[Mayank is a student at Maharashtra National Law University, Nagpur.]
The concept of corporate governance refers to practices adopted by corporations to regulate their internal affairs. Sound corporate governance practices increase the goodwill of the company, boost investor confidence and improve relationship of the company’s management with its stakeholders. In building a sound corporate governance structure, a robust and strong whistleblower policy plays a very vital role. The term 'whistleblower' generally refers to a person who discloses or reports public interest information about wrongdoings in an organisation. In promoting the role of a whistleblower, legislature and regulatory authorities are required to have a proactive role. In this context, recently, the US Securities and Exchange Commission announced the highest reward, in the history of its whistle-blower program, of $279 million to a whistle-blower. In this context, this article analyses the existing whistleblower regime in the US and other matured jurisdictions. It also assesses the Indian framework on whistleblowing. Lastly, it suggests effective and viable solutions to be incorporated into Indian legislation to make a strong and robust whistleblower policy in India.
Whistle-blower Policy in US, UK, EU, and Singapore
In the US, the Whistleblower Protection Act 1989, the Sarbanes-Oxley Act 2002, and the Dodd-Frank Act 2010 (DF Act) envisage provisions related to whistleblower. The Sarbanes-Oxley Act 2002 (SOX) brought monetary as well as non-monetary protections for whistleblowers who report financial wrongdoings at publicly traded companies internally, whereas the DF Act specifically deals with the process for protecting and incentivising whistleblowers to report potential violations of Federal securities and commodities laws to the Securities and Exchange Commission (SEC). The DF Act has brought significant changes in the SOX as it expanded the definition of 'employee' to include employees of all subsidiaries and affiliates of public companies. It has also extended its protection to employees of private companies. Moreover, it has introduced a bounty program wherein if the information given by whistle-blower leads to enforcement action imposing sanctions of more than $1 million, the SEC is bound to pay minimum 10% to maximum 30% of the monetary sanctions collected. The eligibility criteria for bounty program is that information must be reported voluntarily and be original in nature. Additionally, the DF Act provides private right of actions to the whistleblower.
One of the biggest criticisms of the DF Act, though, is that it threatens to undermine the internal corporate reporting. The DF Act provides that whistleblowers are required to provide information to the SEC to be eligible to the protections provided under it. However, the Securities Whistleblower Incentives and Protections rules published by the SEC provides that the anti-retaliation protection provided under the DF Act would extend to employees of public companies and their subsidiaries who report information to persons or governmental authorities other than the commission. However, ultimately the SEC rules and the DF Act do not create a prerequisite in the form of mandatory prior internal reporting. Nevertheless, the overall picture available before us is that whistle-blower protection and the incentive provisions in USA are very robust as they provide hefty monetary rewards to whistleblowers, ensure their privacy, and protect them from retaliatory actions taken by their employers.
In the UK, the Public Interest Disclosure Act 1998 (PIDA) was a pioneering step towards protecting whistleblowers from retaliation by employer. The PIDA provides that a whistleblower can bring a claim before the employment tribunal only after the employer has brought a retaliatory action against whistleblower for making disclosure. The statute does not provide for any incentive mechanism for whistleblower. However, recent practices adopted by regulatory authorities such as CMA and HMRC highlight that monetary incentives are being awarded to whistle-blowers under their respective legislations. Unlike the provisions in the USA, the fundamental principle of the PIDA is to promote internal corporate reporting by putting responsibility on employer to ensure that proper mechanism is in place for reporting and investigation of disclosure made by whistleblower. However, the statute has been heavily criticized for various reasons such as the Employment Tribunal not being an effective body to tackle these cases (as it takes nearly around two years to complete the whole proceeding and the success rate of whistleblower cases is very low). Also, there is no statutory obligation upon employer to put in place a whistleblowing policy. Taking into consideration all these inefficiencies in the system, it can be said that PIDA has failed to give adequate protection to whistle-blowers. Hence, to revamp this whole framework, the Office of the Whistleblower Bill has been introduced in the UK Parliament, although the same has not yet been passed.
The European Union in 2019 adopted the EU Whistleblower Directive. It proposes a very wide definition of whistleblowers by incorporating workers who work in either the public or the private sector. The directive has proposed a three-tier model of reporting, whereby the first level of reporting will be internal reporting, followed by an external reporting (i.e., to regulatory authorities etc.) and, lastly, public (media) reporting. Further, the views of the European Union on financial incentives to whistleblower are different from those in the US which is apparent from the text of the directive providing that it is upon the discretion of the member states to provide financial assistance to reporting persons. The discretion granted to member states reflects that the European Union is not in favour of granting mandatory financial incentives to whistleblower which is in contrast to the position adopted by the SEC. Nevertheless, the adoption of the ‘EU Whistleblower Directive’ is a welcome step in protecting whistleblowers in Europe.
In Singapore, there is no dedicated legislation for protection of whistleblowers, but it does not mean that no protection has been granted to whistleblowers. Legislations such as the Companies Act of Singapore, the Prevention of Corruption Act, and the Competition Act of Singapore contain provisions to protect whistleblowers. Moreover, the Code of Corporate Governance encourages listed companies to put in place a whistleblowing policy and inform employees about the process of reporting wrongdoings in the company. Furthermore, the Singapore Exchange Regulation mandates all issuers to implement a whistleblowing policy and mention the same in their annual reports and also explain their compliance with the said policy.
Existing Lacunas in the Indian Regulatory Framework over Whistleblowers
The Whistle Blowers Protection Act 2014 is the dedicated legislation that provides the process for reporting and protection of whistleblowers. The statute was passed by the Parliament, but it has not yet been brought into effect. Accordingly, we lack a specific legislation for whistle-blowers. However, we have different legal texts and guidelines in place for whistle blowing. For instance, Section 177 of the Companies Act 2013 read with Regulation 22 of the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations 2018 (LODR) mandate listed companies to implement a vigil mechanism (whistleblowing policy). Moreover, Schedule V of the LODR provides that a listed company is required to disclose the implementation of a whistle blower policy and the extent to which they have complied with the same in their annual report. Such disclosure is a laudable step taken by the SEBI because it will boost the confidence of stakeholders, potential investors, and shareholders of the company regarding the corporate governance structure and the risk management mechanism in the company. Moreover, in 2020, the Ministry of Corporate Affairs issued an order whereby private companies of certain classes were mandated to disclose the details of whistleblower complaints to the auditor. However, the said order does not provide provisions for protection of whistleblowers in a private company.
Moreover, the SEBI (Prohibition of Insider Trading) (Third Amendment) Regulations 2019 introduced Clause IIIA whereby it made provisions for protection of whistleblowers who voluntarily provide original information pertaining to violation of insider trading laws to SEBI. The amendment provides provisions for protection from retaliation and incentivising whistleblowers to report violation or potential violation of insider trading laws. Another important aspect of this amendment is that even if the whistleblower originally provides information to its internal legal compliance committee and subsequently notifies it to the SEBI, it will be eligible for reward by the regulator.
However, the author has also found that there are some lacunas in the existing system. Firstly, it does not impose any civil or criminal liability on the officer in charge who takes retaliatory action against the whistleblower. Secondly, it provides that it is on the discretion of the SEBI to reward the whistleblower, hence even if the whistleblower provides a voluntary original information in good faith which leads to successful enforcement, he might not get the reward which is not the case in the US where it is mandatory upon SEC to reward whistleblowers who fulfill all the required criteria mentioned in the legislation.
Suggestive Measures: A Way Forward
The author is of an opinion that there is a dire need to implement a legislation that provides adequate protection to whistleblowers in public unlisted as well as private companies. The legislation should also create a supervisory authority before whom an aggrieved whistleblower can file an appeal if the internal system of a company does not handle the complaint in a reasonable time or mishandles the complaint. To enhance the confidence in public interest whistleblowing, the supervisory authority, similar to other advisory bodies created by several international whistleblowing legislations, should provide advice, information, and support to public interest whistleblowers regarding disclosure of wrongdoing. If the authority finds it proper, it should be allowed to refer the complaints of whistleblowers to the concerned regulatory authorities for proper investigation. The legislation should also make provisions for monetary incentives to whistleblowers who report original information related to the commission of an offence in a public/private organisation which leads to a successful enforcement action. Additionally, the author proposes that either civil or criminal liability should be imposed on the person who imposes discriminatory/disadvantageous measures against the whistleblower because of his public interest whistleblowing.
Second, concerning the securities market, we already have a whistleblowing mechanism in place, but its scope and application is very narrow. The SEBI allows whistleblowers to directly report the violation of insider trading laws to it. Therefore, the author proposes that for other securities laws violations also, whistleblowers should be allowed to directly report to the SEBI. This will provide an alternative mode of reporting to whistleblowers and will extend to them the protection provided by the SEBI.
Lastly, since the SEBI provides incentive in case of whistleblowing of violation of insider trading laws while there is absence of incentive provisions for whistleblowers in other cases, it is suggested that the SEBI brings incentive provisions in case of voluntary reporting of original information pertaining to violation of any securities laws in India leading to successful enforcement and use of the investor protection and education fund for rewarding whistleblowers.