Corporate Whistleblowing: Legal Safeguards and Ethical Aspects

Abstract

The rise in whistleblower complaints has underscored the growing significance of establishing a robust mechanism to safeguard their interests. The whistleblowing framework serves as a vital tool in exposing misconduct within the government. This article delves into the legal foundation that offers protection to whistleblowers in India. It commences with a brief overview of the relevant laws before culminating in an examination of the legislation’s impact on corporate governance and promoting transparent business operations.

Corporate Whistleblowing: Legal Safeguards and Ethical Aspects

(Author: Ananya Singh, student at Babu Banarasi Das University)

Introduction: 

The rise in whistleblower complaints has emphasized the growing significance of establishing a strong mechanism for their protection. This heightened focus on whistleblower protection in India serves as a resource for organizations to foster transparent structures and facilitate clear, effective communication. The underlying drivers for whistleblowers are rooted in the principles of ethics, integrity, and transparency. They are employees who feel compelled to expose information regarding an organization’s unethical and corrupt practices by reporting its illicit activities.

The majority of whistleblowers who report misconduct are employees of the organization, making it essential to have a mechanism that protects them. Numerous instances of attempts to control and silence whistleblowing activities have gained widespread attention. This article aims to scrutinize the legal aspects of the whistleblowing regime in India, focusing on the mechanisms in place to safeguard whistleblowers.

Types of whistleblowers 

1. Internal: The process wherein individuals report instances of misconduct to the highest levels of an organization is known as internal whistleblowing. 
2. External: When misconduct is reported to an external authority such as the media or enforcement agencies, it is known as external whistleblowing. 
3. Alumni: The whistleblower is a previous employee of the organization in question. 
4. Open: When the identity of the whistleblower is known or revealed, it is referred to as open whistleblowing.
5. Personal: When an individual exposes wrongful actions within an organization that affect them personally, it is known as personal whistleblowing.
6. Impersonal: Impersonal whistleblowing refers to cases where the acts of wrongdoing harm others.
7. Government: The disclosure of information about wrongdoings, often involving corruption by government officials, is a critical aspect of transparency and accountability.
8. Corporate: When an individual exposes information about the unethical or illegal activities of a company, it is referred to as corporate whistleblowing.

Case study related to corporate whistle-blowing in India:

1. Satyendra Dubey Case: Satyendra Dubey, an engineer at the National Highways Authority of India (NHAI), played a crucial role in exposing widespread corruption during the construction of the Golden Quadrilateral project, a significant national highway endeavour. Despite the inherent risks, Dubey fearlessly communicated his findings to higher authorities, including the Prime Minister, highlighting the use of substandard construction materials and associated hazards. Regrettably, his identity was compromised, leading to his tragic murder in 2003. Dubey’s untimely demise sparked nationwide outrage and brought attention to the dangers faced by whistleblowers. This case acted as a catalyst for substantial improvements in whistleblower protection, ultimately resulting in the passage of the Whistleblowers Protection Act in 2014. Satyendra Dubey continues to symbolize integrity and stands as a poignant reminder of the sacrifices made in the ongoing battle against corruption in India.
2. Volkswagen Emissions Scandal: The 2015 Volkswagen emissions scandal, or “Diesel Gate,” revealed a widespread fraudulent practice within the automotive industry. It came to light that Volkswagen had equipped approximately 11 million diesel vehicles across the globe with illegal software designed to manipulate emissions test results. This fraudulent activity resulted in substantial financial penalties, settlements, and a significant dent in consumer confidence. The scandal catalysed revisions in emissions testing protocols and regulatory supervision, emphasizing the criticality of transparent and accountable corporate conduct.
3. Manjunath Shanmugam case: On November 19, 2005, Indian Oil Corporation officer Shanmugam was conducting a surprise inspection at a petrol pump in Gola Gokarannath, Lakhimpur Kheri. He discovered and took action against petrol pumps selling adulterated fuel, and as a result, he ordered the sealing of two petrol stations in Lakhimpur Kheri, Uttar Pradesh. Unfortunately, Shanmugam was killed by the petrol pump owner and his associates for exposing their corrupt practices. His tragic death highlighted the significant risks faced by whistleblowers in India and contributed to the urgent need for stronger whistleblower protection laws, such as the Whistle Blowers Protection Act of 2014.

Protection of Whistleblowers in India:

1. Constitution of India: The Constitution of India protects whistleblowers. Article 19(1)(a) gives citizens the right to impart and receive information as part of the right to speech and expression. Additionally, Article 21 provides for the right to life and personal liberty, including the right to hold a particular opinion.
2. The Whistleblower Protection Act, 2011: The Whistleblower Protection Act is a crucial legislation that safeguards individuals who expose wrongdoing, corruption, or illegal activities in the public sector. It provides protection from retaliation, ensures confidentiality of whistleblowers’ identities, and establishes a mechanism for investigation and redressal. The Act also allows for whistleblower rewards and aims to raise public awareness about the importance of whistleblowing. However, its effective implementation remains a challenge, and efforts are needed to strengthen institutional mechanisms and provide adequate support to whistleblowers.
3. The Companies Act, 2013: Section 177(9) of the CA mandates publicly listed companies to establish a vigil mechanism for persons making disclosures. It is also mandatory for them to have a whistleblower policy to safeguard the persons using the mechanism. Private companies may establish a vigil mechanism at their discretion. The success of the whistleblower policy depends on the organization’s intent and adherence to the policy. The mechanism must include channels for reporting violations, a hierarchical structure for reporting, protection against harassment, confidentiality for whistleblowers, and disciplinary action for false disclosures. Sections 206 to 229 of the CA provide a framework for inquiry and investigation to support whistleblowers’ protection. Sections 208, 210, and 211 empower inspectors and the government to investigate matters of doubt and fraud.
4. The Securities & Exchange Board of India Regulations, 2015: SEBI’s amendments to the Listing Agreement made it mandatory for listed companies to have a whistleblower policy to protect employees who report instances of leaks of sensitive information. This policy, also known as a “vigil mechanism,” is mandated by Regulation 22 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Additionally, public companies are mandated to have a whistleblower policy under Regulation 9A (6) of the SEBI (Prohibition of Insider Trading) Regulation, 2015, with measures in place to encourage and protect those who disclose violations of insider trading laws. These regulations aim to strengthen corporate governance and transparency. While these rules only apply to listed companies, some private companies have also adopted whistleblower policies voluntarily to maintain global standards, shareholder trust, and transparency. Other provisions, such as Regulation 30 of the LODR and the Companies (Auditor’s Report) Order, aim to enhance transparency and due diligence. Whistleblower policies provide a framework for taking action against false disclosures and complaints.

The timeline of reformation for whistleblower protection:

Early Efforts and PIDPIR (2004)

• 2004: The Public Interest Disclosure and Protection of Informers Resolution (PIDPIR) marked an important initial measure in enabling citizens to expose corruption and abuse of authority by public officials to the Central Vigilance Commission (CVC). Nevertheless, it was deficient in comprehensive legal support.

Whistle Blowers Protection Bill (2011)

• 2011: The Whistle Blowers Protection Bill, which was presented in the Lok Sabha, sought to establish a legal framework to safeguard individuals who disclose instances of corruption and abuse of authority. This legislation was a proactive response to increasing calls for enhanced transparency and answerability in governance.

Whistle Blowers Protection Act (2014)

• 2014: The Whistle Blowers Protection Act was implemented to establish a systematic framework for the examination of grievances and safeguarding those who expose misconduct from reprisal. It marked a significant milestone in advancing openness and answerability within the realm of public governance.

Proposed Amendments (2015)

• 2015: Proposed amendments to the Whistle Blowers Protection Act by the government sought to exempt disclosures concerning national security and sensitive information from the act’s coverage. This proposal sparked controversy due to concerns that it could constrict the protection afforded to whistleblowers.

Whistle Blowers Protection (Amendment) Bill (2019)

• 2019: The Whistle Blowers Protection (Amendment) Bill has been introduced to enhance the safeguards and processes for whistleblowers. It aims to address issues raised by the 2015 amendments and improve the overall framework for protecting whistleblowers.

Recent Developments

• 2020s: The ongoing discussions and debates centre on enhancing whistleblower protections. Civil society organizations and activists are pushing for more effective mechanisms to safeguard whistleblowers and ensure that their disclosures result in appropriate actions.

Conclusion 

The prevalence of large-scale corporate scams over the years has significantly impacted the global economy. Many of these fraudulent activities, including prominent cases like Satyam, Kingfisher, Saradha Group, 2G Spectrum, Punjab National Bank, and ICICI Bank, could have been mitigated if there had been an effective whistle-blowing system in place to enable employees to report them. The lack of proper safeguards discouraged some courageous individuals from exposing malpractices within their organizations, leading to widespread harm and financial loss to the public.

Notable whistle-blowers such as Hari Prasad, Somen Mitra, and Sucheta Dalal have bravely strived to uncover frauds and scams within Indian companies, despite the failure of regulatory agencies and responsible executives to diligently perform their duties. Moreover, the Securities Exchange Board of India (SEBI) has endorsed amendments to corporate governance guidelines that empower the audit committee in listed companies and mandate the implementation of a compulsory whistle-blower program for minority shareholders.

Section 177 of the Companies Act, 2013 outlines the categories of companies required to establish a vigil mechanism. It is worth considering whether there is a need for a separate Whistle-Blower Protection Act for the private sector in addition to the existing SEBI Regulations and the Companies Act.

FAQs

1. Mention the protection provided to whistleblowers under the Companies Act, 2013.

• Section 177(9) of the CA mandates publicly listed companies to establish a vigil mechanism for persons making disclosures. It is also mandatory for them to have a whistleblower policy to safeguard the persons using the mechanism. Private companies may establish a vigil mechanism at their discretion. The success of the whistleblower policy depends on the organization’s intent and adherence to the policy. The mechanism must include channels for reporting violations, a hierarchical structure for reporting, protection against harassment, confidentiality for whistleblowers, and disciplinary action for false disclosures. Sections 206 to 229 of the CA provide a framework for inquiry and investigation to support whistleblowers’ protection. Sections 208, 210, and 211 empower inspectors and the government to investigate matters of doubt and fraud.

2. What are the cases that helped in the reformation of whistleblowers’ protection?

• Manjunath Shanmugam case Volkswagen Emissions Scandal Satyendra Dubey Case etc.

Legal protection available to whistleblowers in a company – iPleaders

Whistleblowing in India: The Way Forward | SCC Times (scconline.com)