Whistle Blowing Mechanism | Vigil Mechanism | Provisions of Companies Act' 2013 | Company Law Notes for BCom, BBA and MBA | B.Com Notes CBCS

Whistle Blowing Mechanism

Provisions of Companies Act' 2013

Company Law Notes for BCom, BBA and MBA

Whistle-blowing Meaning

The term “whistle-blowing” originates from the common practice of policemen who blew their whistles whenever they observed any illegal activity or crime. Whistle blowing means simply calling the attention of the top level management towards some irregular activities occurring within an organization. A whistle blower may be an employee (former or existing) or member of an organisation, a government agency or an outsider who have willingness to take corrective action on the irregularities. The Companies Act, 2013 under Sec 177 read with rule 7 of companies (Meetings of Board and its Powers) Rules, 2014 has mandated certain companies to establish Vigil/Whistle-blowing mechanism to report any unethical behaviour or other concerns to the management.

Whistle Blowers Meaning:

Whistle blower is a person who has the ability to stand apart from an inappropriate managerial capture and make an independent and uncontaminated decision on a given issue. It refers to avoidance of undue influence and to being free from any constraints which prevent a correct course of action.

RM Green defines a whistleblower as an employee who perceiving an organisational practice that he believes to be illegal or unethical, seeks to stop this practice by altering top management or falling that by notifying authorities outside the organisation.

Types of Whistle-blowers:

a)    Internal: Internal whistle blowing means reporting of illegal, improper conduct or unethical practice to the employer or officials at higher position in the organisation.

b)   External: External whistle blowing means reporting of wrongdoings to the people outside the organisation like Lawyers, Media, Law enforcement agencies or Watchdog agencies.

c)    Alumini: Alumini whistle blowing means reporting of misdeeds by a former employee of the organisation.

d)   Open: When identity of the whistle blower is revealed, it is called open whistle blowing.

Main objectives of setting up of a Whistle-blowing mechanism within an organisation

a)    To encourage employees to report any irregular activity, wrongful conduct, unethical behaviours, legal violations etc they have come across to an internal authority so that action can be taken immediately to resolve the problem.

b)   To build and strengthen the culture of transparency within the organisation.

c)    To minimize the organization’s exposure to the risk and damage that can occur when employees conduct is unethical or wrongful.

d)   To let employees know the organization is serious about adherence to codes of conduct.

Steps for Creating a Whistle-blowing Culture:

a)    Developing a whistle blowing Policy.

b)   Gaining top level management commitment.

c)    Developing reporting mechanism.

d)   Embedding the programme.

e)   Publicize the Organisation’s Commitment.

f)     Investigate and Follow Up.

g)    Assess the Organisation’s Internal Whistle-blowing System.

Process of Whistle Blowing Mechanism

a)    Whistle blower raises concern about irregularities.

b)   Such concern is forwarded to the compliance officer.

c)    Initial enquiry by the compliance officer and if detailed investigation is necessary, then investigator is appointed.

d)   If the concern is proved, disciplinary actions are taken and also corrective measures are taken to prevent it in future.

Barriers to whistle blowing mechanism

a)      Lack of trust in the internal system

b)      Fear amongst the whistle blowers of retaliation.

c)       Fear of alienation from management and colleagues.

d)      Unwillingness of employees to be snitches.

Whistle blowing or Vigil mechanism (Provisions of SEBI and Companies Act’ 2013)

A) Under clause 49 of Listing Agreement of SEBI: Whistle blowing or vigil mechanism is now made mandatory requirement under clause 49 of the listing agreement for the following companies:

a)    Every listed companies and

b)   Companies which accept deposits from the public and which have borrowed money from banks and public financial institutions in excess of Rs. 50 crores.

The company may establish a mechanism for employees to report to the superiors about unethical behaviour, or fraud or violation of the company’s code of conduct or ethics policy. It also provides for adequate safeguards against victimization of employees and also provides for direct access to the Chairman of the Audit committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization.

B) Under Rule 7 of Companies [Meeting of board and its powers) Rules, 2014:

1. As per this rule, every company mentioned below shall a establish a whistle blowing or vigil mechanism for their employees and directors to report their genuine concerns:

a)    Every listed companies and

b)   Companies which accept deposits from the public and which have borrowed money from banks and public financial institutions in excess of Rs. 50 crores.

2. Companies which are required to establish an audit committee shall look after the vigil mechanism through the audit committee so formed and if any of the members of the committee have a conflict of interest in a given case, they should be remove from participation in the audit committee and the others members of the committee would deal with the matter on hand.

3. In case of other companies, a director is appointed by the board of directors to play the role of audit committee for the purpose of vigil mechanism.

4. It also provides for adequate safeguards against victimization of employees and also provides for direct access to the Chairman of the Audit committee in exceptional cases.

5. In case of repeated complaints by an employee or director, the audit committee or director appointed for vigil mechanism may take suitable action the concerned director or employee.