Reaching out to the conscience keepers

Blow the whistle and alert those in power about irregularities, frauds and violations of the law; that is what whistleblowers do.

But such whistleblowers run the risk of offenders striking back and attacking them.

So there need to be laws that ensure adequate protection to complainants, besides helping to build official channels for making these complaints.

The Securities and Exchange Board of India is, therefore, right in making it mandatory for all listed companies to set up a channel through which employees and directors can sound the alert about an ongoing misdeed.

While the listing agreement did talk about such a mechanism earlier, it was not mandatory.

Recent cases such as the one involving Dinesh Thakur of Ranbaxy — that brought to light the false claims made by the company to the US authority related to the manufacture and distribution of adulterated drugs — has highlighted the effective use to which such regulations can be put. Ranbaxy had to pay $500 million to resolve the matter and Thakur was paid $48 million as a reward for his involvement.

Many listed companies have already established such channels and seem to have benefited as a result. In a survey by Ernst & Young, 68 per cent of the respondents felt that more frauds were being unearthed within companies in recent times due to the presence of the whistleblowing mechanism.

While only half the Indian companies in the sample had set up a whistleblower system, two-thirds of MNCs claimed to have already set up such a channel.

The amended rules say that every company shall set up a vigil mechanism that covers its directors and employees. The company should provide for safeguards against victimisation of persons using the mechanism. Whistleblowers should also have direct access to the chairperson of the audit committee in exceptional cases.

While the SEBI regulation lays down the basic framework for an internal whistleblowing system within a company, it has numerous shortcomings.

The regulator also needs to consider setting up a whistleblowers’ cell in SEBI to enable people to report stocktrading-related frauds and malpractices.

The rules talk about providing safeguards against reprisal from the management or those higher in the pecking order. But this alone is not enough. It is also important that the identity of the whistleblower is not disclosed.

This is very important in a country like ours where there have been instances of whistleblowers getting killed. The most famous case is that of Satyen Dubey, a project director with the National Highway Authority, who was murdered after he exposed corruption in the Golden Quadrilateral Corridor Project.

Dinesh Thakur, too, was apparently told to go when he reported his finding to the Ranbaxy management. It is, therefore, necessary that the company ensures that the identity of the person making the complaint is protected.

This is also the practice globally; the whistleblower’s identity is not revealed, unless he/she wants it revealed. Many companies that have already set up whistleblower channels do not provide a separate hotline. Employees cite this as a reason why they do not feel safe coming forward to report irregularities.

SEBI could go a step further and flesh out the details of the mechanism to be set up by companies so that it can become more effective.

SEBI has tried to align the whistleblower rules as closely as possible with the Companies Act, 2013. So it has restricted the persons who can use the channel to directors and employees of the company alone.

But there is no reason why external stakeholders such as auditors, consultants or clients cannot use this channel to alert the management of a possible fraud or legal violation.

Such affiliates could be privy to the happenings in a company and they would likely be more willing to lodge a complaint since they have less to lose.

SEBI has avoided expanding the coverage of this rule by stating that there are other mechanisms available for external stakeholders.

But this is not true. The act aimed at providing protection to whistleblowers at large is yet to be passed in the Rajya Sabha. And this Bill leaves the private sector out of its ambit. Persons wanting to complain against an errant private company cannot approach the Central Vigilance Commission.

SEBI can also take the next step in making the optimum use of whistleblowers by setting up a hotline to report frauds, security law violations, circular trading, price-rigging and so on.

Such cells set up by the US Securities and Exchange Commission and the UK’s Financial Services Authority are a roaring success, having helped unearth many malpractices in the stock market.

The commodity market regulator in US too has provided such a hotline. The Forward Market Commission in India too could set up a cell for receiving and looking into malpractices in the commodities market. Perhaps then we will not have NSEL-like fiascos sprung on us.

It is the practice in US that whistleblowers are awarded part of the penalty paid by the company once the allegations are proven.

The Securities and Exchange Commission in US is authorised to award between 10 to 30 per cent of the amount collected as penalty when it exceeds $1 million. Similarly other regulatory arms in US too provide monetary awards for uncovering frauds.

It is perhaps partly this incentive that made Dinesh Thakur of Ranbaxy and Jack B Palmer of Infosys report the violations of Indian companies to the US regulatory authorities. SEBI too could consider giving them a monetary incentive to compensate for the risk taken.

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