Safeguarding The Whistleblowers - The SEBI (Stock Broker) (Amendment) Regulations, 2024
Author: LawSphereX
Category: Corporate & Insolvency
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SAFEGUARDING THE WHISTLEBLOWERS: THE SEBI
(STOCK BROKER) (AMENDMENT) REGULATIONS, 2024
Vidushi Kanchan, Ramaiah College of Law, Bengaluru
ABSTRACT
Whistle Blowers are often referred to as the ‘Guardians of Good Governance ’ and it is for this reason that a sound and effective mechanism for protection of the whistle-blowers becomes essential. Whistle blower is a person who exposes wrongdoings, and corrupt and fraudulent practices carried out in an organisation. However, these whistle-blowers often fall victim to retaliations such as punishments, work firings or even physical injury. In this background, the present research attempts to understand the history and evolution of whistle-blower protection in India, the various whistle-blower protection laws that exist in the country, and the primarily focus of this research is on the recently introduced Securities and Exchange Board of India (Stock Broker) (Amendment) Regulations, 2024.
Further, it attempts to critically analyse the success of this amendment and also its shortcomings, and rests the case by listing the whistle-blower policy of a few institutions and corporations to better understand the implications of such a mandate. Keywords: Whistle-blowing, whistle-blower protection, corporate crimes, SEBI regulations, good governance.
INTRODUCTION
Corporate governance can be established in any organisation by way of establishing transparency, internally as well as externally. Most organisations provide thorough mechanisms to ensure this transparency through strict management and corporate practices and policies. However, in certain cases, either due to the absence, or inefficiency of these mechanisms, there arises a need for alternate measures to serve this purpose. Over the years, Whistle Blowers have been successful in serving this purpose and filling the lacunae in the law. A Whistle-blower is a representative of the collective conscience of justice and the rule of law in a democratic society. Whistle-blowing can be referred to as an act of an individual who discloses the wrongdoings, and the corrupt and malpractices of any private or state-owned entity or corporation.
“A whistle-blower is a person, who could be an employee of a company, or a government agency, disclosing information to the public or some higher authority about any wrongdoing, which could be in the form of fraud, corruption, etc. ”1 These Whistle-blowers can be of two kinds, i. e. , internal whistle-blowers, who report such incidents of fraud and mismanagement to the top management of their company, and external whistle-blowers, who report these acts to appropriate legal authorities, or even media companies and publication houses. Whistle Blowers, being the flag bearers of good governance and the rule of law, make the existence of a sound mechanism for whistle-blowing and protection of such whistle-blowers a sine qua non2. This becomes even more important in a country like India due to its evergrowing issues of inefficient governance and rampant rise in corruption cases.
Moreover, the alarming frequency of cases of attacks and harassment of these whistle-blowers calls for strengthening the ‘whistle-blower protection’ framework in the country. These aforementioned issues have given rise to the need for a comprehensive legislative system to ensure the safety of those involved in the act of whistle-blowing. And the whistle-blower protection laws in India aim to safeguard these personnel. Indian whistle-blowers, either external or internal, come under the purview of the regulations issued by the Securities and 1 What is whistle-blower? definition of whistle-blower, whistle-blower meaning (2024) The Economic Times. Available at: https://economictimes. indiatimes. com/definition/whistle-blower (Accessed: 19 September 2024). 2 Shiva, K. (2021) Whistle-blower protection law in India - safeguarding the Guardians of Good Governance, SSRN.
Available at: https://ssrn. com/abstract=3724381 (Accessed: 21 September 2024).
Exchange Board of India (SEBI)3, and the regulations issued under Whistle Blower Protection Act of 20114, Companies Act of 20135, including provisions issued by a few other legislations. HISTORY AND EVOLUTION OF WHISTLE BLOWER PROTECTION The concept of whistle-blowing in India can be traced back to the Mauryan Empire of the Ancient India. In the Ancient period during the reign of Chandragupta Maurya, the great thinker Kautilya, popularly known as Chanakya, first introduced the idea of whistle-blowing in the Indian subcontinent, and the proof of the same can be found in Kautilya’s Arthshastra. 6 The scripture mentions of a rewards system under which an individual providing information and details about any financial wrongdoing was entitled to be rewarded to a proportion of the fraudulent monetary amount that was exposed by them.
Similarly, it was when the modern India saw a steep rise in whistle-blower complaints in the multiple financial frauds and scams, including the Harshad Mehta Scam, the 2G Spectrum Scam, and many more, that the whistle-blowing system again gained popularity and the need for protection of such whistle-blowers was first recognised. 7 The first whistle-blower case in India was of Satyendra Dubey, who played a major role in exposing the corruption involved in the construction of the Golden Quadrilateral Highway Construction Project in the year 2001. 8 His repeated requests for confidentiality were not honoured, and even his complaints to the PMO about various threats received by him went unheard. Following this, Satyendra was brutally murdered in the year 2003 and his death gave rise to a large-scale public outrage and demand for a robust legal system for protection of the whistle-blowers.
A similar instance to this was the case of S Manjunath, who had exposed the corruption and oil adulteration racket 3 Khureja, K. (2022b) Whistle-blower protection in India - explained, pointwise, Free UPSC IAS Preparation For Aspirants. Available at: https://forumias. com/blog/whistle-blower-protection-inindia/#What_is_the_Whistle-blower_Protection_Framework_in_India (Accessed: 24 September 2024).
4 The Whistle Blowers Protection Act, 2011 no. 17 of 2014. Available at
https://prsindia.org/files/bills_acts/acts_parliament/2011/the-whistle-blowers-protection-act,-2011.pdf (Accessed: 20 September 2024).
5 ibid.
6 Shah, S. (2023) Whistle blowing mechanism in India, an ..., PIMPRI LAW REVIEW JOURNAL. Available at: https://law.dypvp.edu.in/plr/Publication/all-publication/Research-Paper-Samrudhee-Shah.pdf (Accessed: 23 September 2024).
7 History of whistle blowing in ancient India (no date) Whistlefirst. Available at
https://www. whistlefirst. com/blogs/history-of-whistle blowing-in-ancient-india (Accessed: 23 September 2024). 8 Reeves, K. (2024) The story of India’s ‘First whistle-blower: ’stalled progress in the wake of Satyendra Dubey’s 2003 murder, Whistle-blower Network News. Available at: https://Whistle Blowersblog. org/global- Whistle Blowers/the-story-of-indias-first-whistle-blower-stalled-progress-in-the-wake-of-satyendra-dubeys- 2003-murder/ (Accessed: 23 September 2024). in the Lakhimpur Kheri district of Uttar Pradesh in the year 2005,9 and was murdered in the same year as a consequence of exposing the racquet, by a petrol pump owner and his employees and friends. 10 It was in the light of these incidents, that the need and the necessity was realised for establishment of a stringent framework of legislations and policies for the protection of the whistle-blowers.
It was realised, that for whistle-blowers to be able to come forward with such ‘tips’, it is necessary to establish a robust system and framework that ensures confidentiality to these individuals to protect them from the risks of retaliation. WHISTLE BLOWER PROTECTION LEGISLATIONS AND POLICIES IN INDIA The Supreme Court of India, by its order in Writ Petition No. 539/2004, issued a directive to the Union Government to establish an appropriate mechanism which records any such complaint by a whistle-blower, and also provides them protection from any such risk of retaliation. Following this, in the year 2004, the Public Interest Disclosure and Protection of Informers (PIDPI) Resolution was introduced for logging the complaints of alleged corrupt practices or misuse of position and power by a Government officer or Department.
11 To further support this, the Central Vigilance Commission (CVC) was then established as an independent body, which was authorised by the Government of India as the ‘Designated Agency ’under PIDPI to receive written complaints about the aforementioned corrupt practices. 12 Added to this, India is also a signatory to various international and regional agreements on this subject. This includes the US Convention against Corruption in the year 2005. 13 This Convention focuses on reporting the acts and practices of corruption done by either any public or any private entity, and to protect any the Whistle Blowers from any retaliation that they may 9 Manjunath murder case: Supreme Court Awards life term to 6 convicts (2015) India Today. Available at: https://www. indiatoday.
in/india/story/manjunath-murder-case-supreme-court-life-term-awarded-iim-lucknow- 243868-2015-03-11 (Accessed: 23 September 2024). 10 Sahu, M. (2023) IOC’s manjunath murder: Serving life, convict walks free after 17 yrs, The Indian Express. Available at: https://indianexpress. com/article/cities/lucknow/iocs-manjunath-murder-serving-life-convictwalks-free-after-17-yrs-8380747/ (Accessed: 27 September 2024). 11 Khureja, K. (2022) Whistle-blower protection in India - explained, pointwise, Free UPSC IAS Preparation For Aspirants. Available at: https://forumias. com/blog/whistle-blower-protection-inindia/#What_is_the_Whistle-blower_Protection_Framework_in_India (Accessed: 24 September 2024). 12‘whistle- blower ’complaints to CVC. Available at: https://mptgoa. gov. in/pdf/Whistle-Blower-Complaints. pdf (Accessed: 23 September 2024).
13 ibid.
face. The Companies Act of 2013, too takes a step in this direction where Section 206 to Section 229 talk about the inspection and inquiry matters. 14 Section 208 of this Act authorises the Registrar or inspector to conduct an inspection of all the books and papers of a company, and to submit its report with recommendations for further investigation if there is still any ambiguity or doubt. 15 Similarly, Section 210 empowers the Central Government to investigate the internal affairs or the internal workings of a company.
16 Section 39 of the Code of Criminal Procedure (CrPC) of 1973, replaced by Section 33 of the Bhartiya Nagarik Suraksha Sanhita (BNSS) of 2023, requires the public to give information about certain offences to the appropriate legal authority and includes any act which is considered unlawful under any Indian legislation, which might be committed either within the territory of India or even outside the territory of India. The Whistle Blowers Protection Act of 2011, renamed as Whistle Blowers Protection Act, of 2014,17 is a specific and unique legislation that primarily focuses on various aspects of whistleblowing, and aims to protect all such whistle-blowers, both internal and external. The act primarily focuses on ensuring confidentiality to the whistle-blowers and penalises anyone who fails to adhere to this mandate.
This Whistle Blowers Protection Act of 2014 was proposed to be amended through the Whistle Blower Protection (Amendment) Bill, of 2015,18 however, there has not been any further development regarding this. Lastly, The Securities and Exchange Board of India, popularly known as SEBI, has gone a step further in this direction and has recently issued the Securities and Exchange Board of India (Stock Broker) (Amendment) Regulations, 2024. 19 This amendment has inserted a separate chapter IVA after chapter IV, titled as “Institutional Mechanism for Prevention and Detection of Fraud or Market Abuse. ” This new regulation aims at establishing an institutional 14 Khureja, K. (2022a) Whistle-blower protection in India - explained, pointwise, Free UPSC IAS Preparation For Aspirants. Available at: https://forumias.
com/blog/whistle-blower-protection-inindia/#What_is_the_Whistle-blower_Protection_Framework_in_India (Accessed: 24 September 2024).
15 The Company Act, 2013, No. 18, Acts of Parliament, 2013 (India).
16 ibid.
17 The Whistle Blowers Protection Act, 2014, No. 17, Acts of Parliament, 2014 (India).
18 The Whistle Blowers Protection (amendment) Bill, 2015. Available at
https://loksabhadocs.nic.in/Refinput/New_Reference_Notes/English/The_whistle_blowers_Bill.pdf (Accessed:
23 September 2024).
19 Vigilance Department (vigilance dept.) (no date) SEBI. Available at
https://www. sebi. gov. in/department/vigilance-department-67/overview. html (Accessed: 24 September 2024). mechanism for the prevention and detection of fraud and market abuse. It also mandates every company which is listed under SEBI, to have a whistle-blower policy, and makes the company responsible for communication of such a policy to all its employees. 20 THE SECURITIES AND EXCHANGE BOARD OF INDIA (STOCK BROKER) (AMENDMENT) REGULATIONS, 2024: A NEED OF THE HOUR The Securities and Exchange Board of India (SEBI) as an organisation vouches for the detection and prevention of fraud, market abuse or any other corrupt practices. The Board holds these surveillance and control measures as the cornerstone of a transparent and autonomous business, and finance economy, for the purpose of shielding the investors and the stakeholders from fraud.
The Securities Exchange Board of India (SEBI) in line with this, on June 27 of 2024, issued an amendment to the SEBI (Stock Brokers) Regulations, 1992 through a publication in the Official Gazette. 21 This new regulation was called the Securities and Exchange Board of India (Stock Broker) (Amendment) Regulation, 2024, and was brought in under Section 30 of the SEBI Act of 1992. 22 This amendment has inserted a separate Chapter IVA which focuses on establishing an institutional mechanism for detecting and preventing any act of fraud and market abuse. Among other developments, the new amendment mandates stockbrokers for establishment and documentation of a whistle-blower policy in all companies listed under the SEBI, with the aim of achieving and ensuring confidentiality and anonymity to the whistle-blowers, i. e.
, those individuals who may report any unethical practice or violation of a legal requirement, among other vulnerabilities. 23 This Policy is aimed at ensuring adequate protection for whistleblowers, while also ensuring compliance with the appropriate regulations and legislation, for the purpose of achieving transparency and accountability in these organisations. 24 This new Policy has now been extended towards providing adequate safeguards to the whistle-
20 Securities and Exchange Board of India (stock brokers) (amendment) regulations, 2024 (2024) SEBI.
Available at: https://www.sebi.gov.in/legal/regulations/jun-2024/securities-and-exchange-board-of-india-stockbrokers-amendment-regulations-2024_84505.html (Accessed: 24 September 2024). 21 taxguru_in and Editor6 (2024) SEBI (stock brokers) (amendment) regulations, 2024, TaxGuru. Available at: https://taxguru.in/sebi/sebi-stock-brokers-amendment-regulations-2024.html (Accessed: 24 September 2024).
22 ibid.
23 ibid.
24 SEBI (stock brokers) (amendment) regulations, 2024. Available at
https://www. ricago. com/assets/front/base/file/newsletters/148. pdf (Accessed: 24 September 2024). blowers, and this shall not just be the responsibility of the stock brokers and their employees, but also the stakeholders and the top management. This amendment focuses on introducing a reporting matrix for not just the complaints received by the whistle-blowers, but also for other things. This includes assigning responsibility to various posts or positions as to which kind of complaint will be addressed by the person sitting at which job post. The new Chapter has also provided for periodic reporting mechanisms to cross-verify the details and informations in order to ensure efficiency in the system and establish internal control, among other provisions. 25 This new chapter also calls for a thorough surveillance system to monitor all the trading activities taking place in these entities.
SUCCESS AND SHORTCOMINGS OF THE AMENDMENT Even though the SEBI (Stock Broker) (Amendment) Regulations of 2024 aims at improving the transparency and efficiency of governance, the Policy has been on the receiving end of a series of criticisms and shortcomings due to a variety of reasons. These include the burden caused on the stockbrokers by the new stringent reporting mechanisms and other compliance issues. This includes the increase in administrative functions and financial expenses, which might disproportionately affect the smaller stock brokers, leading to a concentration of power in the hands of the bigger players. There is also the possibility that the brokers might attempt to recover these additional costs from their clients through the medium of a higher fees amount, which will further increase the burden on the clients and will in turn reduce their accessibility to the markets.
There is also the problem of ambiguity and inconsistency in the language of these provisions in the Policy, such as the framework provided for ‘risk management’ and ‘capital adequacy’, leading to inconsistent interpretations and implementations among the stock brokers across the country. In the new policy, there is also a lack of focus on the potential cybersecurity threats or system failures, which falls inconsistent with the increasing digitisation of the trading arena. Moreover, though there is a call for the introduction of provisions for the redressal of customer 25 Editor_4 and Ridhi (2024) Securities and Exchange Board of India (stock brokers) (amendment) regulations, 2024, SCC Times. Available at: https://www. scconline.
com/blog/post/2024/07/02/securities-and-exchangeboard-of-india-stock-brokers-amendment-regulations-2024-legalnews/#:~:text=The%202024%20Regulations%20inserted%20Chapter,stock%20brokers%20and%20their%20e mployees. (Accessed: 24 September 2024). grievances, there is still no explicit mechanism for ensuring a rapid resolution of these. Also, the mandated timeline for the transition period, i. e. , for compliance with the new regulations, might not be sufficient for those brokers who at present lack adequate infrastructure and resources that may be required for a smooth and rapid transition. WHAT SHOULD AN IDEAL WHISTLE BLOWER POLICY INCLUDE?
An ideal whistle-blower policy must include the preamble to the Policy; the aims, objectives and the scope of the Policy; and also the laws governing the whistle-blower mechanism in the company. There must be a mention of who can blow the whistle, i. e. , explaining what is actually meant by ‘whistle-blower’ and ‘whistle-blowing’. Similarly, there also must be a mention of what is not whistle-blowing. For instance, reports of personal grievances, such as harassment or bullying, cannot be covered under any whistle-blower protection legislations. 26 The whistle-blower policy must include the whistle blower mechanism be followed in the company, i. e. , the procedure for filing a complaint and the flow of the complaint until it reaches a resolution.
This includes designating a specific resolution committee to whom the complaints will be addressed and reported, while also specifying the contents that are to be reported, the process of reviewing such complaints, and the documents that might be required during the procedure, among others. The closure of these complaints is the last leg of this policy. This might include the criteria for when a complaints is to be considered resolved, followed by the submission of the report by the investigators of their findings. Provisions for ‘appeal’ might also be included in this Policy, or even the plan of action that is to be followed if a complaint is to be found mala fide. It is of utmost important here that these records are to be stored with caution to avoid any potential risk of leaks.
Moreover, this Policy should be subject to review periodically, and must be accommodated to the changing legislations, policies and market trends.
CONCLUSION
AND WAY FORWARD The past few years have seen a drastic rise in large-scale corporate scams that have majorly impacted the Indian economy. Corporate Governance, in the form of whistle-blowing, has
26 What should the ideal whistleblowing policy include? (2023) EQS Integrity Line. Available at:
https://www. integrityline. com/expertise/blog/whistleblowing-policy/ (Accessed: 27 Septemb er 2024) proved to be a viable option to this issue, if not to eliminate, but mitigate its effects. The Securities and Exchange Board of India (Stock Brokers) (Amendment) Regulations 2024 has proved to be a step forward in this direction by providing a timely response to the issue of extensive rise in cases where the safety of the whistle-blower has been compromised, which has in turn demotivated the employees from coming forward because of the rise to their lives and occupation. This Policy has also been successful in filling the gaps in the law that were left in the previous regulations by providing legislation on issues including, the manner in which these complaints can be handled to provide better protection to the whistle-blowers.
The introduction of this mandate on the establishment of a regulatory framework in India represents an acknowledgement by the authorities, of the crucial role the stock brokers play in shaping the overall economy and the market of a country. However, to achieve these objectives, a step-by-step implementation of this regulatory framework is required. Hence, the primary step in the chain of action should be to establish a confidential and anonymous reporting process system, which can assist these brokers and organisations to effectively go about the aforementioned mandate. This system will be dependent on the nature of the business, the size of its operations, and also the complexity of the cases that the organisation deals with.