Hush of the Whistleblower

[Guest post
by
Malek Shipchandler, who
practices law with a firm in Mumbai. Views are personal and do not necessarily
represent those of the firm.]
The ongoing controversy
at one of India’s most celebrated companies, built on high standards of
corporate governance, raises some interesting issues for consideration from a
whistleblower perspective. It was earlier 
reported that the Indian securities regulator, the
Securities and Exchange Board of India (SEBI) is examining a letter from a
whistleblower at Infosys alleging that the CEO agreed to a gargantuan payout to
a resigning chief financial officer, without any formal approval of the board,
governance committees or the shareholders. The payout, the size of which is
apparently unprecedented at Infosys, was riddled as “hush money” by one of the
prominent founders of Infosys in an 
interview.
The Indian whistleblower
norms for listed companies are relatively straitened, in comparison with
jurisdictions such as the United States, where India often derives regulatory
inspiration from. The Dodd-Frank Wall Street Reform and Consumer Protection Act
of the United States established a
whistleblower program to be overseen by the U.S. Securities and Exchange
Commission (SEC) in 2010. The relevant norms, inter alia, make it a
violation of law to take any action to impede an individual from communicating
directly with the SEC about a possible securities law violation, including
enforcing, or threatening to enforce, a confidentiality agreement. In the
contrasting Indian scenario, while the SEBI listing norms and Companies Act,
2013 mandate the company to establish a vigil and whistleblower mechanism
which, inter alia, is to provide for adequate safeguards against
victimization of the employees and their direct access to the audit committee
of the company, they appear to envisage the umpiring and first go-to authority
to be the board of directors and/or the audit committee, rather than a
regulator such as SEBI. While the audit committee is statutorily required to be
constituted (in majority) and helmed by ‘independent directors’ – considering
that a majority
of Indian listed companies are promoter driven
, with independent directors
spending less than nine days per year on board related work, and voicing that
their company wants them to “toe the line” (according to the India
Board Report 2015-16
) – the moot point is whether, in reality, independent
directors are truly independent and effective.
Questions therefore
ensue: what if the whistleblower’s information pertains to the action of the
board of directors or members of the audit committee? Is the board or the audit
committee then expected to take action on incriminating information presented
against it? Moreover, from a practical viewpoint, particularly when the
mechanism does not adequately protect the identity of the whistleblower from
the board or governance committee, is the whistleblower going to be protected
from or become a prey of victimization by the very persons being incriminated?
The extant law, while
requiring the company to establish a whistleblower mechanism and safeguarding
against victimization, does not provide any guidance on how the mechanism ought
to function or how victimization can be mitigated (if not avoided). Curiously
enough, SEBI has not specifically touched upon whistleblowing in its recent
guidance note
on board evaluation, despite the guidance note being released
in the aftermath of a high profile board-room battle. An option may perhaps lie
in setting up a whistleblower hotline – managed by a professional third party
who would in-turn verify the credibility of the complaint and the whistleblower.
The idea of a third party managed hotline would however depend on the company’s
willingness to spend extra currency and moreover, how thoroughly it is able to
sensitize its employees about using such a hotline.
Further, employment/severance
agreements often encapsulate boilerplate clauses that restrict a current or
former employee from disclosing, voluntarily, any confidential information
which may disparage the company or its officers. To reiterate the keyword in
such clause(s): voluntarily. While the SEC has statutorily prohibited this (and
taken enforcement actions against companies using such clause(s)), SEBI is yet
to burgeon in this department. From the employees’ perspective, it is
understandable why they would not resist signing off on such clause(s): one,
boilerplate clauses by their very nature are not negotiated upon as
enthusiastically as remuneration or notice period related clauses; and two,
which may perhaps be the most crucial reason, voluntary whistleblowing is not,
statutorily, monetarily incentivized in India. The SEC’s whistleblower program
envisages paying awards to whistleblowers that provide the SEC with credible
information about a securities law violation that leads to a successful SEC
enforcement action resulting in monetary sanctions over $1 million – the award
can range between 10% and 30% of the amount recovered in the enforcement
action. In the Indian context, while it can be argued that monetary incentives
may encourage frivolous and vexatious complaints, statutorily adopting a bounty
system where an award is given only when the information is credible enough to
bring about a successful enforcement action, can be food for thought. In fact,
one of India’s steel giants is said
to be rewarding its employees (including contract workers) up to INR 100,000
for whistleblowing – this is a welcome cue taken from the SEC’s bounty program.
Be that as it may,
while SEBI may have its reasons for not having implemented a statutorily robust
whistleblower program, it would be fair to acknowledge that SEBI does take
cognizance of complaints and incrimination information against entities
violating securities laws, through its
SCORES (SEBI COmplaints REdress System) platform and otherwise. As regards the bounty mechanism for
credible whistleblowers, the SEC Annual Report 2016 states that SEC has, since
the inception of its whistleblower program, levied over $500 million worth of
enforcement actions based on information received from whistleblowers, and
awarded over $100 million to credible whistleblowers. Clearly, Benjamin
Franklin, the founding father of the United States, said something which
appears to resonate with the SEC: “An investment in knowledge pays the best
interest.” Will it with SEBI?
         
Malek Shipchandler

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • OFFHAND
    “……the moot point is whether, in reality, independent directors are truly independent and EFFECTIVE.”
    Presumably, in the context, ‘effective’ postulates, apart from having a sense of / conscience to identify, the right direction to take in regard to any ‘policy decision’, as to be persuasive enough to convince the co-directors to toe the line, with the the objective of ensuring ‘good governance’.
    “….. whistleblower hotline – managed by A PROFESSIONAL THIRD PARTY who would in-turn verify the credibility of the complaint and the whistleblower….”
    Here again, is not the same essential factor of the ‘professional’ dispensing the responsibility in a truly ‘independent’ manner coming into play – a sort of vicious circle!
    On the India Board Report 2015-16, having accessed and given a quick reading of it @ http://hunt-partners.com/…/F…/TheIndiaBoardReport2015-16.pdf :
    That is an Experts' Report, which makes for an interesting but concerned read; on the vexing , rather irresolute problem faced / confronted with in ensuring 'independence' – that is, with focus on the field of 'corporate governance', the avowed objective is to securing independent 'thinking' and 'acting' by each and every individual functioning as a 'director', more so as an 'independent director'- to meet the expectation of 'trust' placed. The struggle towards achieving the desired objective, through legislation, is as old as the concept of 'corporate' itself.
    it stands to be gathered from the report that the matter has as ever before remained a wishful thinking, if not a pipe dream.
    What then is the root cause of the whole problem, or the factor(s) responsible therefor? In an attempt to find some answer or clue , if so wish, may be pleased to listen to the host of videoed interviews with a popular leader of his unique kind- Sachi Vausudev.
    Taking out of context, but felt to being of relevance, to share :
    Q
    When it comes to other aspects of our life, we employ science and tech to make things work. When it comes to religion, we still have silly philosophies and ideologies. Why? This is a movement from religion to RESPONSIBILITY (1). Without turning inward, there is no way you will have yourself THE WAY YOU (2) want yourself to be. When you can approach medicine in a scientific manner, why can’t you approach inner-well being in a logically correct and scientifically verifiable way, I ask?
    UQ
    (1) – ideally, towards the rest of the society, in its restricted or broader meaning as the context may warrant !
    (2)-instead,the way fellow beings, directly concerned, want yourself to be !!

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