the duties of the directors envisaged under law. This protects the interests of the stakeholders of the company. Similarly, the board of directors play a crucial role as acting as an example of highest standards of care, honesty and integrity, which encourages the rest of the employees and managerial personnel to abide by their duties towards the interests of the organisation and society as a whole.

The Growing Whistleblowing Environment

Instances of whistleblowing complaints in listed companies are becoming increasingly common and such complaints can be seen to be made in certain prominent and well-established companies in India. In 2021, one of India’s largest drug making companies paid a settlement of INR 56 lakhs in lieu of allegations of fund diversions by the company via its distributor⁸. A prominent Indian bank also paid settlement fees of INR 28.4 lakhs to an employee on claims of being subjected to victimisation by being transferred to work under officials who he had filed a whistleblowing complaint against⁹. The most recent whistleblowing news to come to light was for Amazon India, which led to the wheels of its own investigative process into motion.  

This increases the onus on the Board of Directors, who are not only tasked with setting up a vigilance mechanism, but also ensuring its effective implementation in letter and spirit. To this end, the board must ensure awareness about such policies is created throughout the company through repeated training programmes, workshops and campaigns.

According to a survey conducted by Deloitte in June 2020, only about half¹⁰ (48%) of the respondents indicated that they were aware of the presence of whistle-blower policies within their organisation. The survey found that organisations that invested considerably in whistleblowing mechanisms witnessed a greater degree of transparency, relevant disclosures, fraud detection and an improvement in internal control of the company, in contrast to organisations that opted for a more superficial approach of establishing whistleblowing mechanisms as a regulatory formality, with minimal expenditure towards the same. 

Certain private, unlisted companies have also followed suit in implementing the provisions pertaining to a vigil committee¹¹, but the efficacy of such whistleblowing policies remains subjective and discretionary. Lack of employee confidence is also detrimental to the success of any whistle-blowing policy. The fact remains, if employees do not trust the confidentiality and anonymity they will be provided with after filing a complaint, they will seldom take the risk of reporting such activities. 

Another very rarely raised point of concern is the treatment of frivolous whistle blower complaints. Though the Companies (Meetings of Board and its Powers) Rules, 2014 through Rule 7(5) provides a somewhat adequate safeguard to listed companies to take “suitable” action, including reprimand, against frivolous complaints by directors or employees, the lack of deterring penal sanctions is a cause of concern in light of the irrecoverable damage which can be caused to public faith and perception with respect to the company¹². What exactly is suitable action remains ambiguous and highly subjective, varying from circumstance to circumstance. Similarly, the Act also provides for a jail term of up to two years, or a fine for a frivolous complaint, but considered in the larger context, it is incommensurate in the aftermath of the publicly reported investigations and inquiries taking place to judge the legitimacy of a complaint.

Conclusion

Unlisted, private companies currently occupy a legal vacuum in relation to effective whistle-blowing policies. Substantial reliance on self-initiative prevents the prevalence of accepted standards and general practices, since companies subjectively implement mechanisms for protecting and facilitating whistle-blowing within the organisational framework.

The lopsided balance of powers in vigilance committees, largely comprised of internal members, discourages employees from stepping forward and reporting ethical, legal and regulatory violations. The board of directors of a company, act as upholders of trust and confidence for the company and its concerned stakeholders are obliged to step up and spearhead the adoption and implementation of effective whistleblowing policies and mechanisms. In addition to the board of directors ensuring formation of effective and independent vigil mechanisms in unlisted companies, a robust legislation with provisions such as those provided in the Act are crucial to be implemented in India, in order to ensure that when it comes to unlisted and private companies, the protection of whistle blowers and the manner in which such complaints are dealt with does not remain subjective and at the discretion of the management.

A legislation encompassing private companies within its ambit of protection requires immediate consideration and deliberation. Attention needs to be placed on a mutually-conducive legislation which not only establishes a transparent whistleblowing regime in the public and private spheres for the benefit of employees, but also for the company to protect itself from potential damage to their reputation and business activities owing to frequent occurrence of such wrong and fraudulent activities.