Thursday, March 23, 2017

Hush of the Whistleblower

[Guest post by Malek Shipchandler, who practices law with a firm in Mumbai. Views are personal and do not necessarily represent those of the firm.]

The ongoing controversy at one of India’s most celebrated companies, built on high standards of corporate governance, raises some interesting issues for consideration from a whistleblower perspective. It was earlier reported that the Indian securities regulator, the Securities and Exchange Board of India (SEBI) is examining a letter from a whistleblower at Infosys alleging that the CEO agreed to a gargantuan payout to a resigning chief financial officer, without any formal approval of the board, governance committees or the shareholders. The payout, the size of which is apparently unprecedented at Infosys, was riddled as “hush money” by one of the prominent founders of Infosys in an interview.

The Indian whistleblower norms for listed companies are relatively straitened, in comparison with jurisdictions such as the United States, where India often derives regulatory inspiration from. The Dodd-Frank Wall Street Reform and Consumer Protection Act of the United States established a whistleblower program to be overseen by the U.S. Securities and Exchange Commission (SEC) in 2010. The relevant norms, inter alia, make it a violation of law to take any action to impede an individual from communicating directly with the SEC about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement. In the contrasting Indian scenario, while the SEBI listing norms and Companies Act, 2013 mandate the company to establish a vigil and whistleblower mechanism which, inter alia, is to provide for adequate safeguards against victimization of the employees and their direct access to the audit committee of the company, they appear to envisage the umpiring and first go-to authority to be the board of directors and/or the audit committee, rather than a regulator such as SEBI. While the audit committee is statutorily required to be constituted (in majority) and helmed by ‘independent directors’ – considering that a majority of Indian listed companies are promoter driven, with independent directors spending less than nine days per year on board related work, and voicing that their company wants them to “toe the line” (according to the India Board Report 2015-16) – the moot point is whether, in reality, independent directors are truly independent and effective.

Questions therefore ensue: what if the whistleblower’s information pertains to the action of the board of directors or members of the audit committee? Is the board or the audit committee then expected to take action on incriminating information presented against it? Moreover, from a practical viewpoint, particularly when the mechanism does not adequately protect the identity of the whistleblower from the board or governance committee, is the whistleblower going to be protected from or become a prey of victimization by the very persons being incriminated?

The extant law, while requiring the company to establish a whistleblower mechanism and safeguarding against victimization, does not provide any guidance on how the mechanism ought to function or how victimization can be mitigated (if not avoided). Curiously enough, SEBI has not specifically touched upon whistleblowing in its recent guidance note on board evaluation, despite the guidance note being released in the aftermath of a high profile board-room battle. An option may perhaps lie in setting up a whistleblower hotline – managed by a professional third party who would in-turn verify the credibility of the complaint and the whistleblower. The idea of a third party managed hotline would however depend on the company’s willingness to spend extra currency and moreover, how thoroughly it is able to sensitize its employees about using such a hotline.

Further, employment/severance agreements often encapsulate boilerplate clauses that restrict a current or former employee from disclosing, voluntarily, any confidential information which may disparage the company or its officers. To reiterate the keyword in such clause(s): voluntarily. While the SEC has statutorily prohibited this (and taken enforcement actions against companies using such clause(s)), SEBI is yet to burgeon in this department. From the employees’ perspective, it is understandable why they would not resist signing off on such clause(s): one, boilerplate clauses by their very nature are not negotiated upon as enthusiastically as remuneration or notice period related clauses; and two, which may perhaps be the most crucial reason, voluntary whistleblowing is not, statutorily, monetarily incentivized in India. The SEC’s whistleblower program envisages paying awards to whistleblowers that provide the SEC with credible information about a securities law violation that leads to a successful SEC enforcement action resulting in monetary sanctions over $1 million – the award can range between 10% and 30% of the amount recovered in the enforcement action. In the Indian context, while it can be argued that monetary incentives may encourage frivolous and vexatious complaints, statutorily adopting a bounty system where an award is given only when the information is credible enough to bring about a successful enforcement action, can be food for thought. In fact, one of India’s steel giants is said to be rewarding its employees (including contract workers) up to INR 100,000 for whistleblowing – this is a welcome cue taken from the SEC’s bounty program.

Be that as it may, while SEBI may have its reasons for not having implemented a statutorily robust whistleblower program, it would be fair to acknowledge that SEBI does take cognizance of complaints and incrimination information against entities violating securities laws, through its SCORES (SEBI COmplaints REdress System) platform and otherwise. As regards the bounty mechanism for credible whistleblowers, the SEC Annual Report 2016 states that SEC has, since the inception of its whistleblower program, levied over $500 million worth of enforcement actions based on information received from whistleblowers, and awarded over $100 million to credible whistleblowers. Clearly, Benjamin Franklin, the founding father of the United States, said something which appears to resonate with the SEC: “An investment in knowledge pays the best interest.” Will it with SEBI?

-          Malek Shipchandler

Monday, March 20, 2017

SAT on Interest Payment Obligations under the SEBI Act

Readers may recall that the securities law were amended in 2013 in order to confer significant enforcement powers on SEBI. This was done initially by the Securities Laws (Amendment) Ordinance, 2013 that was promulgated with effect from 18 July 2013. The Ordinance had to be re-promulgated before the amendments finally took shape by way of the Securities Laws (Amendment) Act, 2014.

Among the statutory provisions introduced with effect from 18 July 2013 is section 28A of the Securities and Exchange Board of India Act, 1992 (the SEBI Act). This provision states that where a person fails to: (i) pay the penalty imposed by SEBI’s adjudicating officer, (ii) comply with SEBI’s direction for refund of monies, (iii) comply with a direction of a disgorgement order, or (iv) pay any fees due to SEBI, then various consequences follow. These include attachment of the defaulter’s movable property, bank accounts, immovable property, and also arrest of the person and detention in prison. The provision also states that, for this purpose, section 220 and other stipulated provisions of the Income Tax Act, 1961 (the IT Act) would apply. While section 28A of the SEBI does not mention anything about interest payments on defaulted obligations, section 220(2) of the IT Act provides for interest obligations on defaulted or delayed payments.

In this context, some legal questions arose before the Securities Appellate Tribunal (SAT) in Dushyant N. Dalal v. Securities and Exchange Board of India. These were paraphrased by the SAT as follows:

1. Whether Section 28A inserted to the Securities and Exchange Board of India Act, 1992 (“SEBI Act” for short) with effect from 18.07.2013 imposes interest liability on a person who fails to pay the amounts specified in Section 28A within the stipulated time and if so, whether Section 28A can be invoked for demanding interest on the amounts due to SEBI pursuant to the orders passed prior to 18.07.2013 is the question raised in all these appeals.

The above paragraph reflects two issues, and I summarize the findings and reasoning of SAT on each of them. The first, and the more lasting question, relates to whether section 28A imposes any interest payment obligations at all on any failure to make the payments required under the section. The thrust of the appellants’ arguments was that section 28A itself does not contain any specific obligation to pay interest on defaulted amounts and that, in the absence of any statutory provisions, interest cannot be levied. However, this argument was not accepted by SAT. It found that instead of specifying collection and recovery mechanism in section 28A, Parliament thought it fit to incorporate by reference the provisions of the IT Act in this regard. SAT noted:

Fact that Section 28A of SEBI Act does not specifically mention the interest liability for the delayed payment of the amounts specified therein cannot be a ground to hold that there is no substantive provision in the SEBI Act to demand interest on delayed payments. By incorporating Section 220 of the Income Tax Act in Section 28A of SEBI Act, the legislature has statutorily imposed interest liability on the delayed payment of the amounts set out in Section 28A of the SEBI Act. In other words, the liability to pay interest under Section 28A read with Section 220 is automatic and arises by operation of law. Therefore, the argument of the appellants that there is no substantive provision in the SEBI Act to demand interest and hence, the RO, could not demand interest for the delayed payment cannot be accepted.

Accordingly, SAT concluded that section 28A imposes interest liability on persons who fail to pay the amounts stipulated therein.

The second question was a more immediate one, and related to timing. More specifically, it was as follows: “when section 28A imposes the interest liability on the unpaid amounts due to SEBI from 18.07.2013, whether interest could be demanded under section 28A on the amounts due to SEBI for the period prior to 18.07.2013”. After reviewing the legal provisions, SAT concluded that the provisions relating to payment of interest can only apply prospectively, i.e., from 18 July 2013. It observed:

20. Thus, Section 28A, read with various provisions contained in Section 220 of the Income Tax Act makes it abundantly clear that the rights and obligations set out therein are prospective in nature. Accordingly, we hold that where the orders passed by SEBI prior to 18.07.2013 do not envisage interest liability for the delayed payment of the amounts specified in the respective orders, on insertion of Section 28A, the RO is authorised to demand interest on the amount remaining unpaid after expiry of 30 days from 18.07.2013 and not for the period prior to 18.07.2013.

Based on the facts of the individual cases before it, the SAT held that in all appeals, except one, interest liability could not be imposed on the parties for the period prior to the cut-off date above. In the one appeal though, since the adjudicating officer had previously ordered the payment of interest, it was sustained.

From a broader perspective, the SAT has clarified that section 28A imposes obligations on payment of interest even though the result is arrived at through incorporation of the specific provisions of the IT Act. This confirms the additional powers that were sought to be available to SEBI to enforce the securities laws in a more stringent manner, and further strengthens SEBI’s hands.

Sunday, March 19, 2017

Shareholding Thresholds for Oppression and Class Actions

The Tata-Mistry episode has brought into focus the minimum shareholding threshold required for a minority shareholder to bring an action for oppression and mismanagement under sections 241 to 244 of the Companies Act, 2013. In a piece in Bloomberg Quint titled Minority Shareholder Protection as a Numbers Game, I examine the implications of such shareholding thresholds that operate as a filter, which seeks to weed out frivolous and vexatious suits from the genuine ones. However, as I argue in the piece, such a quantitative threshold raises a number of issues and is minority shareholder unfriendly, thereby requiring a review of the policy surrounding such an approach.

Announcing the Socio-Legal Review Forum

[Announcement from the Editorial Board of the Socio-Legal Review]

The Editorial Board of the Socio-Legal Review is proud to announce the launch of its online companion/blog, the Socio-Legal Review Forum. Since its inception in 2005, SLR has strived to further the discourse on the intersection of law and society. Over the past decade, it has provided both students and scholars a platform to engage with socio-legal matters relevant in the South Asian context. Since it became a biannual publication in 2012, it has produced a themed issue every year, providing different perspectives on current issues such as legal education, human rights, and the environment.

However, the constraints of a journal format have frequently rendered us unable to respond to current events with the immediacy they require. Additionally, the legal blogosphere in India has a noticeable vacuum when it comes to discussion on socio-legal issues, while more popular outlets for think-pieces often lack a much-need legal perspective. To counter this, we seek to provide a platform for informed debate on contemporary developments across the globe. As a more informal venue, we also hope to reach out to a wider audience than a journal is able to.

We welcome submissions in the form of comments on recent legal developments or book reviews engaging with recent literature, as well as responses to pieces previously published in the Review or the Forum. To contribute a piece for the Forum, please write to us at To submit a piece for our print journal, please email us at

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