Indians high on whistle-blowing to SEC, back off when tipping Sebi

Sebi can neither offer significant protection nor reward when compared to SEC

The Securities and Exchange Board of India (Sebi) may be missing out on a key source of information on wrongdoing as India lacks an effective enabling framework for whistle-blowers. 

Sebi can neither offer significant protection nor a reward when compared to others. The contrast is seen in a report submitted to the US Congress about the American securities regulator’s whistleblower programme, which showed significant success in attracting informers, with India accounting for 26 such tips, nearly twice the 14 complaints in the previous year.

India was sixth in the list of top-10 countries, ahead of Israel, Brazil and Russia, for whistleblower complaints in a record-breaking year for the Securities and Exchange Commission’s (SEC’s) tip-off programme. “The commission also received more whistleblower tips in FY2018 than in any other previous year,” said SEC in its annual report to the US Congress. SEC’s financial year is October-September.

The US securities market regulator has put in place a mechanism for receiving tip-offs about fraud, manipulation and insider trading, among other offences. It also provides for a financial reward to such whistle-blowers. The report to the US Congress on the programme said that the SEC awarded its largest such pay-outs to whistle-blowers in the last financial year at $168 million. These awards were larger than all the previous years combined – the SEC has awarded $326 million since the beginning of the programme in FY 2011. 

According to rules, awards between 10-30 per cent of fines collected could be given to whistle-blowers. The US Congress has established a separate investor protection fund to pay whistle-blowers. However, whistleblowing remains a challenge back home, legal and governance experts told Business Standard. The Sebi faces restrictions that the SEC doesn’t. 

“The US SEC has a better mechanism for protection of whistle-blowers. This includes the ability to provide such individuals with immunity. The law in India doesn’t allow Sebi to provide immunity, only the central government can take such a call though Sebi can recommend it to the government,” said Sumit Agrawal, founder, RegStreet Law Advisors and a former Sebi officer. 

“Sebi also doesn’t have a scheme to offer rewards to informers such as the SEC or even India’s Income Tax Informants Rewards Scheme. Vishwanathan committee on fair market conduct had also recommended the same,” Agrawal further said.

There is plenty for whistle-blowers to talk about in India, according to Shriram Subramanian, founder and managing director of proxy advisor InGovern Research Services. He said issues around financial shenanigans could come up through such channels. But companies and the regulators need to put in place a robust mechanism for such cases to emerge. “It is still to pick up in India,” he said.

Others feel financial incentive may not be a great way to bring such cases to light. It needs to be a moral decision and should perhaps not be driven by monetary considerations, Amit Tandon, founder and managing director, Institutional Investor Advisory Services India (IIAS) said. “I am skeptical,” he said, about using money as an incentive for whistle-blowers.

About 40 per cent of respondents believe bribery and corruption are widespread in the country’s businesses, according to the EY Global Fraud Survey 2018: Integrity in the Spotlight. The US SEC also acts against firms seeking to discourage whistle-blowers. “The SEC also brought a settled action against Oklahoma-based oil and gas company SandRidge Energy for terminating an employee in retaliation for raising concerns to company management about how the company calculated its reserves…. The commission also found that the company had violated Rule 21F-17 by entering into separation agreements with hundreds of employees that prohibited voluntary, direct communication with the Commission,” noted the previous year's whistle-blower report. 

An email query sent to Sebi did not receive a reply.