Whistleblower complaints against Infosys and the IT firm's handling of the issue have raised many questions about the regulatory mechanism related to such issues such as how soon the companies should disclose such complaints and whether they should make an attempt to verify before they disclose.
Two former heads of the Securities and Exchange Board of India, M Damodaran and
UK Sinha have also weighed in the matter. Is the mechanism effective?
Damodaran said the
whistleblower complaints mechanism is a fair process and can still function as an excellent mechanism to unearth things that are out of the radar for regulators and the audit committee. Sinha believes more and more people are now using the whistleblower route but there are three-four areas where it needs to evolve.
"There are 3-4 areas with regards to whistleblowers which are not yet clear and which have to be evolved. For example, when a whistleblower complaint is received, what is the desired course of action and there is always an element of judgement on the part of the management," said Sinha in an interview with CNBC-TV18.
Sinha pointed out that the whistleblower mechanism outside India has succeeded, partially, because of an element of reward given to them and the regime of whistleblower protection. 'Rules are in place but I am sure over a period of time the practices will develop in that direction," said Sinha.
To disclose or not to disclose
In the Infosys case, Sebi has initiated an investigation into non-disclosure of the whistleblower complaints. The market regulator has also started collating trading data around the complaints were filed and the role of some directors and executives, according to media reports. Both Sinha and Damodaran agreed that disclosure of whistleblower complaints is the tricky part.
He argued that, because it looks credible and is well-drafted, you should not think it is right and put it out. If the whistleblower’s complaint is not true, putting it out on the exchanges prematurely, you might be spreading this falsehood, which is in no-one’s interest, said Damodaran.
"Like every good instrument, it can also be used wrongly. You can use it to settle scores, you can use it to take pot-shots at people. Should somebody do a screening before it is disclosed? Absolutely," said Damodaran.
Sinha said it is impractical to think that every complaint should be reported to the public. "If we insist that each and every complaint should be or must be reported to the public or to the stock exchanges, that will be very impractical. In fact, people will start gaming on it. We have to strike that balance," said Sinha.
What is the ideal approach?
Damodaran said it is important that whistle-blowers first send the complaint to the company and It is quickly investigated. "You don’t have the luxury of time." During the investigation, if you get to a situation where there is some doubt, that is a stage you tell to the stock exchange that we have received a complaint and there could be something that needs verification.
Sinha also argued that just because a complaint has been made, that does not mean it should be immediately reported to stock exchanges or to the regulator. However, he said, the audit committee must show urgency in trying to find out some preliminary details about the contents.
"If there is some truth, they must immediately take the next step which is to conduct a thorough inquiry and also to keep the regulators and the stock exchange in the picture," he said.
Sinha also said that every company must have a policy and that policy should be on its website and the chairman of the audit committee should be available for any whistleblower to approach you directly. He also added that if there are 40-50 complaints being received in a company on a quarterly basis, each and every complaint cannot be seen by the chairman of the audit committee himself.
"My feeling is over a period of time things will emerge and the system will come in place," Sinha said.
"So the practice which has developed is that in a quarterly meeting the report to the audit committee, the nature of complaints and how they were handled," he said.