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CS M. Kurthalanathan

IntroductionThe 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 organisation, a government agency, who have willingness to take corrective action on the misconduct.

As per Sec.177 of the Companies Act,2013, certain companies  have to establish Vigil/Whistle-blowing mechanism to report any unethical behaviour 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

Sarbanes-Oxley Act,2002(SOX):

An Act enacted by U.S. congress in 2002 to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.

It is a set of standards that all U.S public companies and public accounting firms must comply and adhere with good quality reporting.

SOX is an essential law which has brought discipline in financial reporting process. The transparency brought by this act is boosting investor’s confidence that further helps building a strong capital market in the economy

Clause 49 of the listing agreement is pretty much on the lines of Sarbanes Oxley Act of 2002 provided by SEC for companies listed on US stock exchanges. According to Clause 49, the top management becomes directly accountable for all financial statements and internal controls of the organization, which is also the bottom line in case of Section 302 of Sarbanes Oxley Act of 2002

Applicability:

Whether SOX is applicable in India? Yes, all companies, including Indian, which are listed on US stock exchanges, are required to comply with the requirements of the Act. Corporate governance in India too has taken a folio from provisions of Sec. 404 of the Act.

 Provisions of SOX for whistle-blowers:

  • Make it illegal to “discharge, demote, suspend, threaten, harass or in any manner discriminate against” whistle blowers
  • Establish criminal penalties of up to 10 years for executives who retaliate against whistle blowers
  • Require board audit committees to establish procedures for hearing whistle blower complaints
  • Allow the secretary of labour to order a company to rehire a terminated employee with no court hearing.
  • Give a whistle blower the right to a jury trial, bypassing months or years of administrative hearings

Objectives of whistle-blowing:

  • To encourage employees to bring ethical and legal violations they are aware of to an internal authority so that action can be taken immediately to resolve the problem
  • To minimize the organization’s exposure to the damage that can occur when employees circumvent internal mechanisms
  • To let employees know the organization is serious about adherence to codes of conduct

Barriers to Whistle-Blowing:

  • A lack of trust in the internal system
  • Unwillingness of employees to be “snitches”
  • Belief that management is not held to the same standard
  • Fear of retaliation
  • Fear of alienation from peers

Steps for Creating a Whistle-blowing Culture

  • Create a Policy
  • Get Endorsement From Top Management
  • Publicize the Organization’s Commitment
  • Investigate and Follow Up
  • Assess the Organization’s Internal Whistle-blowing System

Vigil Mechanism- Listing Agreement Vs Companies Act,2013:

Listing Agreement Companies Act,2013 & Rules,2014

It is a non-mandatory requirement under clause 49 of  the listing agreement

The company may establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.

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.

Once established, the existence of the mechanism may be appropriately communicated within the organization.

 

 

 

 

It is mandatory for

  • All the listed companies and
  • Companies which accept deposits from the public
  • Companies which have borrowed money from Banks and PFI in excess of Rs.50 crores under section 177(9) read with Companies (Meetings of Board and its Powers) Rules, 2014.

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.

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.

Once established, the existence of the mechanism may be appropriately communicated within the organization.

The details of establishment of Vigil mechanism shall be disclosed by the company in the website, if any, and in the Board’s Report.

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.

Process of Whistle- Blowing Mechanism

 vigil

SAMPLE FORMAT FOR WHISTLE BLOWING

Date 

:

 

Name of the Employee/Director

:

 

E- mail id of the employee/Director       

:

 

Communication Address                         

:

 

Contact No                                                

:

 

Subject matter which is reported            

:

 

(Name of the person/ event focused at)  

:

 

Brief about the concern 

:

 

Evidence (enclose, if any)                      

:

 

                                                                                                                                    Signature

Note:  The whistle blowing shall be submitted at least within 30 days of the  Occurrence of the concern/event (or) before occurrence

Conclusion:  Now the Corporate(s) will have to institute rigorous policy to allow employees to bring unethical and illegal practices to the forefront and also train managers and executives on how to encourage openness. Some of the companies already have a Whistle-Blower policy as a good corporate governance practice and now most of the companies are started to frame this policy to comply with section 177 of the Companies Act 2013 &Corresponding Rules.

Disclaimer:  The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts has made to provide authentic information, it is suggested that to have better understanding kindly  cross-check  the relevant laws, rules under the Companies Act,2013.

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