Financial Crime World

Whistleblower Protection in Finance: A Game-Changer for India?

India has long struggled with corporate fraud and mismanagement. However, with the introduction of the Companies Act, 2013 (the “new Act”), the government has taken a significant step towards protecting whistleblowers and preventing fraudulent activities.

Comprehensive Investigation Procedure

One of the most notable changes brought about by the new Act is the introduction of a comprehensive investigation procedure. Under the old Act, the Registrar of Companies was the sole authority empowered to demand production of books, information, and papers of a company for inspection. However, under the new Act:

  • An Inspector, apart from the Registrar, can also conduct inspections.
  • The Central Government has suo moto powers to order investigations into companies in cases where there is a report submitted by an Inspector or Registrar that suggests irregularities or fraud.

Establishment of Serious Fraud Investigation Office (SFIO)

Another significant change brought about by the new Act is the establishment of the SFIO. The SFIO has been given statutory backing to investigate affairs and frauds relating to companies. Once a case is assigned to the SFIO:

  • It becomes the sole authority to investigate the matter.
  • All papers, documents, and information are transferred to the SFIO.

Other Key Changes

The new Act has also introduced several other notable changes, including:

  • The power of the Inspector to seize books and papers without obtaining permission from any authority.
  • The ability to make copies of such documents or take extracts from them.
  • Specific situations under which a person shall be punished for fraud (between 6 months to 10 years).

Vigil Mechanism

The new Act also requires certain types of companies, including:

  • Listed companies
  • Those that borrow more than INR 50 crores from banks or public financial institutions

to establish a vigil mechanism for directors and employees to report their genuine concerns. This mechanism must provide:

  • Direct access to the chairperson of the Audit Committee or to a director.
  • Adequate safeguards against victimisation of persons reporting their concerns.

Conclusion

While the fundamental concept of investigation provisions remains the same in both Acts, the new Act has brought about significant changes aimed at ensuring better administration and preventing fraud and misconduct. With the increasing number of corporate frauds surfacing in the country, it is anticipated that the new provisions will bridge the gap between corporate fraud and statutory regime.

About the Author

The author is a Senior Associate, Corporate Practice, Lakshmikumaran & Sridharan, Hyderabad.