The Infosys whistleblower saga: What we must learn from it

The recent spate of whistleblower complaints has raised concerns regarding the effectiveness of the whistleblower mechanism adopted by listed entities while handling such complaints as well as the genuineness of such complaints. In November 2018, Sebi had received an anonymous complaint alleging irregularities by Sun Pharmaceuticals Industries Limited, following which the securities market regulator has ordered a forensic audit of the financial statements of the company.

Recently, on October 22, Infosys informed the stock exchanges regarding certain anonymous complaints which reported “unethical practices” on part of its CEO and its CFO, in order to boost the company’s revenue and profits. In its statement, Infosys stated that a similar complaint was also received by the US Securities Exchange Commission (SEC) and that its audit committee was in the process of evaluating such complaints. On November 12, another whistleblower complaint was received from one of its employees alleging misconduct on part of its CEO.

According to the Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations), every listed entity is required to frame a ‘vigil mechanism’ or whistleblower policy for reporting of ‘genuine concerns’ by its directors or employees. Further, the Sebi (Prohibition of Insider Trading) Regulations, 2015 (Insider Trading Regulations) also mandate listed entities to frame a whistleblower policy in order to enable reporting of instances of leak of unpublished price sensitive information. Recently, an additional “informant mechanism” was inserted under the Insider Trading Regulations for incentivising reporting of instances of insider trading. Similar to that of the US SEC Whistleblower Program, effective from December 26, the whistleblower complaints will be processed by the Office of Informant Protection, an independent wing of Sebi.

However, the Listing Regulations and the Insider Trading Regulations do not prescribe any procedure to be followed by listed entities for dealing with whistleblower complaints received by such entities. Therefore, every listed entity follows its own internal policy for evaluating such complaints. Further, the onus is on the listed entity to make disclosures about such whistleblower complaint upon determining the materiality of such information as per Regulation 30 of the Listing Regulations. This has not only raised concerns regarding the effectiveness of the processes followed by listed entities while dealing with whistleblower complaints, but also the need for identifying at what stage such complaints should be disclosed. For instance, pursuant to the intimation by Infosys regarding the whistleblower complaints, BSE has sought information from Infosys regarding the delayed disclosure of such complaints. Further, Sebi has already initiated an investigation into the alleged non-disclosure of price sensitive information by the Infosys management and possible corporate governance lapses in the company.

It is relevant to note that a whistleblower complaint may cover a broad spectrum of information and such information may or may not be price sensitive for a listed entity. Automatic disclosure of every whistleblower complaint received by the listed entity without independent verification of the same may be premature and lead to misinformation, which in turn may dilute the seriousness of the allegations in such complaint. Therefore, it is important for listed entities to prima facie ensure the veracity of each complaint before such complaint is made public. A detailed investigation into the allegations of the complaint is necessary and the disclosures should be made only after the authenticity of the complaint is established.

Further, whistleblower complaints may contain information related to myriad issues and may be motivated due to various reasons. Therefore, listed entities must be allowed the flexibility to objectively assess such complaints prior to making disclosures under Regulation 30 of the Listing Regulations. While there cannot be a straitjacket formula for filtering out frivolous and malicious complaints, the assessment of such complaints should be subject to a time-bound process. Also, listed entities, as custodians of public wealth, should be proactive in verifying such whistleblower complaints and the issues raised therein. The audit committee of a listed entity, which is responsible for reviewing the functioning of the whistleblower mechanism, can play an effective role in ensuring prompt and independent assessment of the whistleblower complaints.

As per Regulation 13(3) of the Listing Regulations, listed entities are required to file quarterly statements providing details of the status of resolution of investor complaints received by such entities. A similar mandate can be prescribed for the listed entities to disclose the status of resolution of whistleblower complaints to ensure transparency and enhance credibility in the governance standards employed by the listed entity.

Lastly, it is important for the media to be cautious while disclosing information about such whistleblower complaints. While the whistleblower mechanism may be used as a powerful tool to keep a check on dilution of corporate governance standards, premature disclosure of false information, as contained in frivolous complaints, may stifle the day-to-day functioning of listed entities.