EMPOWERING WATCHDOGS: STRENGTHENING WHISTLEBLOWER PROTECTIONS IN INSIDER TRADING REGULATIONS

 

Introduction:

 

In a significant move to fortify corporate governance, the Securities and Exchange Board of India (SEBI) introduced a pivotal amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015. This amendment, dated December 26, 2019, aimed at enhancing the whistleblower mechanism, providing a direct channel for reporting insider trading violations to SEBI. The shift towards external reporting seeks to ensure greater protection and anonymity for whistleblowers, aligning India's regulations with international standards, particularly akin to the Whistleblower Program in the United States.

 

Evolution of Whistleblower Mechanism:

 

The journey towards a robust whistleblower mechanism in India began with the 2018 amendment to the SEBI (Prohibition of Insider Trading) Regulation, 2015 , making it mandatory for public companies to establish an institutional vigil mechanism, including a whistleblower policy. However, the internal nature of this mechanism raised concerns about potential bias and the underreporting of violations. In response to these challenges, SEBI released a discussion paper in June 2019, paving the way for a more comprehensive and externalized informant mechanism.

 

Procedure of Reporting by Informant:

 

The latest amendment outlines a structured process for whistleblowers to report insider trading violations directly to SEBI. The whistleblower is required to submit a Voluntary Information Disclosure Form (VIDF) through their legal representative or appear in person to verify their identity. If submitted through a legal representative, the onus is on them to ensure the informant's identity verification, maintain confidentiality, and certify the truthfulness of the information. Notably, the informant has the option to exclude details that might reveal their identity.

 

Role of the Informant Protection Office:

 

SEBI designates an Informant Protection Office (IPO) to serve as the communication hub with whistleblowers. The IPO assists in receiving and registering VIDFs, maintains a hotline for potential informants, ensures confidentiality, and handles press releases and rewards related to informants. The IPO operates independently from the investigative and inspection wings and is accountable for submitting an annual report on its functioning.

 

Informant Confidentiality:

 

Confidentiality is a critical aspect of the whistleblower protection framework. The amendment specifies that information provided by the informant may be disclosed in legal proceedings, regulatory or self-regulatory organizations, law enforcement agencies, or public prosecutors in criminal proceedings. However, SEBI emphasizes maintaining confidentiality regarding the informant's identity throughout the investigation and proceedings, except when their evidence is required.

 

Whistleblower Immunity:

 

While being an informant does not automatically grant immunity for past wrongdoings, including securities law violations, the amendment allows informants to settle violations confidentially under the SEBI (Settlement) Regulations, 2018. Cooperation from the informant is considered in determining the sanctions to be imposed.

 

Reward to the Informant:

 

A groundbreaking incentive introduced in the amendment is the provision for monetary rewards to whistleblowers. SEBI may declare informants eligible for rewards upon the collection or recovery of monetary sanctions. The reward is set at 10% of the recovered amount, with a cap of INR 1 crore. An interim award of up to INR 10 lakhs may be provided after the issuance of the final order by SEBI. The Investor Protection and Education Fund will finance these rewards.

 

Criteria for Reward Eligibility:

 

The amendment outlines specific criteria for reward eligibility, including the originality of information, cooperation during investigations, furnishing complete information, and the absence of any disqualifications. An exemption may be granted from disqualifications under certain circumstances.

 

Conclusion:

 

The enhanced whistleblower protection mechanism introduced by SEBI represents a significant leap towards fostering a culture of transparency and accountability in India's securities market. By providing a direct channel to report insider trading violations, maintaining confidentiality, and offering monetary rewards, SEBI aims to incentivize and protect those who step forward to expose malpractices. The success of this mechanism will not only depend on effective implementation but also on cultivating a sense of trust and security for informants. As India strives to align its regulatory practices with global standards, this amendment serves as a beacon for ethical conduct in the financial markets.

 

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Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.

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