[The following post is contributed by Suprotik Das, a 3rd year law
student at the Jindal Global Law School, Sonepat, Haryana]
student at the Jindal Global Law School, Sonepat, Haryana]
Last year, with the
advent of the Companies Act, 2013 (the Act), the thrust has been toward fraud
protection and having an effective corporate vigil mechanism. Companies in
India are now required to have an appropriate whistle blower protection policy
in place. In this regard, section 177(9) of the Act mandates that 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. However, the Ministry of
Corporate Affairs has still not notified what exactly a ‘genuine concern’
entails.
advent of the Companies Act, 2013 (the Act), the thrust has been toward fraud
protection and having an effective corporate vigil mechanism. Companies in
India are now required to have an appropriate whistle blower protection policy
in place. In this regard, section 177(9) of the Act mandates that 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. However, the Ministry of
Corporate Affairs has still not notified what exactly a ‘genuine concern’
entails.
Under section 177(10),
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.The proviso to the section
requires such mechanism to be disclosed by the company on its website as well
as in the board’s report.
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.The proviso to the section
requires such mechanism to be disclosed by the company on its website as well
as in the board’s report.
In 2014, keeping in
line with the growing role of corporate governance, the Ministry of Corporate
Affairs notified Chapter XII of the Act which is implemented through The
Companies (Meetings and Powers of Board) Amendment Rules, 2014 and expanded the
ambit of the whistleblower protection norms under Section 177 (9) and (10).
line with the growing role of corporate governance, the Ministry of Corporate
Affairs notified Chapter XII of the Act which is implemented through The
Companies (Meetings and Powers of Board) Amendment Rules, 2014 and expanded the
ambit of the whistleblower protection norms under Section 177 (9) and (10).
As per rule 7(1), the
following classes of companies need to have a vigil mechanism to report genuine
concerns or grievances –
following classes of companies need to have a vigil mechanism to report genuine
concerns or grievances –
(a) Companies which accept
deposits from the public;
deposits from the public;
(b) Companies which have
borrowed money from banks and public financial institutions in excess of fifty
crore rupees.
borrowed money from banks and public financial institutions in excess of fifty
crore rupees.
As
per rule (2), where companies are required to constitute an audit committee,
such committee shall oversee the vigil mechanism and if any of the members of
the committee have a conflict of interest in a given case, they should recuse
themselves and the others on the committee will deal with the matter on hand.
per rule (2), where companies are required to constitute an audit committee,
such committee shall oversee the vigil mechanism and if any of the members of
the committee have a conflict of interest in a given case, they should recuse
themselves and the others on the committee will deal with the matter on hand.
As per rule (3), in
case of other companies, the Board of directors shall nominate a director to
play the role of audit committee for the purpose of vigil mechanism to whom
other directors and employees may report their concerns.
case of other companies, the Board of directors shall nominate a director to
play the role of audit committee for the purpose of vigil mechanism to whom
other directors and employees may report their concerns.
On April 17, 2014, the
Securities and Exchange Board of India (SEBI) released a circular
to amend Clauses 35B and 49 of the SEBI Equity Listing Agreement. The circular
makes significant changes to the scope of whistle blowing protection in India.
Securities and Exchange Board of India (SEBI) released a circular
to amend Clauses 35B and 49 of the SEBI Equity Listing Agreement. The circular
makes significant changes to the scope of whistle blowing protection in India.
As per Clause 49. I. B.
1. e., the company should devise an effective whistle blower mechanism enabling
stakeholders, including individual employees and their representative bodies,
to freely communicate their concerns about illegal or unethical practices.
However, it is still unclear as to the ambit of the illegal or unethical
practices. Do they mean fraud or embezzlement or securities violations? We are
still unclear with respect to the term illegal or unethical practice.
1. e., the company should devise an effective whistle blower mechanism enabling
stakeholders, including individual employees and their representative bodies,
to freely communicate their concerns about illegal or unethical practices.
However, it is still unclear as to the ambit of the illegal or unethical
practices. Do they mean fraud or embezzlement or securities violations? We are
still unclear with respect to the term illegal or unethical practice.
Clause 49. II. F.
categorically lays out a Whistle Blower Policy to be followed-
categorically lays out a Whistle Blower Policy to be followed-
1. The company shall establish a vigil mechanism for
directors and employees to report concerns about unethical behaviour, actual or
suspected fraud or violation of the company’s code of conduct or ethics policy.
directors and employees to report concerns about unethical behaviour, actual or
suspected fraud or violation of the company’s code of conduct or ethics policy.
2. This mechanism should also provide for adequate
safeguards against victimization of director(s) / employee(s) who avail of the
mechanism and also provide for direct access to the Chairman of the Audit
Committee in exceptional cases.
safeguards against victimization of director(s) / employee(s) who avail of the
mechanism and also provide for direct access to the Chairman of the Audit
Committee in exceptional cases.
3. The details of establishment of such mechanism
shall be disclosed by the company on its website and in the Board’s report.
shall be disclosed by the company on its website and in the Board’s report.
Victimisation of
whistlebowers was a point that was not addressed before. However, safeguards
and policies should clearly be laid down by companies to prevent termination,
demotion and punishment of whistleblowers.
whistlebowers was a point that was not addressed before. However, safeguards
and policies should clearly be laid down by companies to prevent termination,
demotion and punishment of whistleblowers.
Financial incentives can be another step towards effectively unearthing fraud.
This is present in the United States with the Dodd–Frank
Wall Street Reform and Consumer Protection Act. Section 922 of that Act
mandates that 10% to 30% of what has been collected in monetary sanctions,
exceeding $1 Million, will be given to whistleblowers. In determining the amount,
the Securities and Exchange Commission will take the following into account:
1. The significance of the information;
2. The degree of assistance provided by
the whistleblower; and
the whistleblower; and
3. The interest of the government in
deterring violations of securities laws.
deterring violations of securities laws.
Incentives of this
nature, however, are absent in India.
nature, however, are absent in India.
Clause 49. III. D. 18 requires
a qualified and independent Audit Committee to review the functioning of the
Whistle Blower mechanism. As per Clause 49. VII. H. 2., the details of the vigil
mechanism should be disclosed by the company on its website and in the Board’s
report.
a qualified and independent Audit Committee to review the functioning of the
Whistle Blower mechanism. As per Clause 49. VII. H. 2., the details of the vigil
mechanism should be disclosed by the company on its website and in the Board’s
report.
The revised Clause 49
would be applicable to all listed companies with effect from October 01, 2014.
The provisions of Clause 49(VII) as given in Part-B shall be applicable to all
prospective transactions. For unlisted companies, the 2014 Rules under Chapter
XII as well as section 177(9) and (10) will be applicable.
would be applicable to all listed companies with effect from October 01, 2014.
The provisions of Clause 49(VII) as given in Part-B shall be applicable to all
prospective transactions. For unlisted companies, the 2014 Rules under Chapter
XII as well as section 177(9) and (10) will be applicable.
The circular states
that for other listed entities such as banks, financial institutions, insurance
companies, NBFCs, which are governed by other statutes, Clause 49 will be
applicable to the extent there is no conflict with their statutes, rules or
guidelines. However, Clause 49 is not applicable to Mutual Funds.
that for other listed entities such as banks, financial institutions, insurance
companies, NBFCs, which are governed by other statutes, Clause 49 will be
applicable to the extent there is no conflict with their statutes, rules or
guidelines. However, Clause 49 is not applicable to Mutual Funds.
Tracing the legislative
history, it is found that the Companies
Bill, 2011 made amendments to the Statement of Objects and Reasons included
in the Companies
Bill, 2009. Clause 5(d) illustrates whistle blowing provisions so as to
facilitate ethical corporate behaviour, while rewarding employees for their
integrity and for providing valuable information to the management on deviant
practices. In my opinion, the Ministry should provide clarity on some of the
terms in the Act, Rules and circulars so as to define the scope of some terms
such as ‘genuine concerns’ and ‘illegal and unethical practices’.
history, it is found that the Companies
Bill, 2011 made amendments to the Statement of Objects and Reasons included
in the Companies
Bill, 2009. Clause 5(d) illustrates whistle blowing provisions so as to
facilitate ethical corporate behaviour, while rewarding employees for their
integrity and for providing valuable information to the management on deviant
practices. In my opinion, the Ministry should provide clarity on some of the
terms in the Act, Rules and circulars so as to define the scope of some terms
such as ‘genuine concerns’ and ‘illegal and unethical practices’.
Although the objectives
set out by the Bill have not been achieved yet, significant strides have been
made in that direction. The new benevolence in Corporate Governance is a welcome
step for Indian Companies and more importantly, for employees in Indian
Companies who seek to uncover and report instances of fraud, embezzlement, or
securities law violations or other illegal or unethical conduct.
set out by the Bill have not been achieved yet, significant strides have been
made in that direction. The new benevolence in Corporate Governance is a welcome
step for Indian Companies and more importantly, for employees in Indian
Companies who seek to uncover and report instances of fraud, embezzlement, or
securities law violations or other illegal or unethical conduct.
– Suprotik Das