The current legal framework is based on the assumption that whistle-blowing is always done for good reason
The allegations made by whistle-blowers against Infosys chief executive officer Salil Parekh have turned the spotlight on rules related to India’s whistle-blower policy. A part of both the Securities and Exchange Board of India (Sebi) regulations as well as the Companies Act, 2013, India’s current policy calls for every listed company and companies of certain classes to establish a vigil mechanism and set up an audit committee for any serious complaints related to impropriety and wrongdoing at the management level.
In the Infosys case, two letters from whistle-blowers have surfaced, one of them written by a group calling themselves “ethical employees". The second letter that recently appeared in the media is quite frivolous in nature and talks about such trivialities as Parekh’s travel expenses on trips made between Mumbai and Bengaluru.
The policy has enough in-built safeguards for the protection of a whistle-blower. Under it, no proceedings can be initiated against the whistle-blower pending an inquiry into allegations made by him or her. The policy has rules that protect the whistle-blower’s anonymity, among other interests.
Having enough safeguards in the system to protect whistle-blowers is a must, and the government and several of its agencies have put considerable thought into making the process foolproof, and rightly so, given that more than half the companies of the Nifty 50 stock market index have got a cumulative 4,552 whistle-blower complaints for 2018-19, almost 30% higher than the previous financial year.
However, when it turns out to be a case of frivolous, motivated or mala fide complaints, the policy does not provide enough justice to secure the interests of India Inc. The rules and consequences in the policy are not very clear in such cases. The current rules may even go against the very interests of companies, especially if they are multinational and listed on bourses.
Even if rare, a whistle-blower could have mala fide intentions, such as manipulating the company stock or settling a personal vendetta, or even playing into the hands of former related parties. It is well-understood that corporations are likely to be prone to motivated agendas. The whistle-blower, as defined under the law, could be anyone—a current employee of the company, an ex-employee, a current or a former contractor, shareholder, an auditor, a lawyer, or even someone from the media.
Section 177 of the Companies Act, 2013, which deals with the vigil mechanism/whistle-blower policy, says that in case of repeated frivolous complaints being filed by a director or an employee, the audit committee may take suitable action against the concerned director or employee, including a reprimand. The Whistle Blowers Protection Act, 2014, says if a complaint is proven to be frivolous, the complainant can face a jail term of up to two years.
However, this is all in theory. In reality, if it is an anonymous compliant, there is no mechanism in place that can identify the complainant. Even if he is identified, the law does not provide for penal provisions that are stringent enough to act as a deterrent.
Other than the two-year jail term, the Whistle Blowers Protection Act, 2014, has an almost negligible fine that a person has to pay if his or her complaint is established as frivolous, and the Companies Act merely says that the management can take suitable action in such cases, with nothing spelt very clearly or defined in detail. The rules prescribed by Sebi do not offer any clarity either.
The cost that a company pays even if a complaint turns out to be mala fide or frivolous could be humongous. Not only does it entail the loss of goodwill for the company and its top brass, but for an entity that is listed, it could also wipe billions of dollars off its market value and impact its overall order book. And all of this might happen even before the investigation is completed and while the jury is still out.
The Infosys stock was down 16% on the day the first whistle-blower letter was leaked to the media. Another point one must understand here is that whenever such material appears in the media, it is usually followed by a lot of speculative angles in newspapers and TV channels which further undermine the position of company. At the same time, it stifles the day-to-day functioning of the organization. Unfortunately, the impact of ill-motivated complaints on the corporate world has not yet adequately been debated and addressed, nor has it been a priority for any government body dealing with issues related to corporate governance.
The current law does not provide any remedy for companies if the allegations levelled are found false. It wouldn’t be inaccurate to say that India’s whistle-blower policy mechanism doesn’t work in a well balanced way. It is tilted in favour of whistle-blowers. It seems to be based on the assumption that whistle-blowing is always done for good reason, and is rarely motivated or frivolous.
The government needs to think about this, as the ramifications of such instances could be devastating for companies and go as far as capital markets taking a hit. There are several existing committees and panels, both within the Sebi framework and the ministry of corporate affairs, that could take this up and clear the air. A lot is at stake for companies. In the past, the government has been quite proactive in dealing with the larger policy issues that have affected India Inc. This matter deserves attention too.
This commentary originally appeared in Livemint.
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