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THE RECOMMENDATION OF the SEBI Committee on Corporate Governance to introduce a whistle-blower policy so as to protect those coming out in the open about frauds and unethical practices happening in a company is bang on. But the move could end in a whimper if not backed by the requirement of timely disclosure of the event to the market. For, keeping the market in the dark can create opportunities for price manipulation. Whistle-blowers themselves could take frivolous recourse to the protection available in order to buy the stock at lower levels or indulge in short selling. Another possibility is insider trading by those who heard the whistle before others.

Whistle-blowing must therefore be treated as a material event, and companies must be required to report each instance to stock exchanges with details. For in the absence of details, there would be uncertainty about the nature and magnitude of the malpractice reported, which can set off panic reactions in the stock market. An upfront disclosure of details may enable the market to judge the seriousness of the infraction or ensure a measured reaction even if the disclosure is serious. The question is when the disclosure ought to be made. Obviously, the complaint must be vetted by the audit committee before it is made public. Premature revelation can jeopardise the company's interests. As for companies, regardless of whether the matter is frivolous or one that requires substantive corrective action, the disclosure requirement would elicit a credible and expeditious response. The disclosure norm could also encourage whistle- blowing as it would ensure that the effort at imparting integrity to corporate practices does not end up an exercise in futility. At the least, investors will know the nature of the plaint even if there are doubts on the quality of the corrective action.

But for this gap in the area of disclosure, the SEBI Corporate Governance Committee's suggested framework is comprehensive: The need to create open channels for all employees to approach the audit committee without consent from superiors; and to protect whistle-blowers from any type of victimisation. The spark for introducing this concept appears to have come from the role played by whistle-blowers in the US in bringing to light large-scale wrongdoings in companies such as Enron and WorldCom. In several cases, audit firms had been turning a blind eye to the goings-on. The SEBI Committee hopes its proposed policy will have a similar effect. To achieve this, it sets much store by the audit committee. Given the track record of independent audit firms, a leap of faith is required to believe that the internal audit committee would right the wrongs. However, that is no reason not to make whistle- blowing part of the corporate governance framework.

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