CS Reema Jain
The term “whistle-blowing” originates from the practice of British policemen who blew their whistles whenever they observed commission of a crime. Whistle blowing means calling the attention of the top management to some wrongdoing occurring within an organization.
A whistle blower may be an employee, former employee or member of an organization, a government agency, who have willingness to take corrective action on the misconduct. As per Section 177 of the Companies Act, 2013, certain companies have to establish Vigil/Whistle-blowing mechanism to report any unethical behavior or other concerns to the management.
Types of Whistle Blower:
1. Internal:
A Whistle Blower may be within the organization who discloses any illegal, immoral or illegitimate practices to the employer. He/she may be;
- Employee
- Superior officer or
- Any designated officer
2. External:
A whistle Blower may be outside the organization who discloses any illegal, immoral or illegitimate practices to the company. He/She may be;
- Lawyers
- Media
- Law enforcement
- Watchdog agencies
| Listing Agreement | Companies Act, 2013 |
| It is a non-mandatory requirement under clause 49 of the listing agreement | It is mandatory for
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| The company may establish a mechanism for employees to report to the management concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. | Companies which are required to constitute an audit committee shall operate the vigil mechanism through the audit committee 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 would deal with the matter on hand.
For 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. |
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It provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit committee in exceptional cases. |
It provide adequate safeguards against victimization of employees and directors who avail of the Vigil mechanism and also provide for direct access to the chairperson of the Audit committee or the director nominated to play the role of audit committee, as the case may be, in exceptional cases. |
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Once established, the existence of the mechanism may be appropriately communicated within the organization. |
Once established, the existence of the mechanism may be appropriately communicated within the organization. |
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The details of establishment of Vigil mechanism shall be disclosed by the company in the website, if any, and in the Board’s Report. |
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In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the director nominated to play the role of audit committee may take suitable action against the concerned director or employee including reprimand. |
The draft rules issued by Ministry of Corporate Affairs on 9 September 2013, under para 12.5 of Chapter XII, had prescribed vigil mechanism for:
1. Listed companies
2. Companies which accept deposits from the public; and
3. Companies which have borrowed money from banks and public financial institutions in excess of Rs 50 crore
What is alarming is the scope envisaged for vigil mechanism by virtue of point 3 as stated above. By prescribing vigil mechanism for companies with borrowing of Rs 50 crore, probably, very few companies have been left out of the ambit of establishing vigil mechanism. This on one hand can be viewed positively as it gives an option to employees and directors to detect and report genuine concerns to companies and also be guarded against any victimization as a result of such disclosure.
What is voicing of genuine concern?
Surprisingly, genuine concern has not been defined. Under the Public Interest Disclosure Act, 1998, workers are free to report even on suspected criminal activities. In fact, section 43B of this law, even allows workers to disclose regarding any injustice or endanger of health or safety of any individual.
In its zeal to bring out rules, the Ministry has left out the scope for blowing of the whistle. Although, it allows reprimanding any director or employee against any frivolous complaints, yet it is a matter of subjectivity when it comes to voicing any concern, which can be termed as genuine and the new Companies Act and the rules are silent on this.
What the rules has done is in fact placed additional burden on companies, which require setting up of a vigil mechanism. When exposure to banks has been prescribed as an applicability criterion, this only means that even where irrespective of whether any public interest is involved or not, vigil mechanism has to be instituted.
The very reason for setting up a vigil mechanism is to rule out any emblazonment of funds of a company or any other prejudicial act, in which any stakeholders’ interest or most importantly, public interest is involved.
In this day and age, borrowing from companies to the extent of Rs 50 crore will possibly filter out very few companies from this applicability. Further, by mandating vigil mechanism for companies with borrowing of Rs 50 crore, the Ministry has unnecessarily regulated such companies which may in nature be closely held companies, in which such a need may not arise at all.
The above has been compiled by CS Reema Jain, an Associate Member of ICSI. Her areas of interest include Corporate and Allied Laws and advisory services. For any queries or suggestions, she can be approached at [email protected], 9953299308.
Author Bio
The article is well structured.
I have a query whether this mechanism is available for Auditor or Creditor??