THE GIST of Editorial for UPSC Exams : 25 October 2019 (India needs a centralised repository for lodging corporate whistle-blower complaints (The Hindu))

India needs a centralised repository for lodging corporate whistle-blower complaints (The Hindu)

Mains Paper 2: Polity
Prelims level: Companies Act of 2013
Mains level: Scenarios of corporate whistle-blowing in India

Context

• The market cap destruction of over ₹50,000 crore suffered by Infosys after it revealed whistle-blower complaints about unethical management conduct from a group of anonymous employees may seem a little excessive.
• India Inc in recent years have left such an indelible mark on the investor psyche, that investors are today inclined to shoot and then ask questions, when governance allegations surface about any firm.

Dealing with whistle-blower complaints

• Infosys is dealing with whistle-blower complaints, it has a well-established process to deal with them.
• Its audit committee, shorn of its CEO and CFO (who figure in the complaint), is now investigating the matter.
• However, the same cannot be said for much of India Inc.
• Though whistle-blower complaints have been critical to blowing the lid off many a corporate scandal in India from the conflict of interest allegations that claimed the career of ICICI Bank’s CEO to the dubious lending at PMC Bank the legal system does little to nurture a culture of insiders calling out corporate fraud.
• The laws enabling corporate whistle-blowing in India are quite loosely drafted. 

Amended companies act

• Section 177(9) of the amended Companies Act of 2013 requires all listed companies and those accepting public deposits or having material borrowings to establish a vigil mechanism for directors or employees to report fraudulent or unethical behaviour.
• But how this mechanism will operate is left open-ended, with companies merely required to provide an email ID to lodge complaints.
• Resolution is left to the discretion of the company and anonymous complaints are actively discouraged.
• SEBI’s LODR Regulations go a little farther by tasking audit committees with reviewing the whistle-blower mechanism.
• But they fail to specify any process for complaint resolution. Even in cases where companies do have a proper whistle-blowing mechanism, complaints are often investigated by the in-house audit committee.
• Given how pliant independent directors on corporate boards tend to be in the Indian context, it seems a tall ask to expect the audit committee to protect the identity of the whistle-blower or to nail the culprits.
• In many cases, forensic audits commissioned by the regulator have unearthed substantial evidence of fraud after perpetrators were exonerated by in-house audit committees.
• This imperfect situation leads to whistle-blowers taking their complaints to the media where they can get widely disseminated before being proved, opening the doors to wealth destruction and market manipulation.

Conclusion

• Establishing a centralised whistle-blower mechanism under the auspices of the market regulator appears to be the best way to solve this problem.
• The Office of the Whistle-blower under the US SEC has been quite successful at unearthing corporate frauds since its inception in 2010.
• SEBI has recently mooted an ‘informant’ mechanism for reporting cases of insider trading.
• There’s no reason why this shouldn’t be extended to whistle-blowing on all legal and corporate governance infractions in listed firms.

  Online Coaching for UPSC PRE Exam

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) With reference to the New Pain Sensing Organ in Skin, consider the following statements:
1. Recently researchers at Karolinska Institute in Sweden have discovered a new sensory organ in the skin that is sensitive to hazardous environmental irritation.
2. It is comprised of glia cells with multiple long protrusions and which collectively go to make up a mesh-like organ within the skin.

Which of the statements given above are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) None of the above

Ans: C
Mains Questions:
Q.1) The laws enabling corporate whistle-blowing in India are quite loosely drafted. Elucidate the statement.