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13 Aug 2010, 0624 hrs IST,Apurv Gupta, ET

MUMBAI: The Securities and Exchange Board ofIndia (Sebi) is considering a proposal to make it mandatory for companies to

have a whistleblower mechanism, according to a member of one of the

committees constituted by the regulator. A whistleblower is typically a company

insider who tips off the management about actual or suspected fraud or violation

of the company’s code of conduct.

At present, under clause 49 of the listing agreement, it is optional for a

company to have such a mechanism, which also has safeguards against

victimisation of the whistleblower. The proposal is part of a review of certainaspects of clause 49 to effectively deal with instances of fraud in companies.

Two days ago, the Union Cabinet cleared a bill to protect whistleblowers and

punish those exposing the identity of people disclosing information. It also

provides the Central Vigilance Commission powers of a civil court to hand down

harsh penalty to people revealing the identity of whistleblowers. The bill has

provisions to prevent victimisation or disciplinary action against whistle blowers

covering central, state and public sector employees.

“Considering the fact that many large corporate frauds have come to light only

through an insider speaking out or a confession, and not through an audit report

or a regulatory investigation, it should be made mandatory for companies to have

a whistleblowing mechanism,” says Suhail Nathani, partner Economic Laws

Practice. 

Other proposals being considered by Sebi include scrapping the requirement to

review the minutes of all the unlisted subsidiaries by the board. Such a move will

help the boards of holding companies to focus on only the substantial issues.

Presently, this clause is applicable for all subsidiaries irrespective of size or their

contribution to the parent company. This consumes much of the time of the boards of

companies which have many unlisted subsidiaries. The regulator is also considering

expanding the scope of the remuneration committee by making it a mandatory one.

“It was suggested that the Remuneration Committee may be renamed as

‘Nomination and Remuneration Committee’ and be made mandatory. This

committee will also determine the remuneration for all the directors and other

senior management personnel,” said a person familiar with the development.

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Mr Nathani thinks this is a welcome move as extravagant remuneration packages have

contributed significantly to several problems.

However, Prithvi Haldea of Prime Database feels that these are mere cosmetic

changes. “Morality cannot be regulated by adopting such measures. Either it has

to be in the DNA or there has to be a fear of law, which is not the case inIndia. Current system passes the onus of regulation from regulator to

independent directors who are appointed by the promoters. There is a need to

improve surveillance, investigation and fast punishment for financial wrong-

doing,” he says.

The Satyam case underscored the need to establish good corporate governance

practice amongst corporate/s in order to ensure transparency and to secure the

interest of the shareholders, say industry experts.

Ashok Bakliwal, president, Bombay Shareholders’ Association, feels that these

measures will be successful if backed by appropriate laws and strong enforcement by

an independent regulator. It is also very important to maintain secrecy on

whistleblowers, which looks weak in the current system.