Now, whistle blowing mechanism for public deposit taking companies

Oct 02 2013, 17:36 IST
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The vigil mechanism is part of the Companies Act 2013, which is implemented by the MCA. Reuters The vigil mechanism is part of the Companies Act 2013, which is implemented by the MCA. Reuters
SummaryThe vigil mechanism is part of the Companies Act 2013, which is implemented by the MCA.

To bolster transparency in corporate governance, companies taking public deposits as well as those that have borrowed over Rs 50 crore from lenders are now required to establish whistle blowing mechanism for their directors and employees.

However, individuals coming up with frivolous complaints through this mechanism would be liable to face action, including reprimand.

The whistle blowing mechanism, popular in many developed nations, would provide an opportunity for employees to report any misdoings within their company.

The vigil mechanism is part of the Companies Act 2013, which is implemented by the Ministry of Corporate Affairs.

To ensure that the whistle blowing system is not abused, the new legislation provides the provision to take action against director or employee "in case of repeated frivolous complaints".

Every listed company and certain class of firms, including entities accepting deposits from the public and those which have borrowed more than Rs 50 crore from banks and public financial institutions, should establish a vigil mechanism for their directors and employees to report genuine concerns, according to draft rules for new Companies Act.

The move also comes against the backdrop of rising instances of investors getting duped by fraudulent money pooling schemes and many entities defaulting on their borrowings.

Going by the draft rules, audit committee of companies should operate the vigil mechanism.

In case of companies that do not have audit committees, the respective board of directors are required to nominate a director (who would play the role of audit committee) for the purpose of vigil mechanism to whom other directors and employees may report their concerns.

The proposed mechanism would also provide for "adequate safeguards against victimisation of employees and directors" who avail the vigil mechanism.

Besides, the whistle blower would have direct access to the chairperson of the audit committee or the nominated director for the purpose of this mechanism.

"In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the director nominated to play the role of audit committee may take suitable action against the concerned director or employee, including reprimand," as per the draft rules.

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