An Inclusive Whistle Blower Regime: The Need of the Hour for India?

An Overview of Whistle Blowing and the Protective Legislation in India

In every organisation, be it government or non-government, be it big or small, there exists a certain element malpractice in the form of corruption, maladministration or policies and measures which runs contrary to the notion of the organisation’s own founding principles or against the notion public welfare. Similarly, often times, with the existence of such malpractice, there also exist some people or group of people, who in order to bring such practises to the forefront of the concerned authorities and the public, reveal the misdeeds of these certain organisations. These people are commonly referred to as ‘Whistle Blowers’,

According to National Whistle-blower Center based out of Washington, D.C., whistle-blowers are “On the simplest level, someone who reports?waste, fraud, abuse, corruption, or?dangers to public health?and?safety?to someone who is in the position to rectify the wrongdoing”.[1] Moreover, often times, the act of Whistle Blowing often ends up being a battle between an individual versus the entire organisation, which not only puts a serious threat to the lives of these blowers, but often, they are silenced before they get an opportunity to reports these inefficiencies and misdeeds. Edwen Snowden, the whistleblower, who brought to the forefront, the surveillance and invasive methods adopted by the CIA, with the sanction of the US Government and has been marked as a criminal and has been under the wraps, becomes the best example to illustrate the above contention.

Even in the Indian context, over the course of years, many governmental lacunae and malpractises have been brought to the forefront, due to the efforts of Whistleblowers. However, for the longest time, India did not have any statutory legislation, which gave these Whistleblowers a safe harbour and protection against the powerful government organisations.

It was in the year 2011, that the WhsitleBlowers Protection Act 2011 (which later became WhistleBlowers Protection Act 2014) was enacted, in a bid to provide a safe harbour and protective guidelines to the people who bring to the forefront the corrupt practises in government forums. The Act aimed at encouraging any public servant to report on public interest disclosure?before a?Competent Authority.?The law has elaborately defined various competent authorities for the same. However, one major shortcoming of the Act is that its scope its limited to just public servants and government authorities and does not include the private sector and other sectors at all.

The Companies Act,2013 and the SEBI Guidelines, do try to fill the vacuum created by the said Act, by creating provisions for a Whistle Blowing mechanism for certain types of companies registered under the Acts. Section 177 of the Companies Act mandates the formation of a Vigil Committee for every listed company, company which accepts deposits from the public or companies which have borrowed amount exceeding Rs. 50 Crores from banks and public financial institutions.[2]

Further, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”), lays down that every listed company must adopt a whistle-blower policy and such a policy must be made aware to every employee.

Instances of whistleblowing complaints in listed companies in India are on the rise,[3] with prominent cases involving allegations of fund diversions and victimization. However, for private, unlisted companies, the situation is critical as they operate without clear whistleblowing policies. Employees may hesitate to report wrongdoing due to a lack of confidence in the confidentiality and anonymity provided. Furthermore, the treatment of frivolous complaints remains a concern, with ambiguous consequences and inadequate deterrence.

To address these issues, a robust legislation encompassing private companies is crucial. Such legislation would establish transparent whistleblowing regimes and protect the identity of whistleblowers. It would also provide clear guidelines on handling complaints and imposing suitable actions. By prioritizing the adoption and implementation of whistleblower legislation, India can promote a culture of transparency, accountability, and ethical conduct within private companies, ensuring the integrity of their operations.

The Lacunae in the Present Legislations

It becomes apparent that the present legislations for Whistleblowers, come with many shortcomings and lacunae, mainly due to their narrow approach and scope. The fact of the matter is that, there exists no legislations, which promote whistleblowing or protect whistle-blowers in private institutions.

The 1991 New Economic Policy, where the Indian Economy was opened up to the world, brought with itself many privately owned institutions, indulging in various fields of business, which directly affect the personal lives of the public. As time went by, and owing to more inclusive economic policies, the fine line which demarcated activities which were reserved, especially for the state-run organisations, and activities allotted to the private organisations, slowly started disappearing.

The effect of this is that, privately run institutions, now play a major role in the lives and livelihoods of the people of India, ranging from the services they provide to the people to the massive quantity of information and data they have. Now, in this situation, if there exists any malpractice or misdeeds within these companies, then that would have the ability to jeopardize, not only the fundamental rights of the people, but also their means to live and many several other repercussions

The entire ‘Theranos Scandal’ becomes a case in point for the above contention. It was a notorious case of corporate deception and fraud. Elizabeth Holmes, while studying at Stanford in 2003, developed the concept of a patch that could conduct blood tests using tiny samples for infectious diseases and antibiotic dosing. She filed a patent and founded Theranos, envisioning a future where traditional blood testing methods would be replaced by a more convenient and cost-effective alternative. The company aimed to use just a few drops of blood collected with a specialized pen-like device and analyze them in their miniaturized laboratory device named "Edison."

Holmes presented Theranos as a game-changer in the healthcare industry, promising easier, faster, and cheaper blood tests. The company targeted the US market dominated by Labcorp and Quest Diagnostics, who relied on large tubes of blood and had longer turnaround times. With endorsements from influential figures such as her Stanford professor Channing Robertson and former Secretary of State George Shultz, Theranos attracted significant attention and investments.

Theranos gained momentum in 2013 when it partnered with Walgreens, aiming to make its tests available in their stores nationwide. Holmes boasted about Theranos' technology being used by the US military in medivac helicopters, a claim later refuted. She became a media sensation, featured on magazine covers and recognized as one of the most influential people in the world. However, behind the scenes, Theranos was facing serious issues.

The "Edison" device, which was supposed to revolutionize blood testing, failed to deliver accurate results. Theranos resorted to using third-party equipment from companies like Siemens, while concealing this fact from patients, partners, and investors. Employees who raised concerns about the device's deficiencies were ignored, and those who persisted were terminated. Whistleblowers Tyler Shultz and Erika Cheung faced harassment and legal threats after exposing Theranos' fraudulent practices.

Investigative journalist John Carreyrou's exposé in the Wall Street Journal in 2015 brought Theranos' deception to light. The article revealed the company's use of modified demo devices and manipulation of test results to hide the device's failures. Regulatory authorities launched investigations, partners like Walgreens severed ties, and lawsuits piled up against Theranos. The company eventually shut down in 2018.

In the subsequent legal proceedings, Holmes and Balwani faced criminal charges. Holmes alleged that she was manipulated and abused by Balwani, while the prosecution accused her of misleading investors and patients. During her trial, evidence was presented showing how the "Edison" device produced unreliable results and how Holmes was aware of the company's wrongdoings. Holmes was found guilty on multiple charges, including fraud.

In an interview with John Carreyrou conducted shortly after the company laid off most of its staff in 2018[4], he provided key insights into the ground-breaking investigation and its aftermath. Carreyrou explains that from his first conversation with former Theranos lab director Alan Beam, he had a strong sense that he had stumbled upon a significant story. While he may not have immediately realized the full extent of the fraud, he knew it was a substantial revelation that would have a profound impact.

Carreyrou also reflected on the response he received from Theranos employees after his stories were published, describing a culture of intimidation and fear within the company. Initially, it was challenging to convince people to speak with him due to their fear of retribution. However, as time went on and Carreyrou continued his investigation, former employees began to open up, ultimately providing valuable insights into the company's history and operations.

One of the most striking takeaways from Carreyrou's experience was his realization that the wrongdoing at Theranos was primarily the work of two individuals: Elizabeth Holmes and Sunny Balwani. He emphasized that the majority of employees were not involved in the fraud and were not motivated to deceive others. Carreyrou was able to recognize the integrity and competence of many former employees, which became a significant aspect he aimed to capture in his book.

Holmes received a significant prison sentence of over 11 years, serving as a stern warning to corporate executives involved in misleading investors. The Theranos case highlighted the importance of fostering a speak-up culture within companies, where employees feel empowered to report misconduct without fear of reprisal. It also underscored the need for thorough due diligence by investors and accountability for the promises made by founders in the tech industry.

In a surprising turn of events, the infamous downfall of Theranos has not deterred investments in the health tech sector. Rather than dampening enthusiasm, the digital health startup landscape has experienced substantial growth in investment[5]. The first half of 2021 alone saw triple the number of investments compared to the total from 2016, with venture capitalists pouring billions of dollars into over two thousand companies. These figures indicate that the Theranos case did not hinder investor interest in pioneering healthcare ventures.

Unfortunately, an unintended consequence of the Theranos debacle has been the negative impact on female-led health tech companies. Elizabeth Holmes, as a prominent female entrepreneur associated with the scandal, has unfairly tarnished the reputation of other women in the industry. Funding for female-led digital health startups has experienced a decline, with the percentage of funding dropping from 17 percent in 2018 to 12 percent in recent years. This gender disparity in investment raises concerns and undermines the progress made in supporting and empowering women in the field. Whistleblowers, by exposing wrongdoing and promoting transparency, play a crucial role in driving positive change and fostering ethical practices within an industry. Ultimately, these setbacks should not overshadow the potential of whistleblowers to contribute to the long-term improvement of an industry.

Secondly, the recent times have also been witnessed to various corporate frauds in India. Be it the Yes Bank fraud, where imprudent lending practises, gross under-provisioning of Non-Performing Assets or the downfall of Jet Airways, due to overstatement of profits, accounting of fake invoices, all of these corporate frauds have impacted the cyclical economy of India in more than one way. [6]For instance, banks have a massive influence on the economy of any country. Due to the economy being cyclical, any misstep by one banking institutions, has as huge ripple effect on the entire economic system of banks. Thus, any malpractise by any of the private sector enterprise, would obviously, affect the operations and working of every other financial institution present in the country. The existence of an efficient Whistle Blower Policies, where proper safeguards and mechanism are implemented for the people to bring these malpractices to the forefront, could be the panacea against such corporate frauds and scams.

The South Korean Model: A Potential Source of Legislative Inspiration

South Korea, over the course of years has successfully implemented various whistle-blower policies, which has pushed it to 20th Rank in the Index of Public Integrity, which measures the extent to which corruption is controlled in any country and degree to which public resources are not spend on corrupt practises. [7]

The evolution of South Korean whistleblowing legislations shared many similarities with that of India. Even in South Korea, the scope of these legislations were limited to merely to the public sector until the year 2011. The 2008 Act on the Prevention of Corruption?and the Establishment and Management of the Anti-Corruption and Civil Rights Commission (ACRC Act), laid down various measures and safeguards to encourage public servants to report any malpractices in the government sector.[8]

The ACRC Act also provided various safety nets in the form of confidentiality, employment opportunities and physical protection. The Act, also inculcated an efficient system of rewards, which incentivised public servants to come to the forefront. While the amount of payment and other similar in-kind rewards vary on a case-to-case basis, the fact of the matter remains, that this system has actually led to the reporting of various corrupt practises and misdeeds in the government sector.

With the goal of increasing the ambit of the Whistle-blower policies, the Act on Protection of Public Interest Whistleblowers ( PPIW) was passed by the South Korean government in 2011. The Act empowered any public-spirited person to report any misdeed or malpractice occurring in the private sector as well.[9]Like ACRC Act, even the PPIW Act laid adequate safeguards and measures for the Whistleblowers. The various Articles of the Act lay down that any whistle-blower who wishes to report under the PPIW, may do so to the Government Complaints Counselling Center while maintaining their confidentiality.

Moreover, the PPIW operates in consonance with the ACRC Act, and also provides safety nets in the form of physical protection, economic opportunities and other confidentiality. The previously mentioned rewards systems, too are applicable under this act.

Thus, on a closer look, it becomes evident that the ACRC Act of South Korea shares many similarities with India’s 2014 Act on Whistleblowers Protection. It could also easily be ascertained that, South Korea, as a nation was able to ascertain the lacunae of having a legislation with scope exclusive to the government sector and thus implemented the PPIW Act.

It is high time now, that even India increases the scope of its legislation, to include private sector entities as well, as the private sector, as established before, has the potential to affect not only the livelihood of the people of our nation, but also their lives. Moreover, there have been various countries who have implemented such policies against private entities, thus India has various options to draw inspiration from and adapt it according to its own prevailing variables and societal, economic and political status quo.

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[1] NWC, What is a Whistleblower?, National Whistle Blower Center, ( December 12,2022, 11:30 AM)

https://www.whistleblowers.org/what-is-a-whistleblower.

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[2] Companies Act, 2013, § 177, No. 18, Acts of Parliament, 2013 (India).

[3] Mohak Kapoor, Sahil Kanuga, India: The Indian Disposition On Whistleblowing In A Private Company, Mondaq.com (November 4th, 2021)

https://www.mondaq.com/india/directors-and-officers/1128912/the-indian-disposition-on-whistleblowing-in-a-private-company

[4] Kate Knibbs, How John Carreyrou exposed the Theranos Scam, theringer.com (May 22, 2018, 8:36 AM) https://www.theringer.com/2018/5/22/17378494/bad-blood-theranos-john-carreyrou-interview

[5] Darius Tahir, Has health tech investing changed since Theranos? politico.com (August 11, 2021, 10:00 AM) https://www.politico.com/newsletters/future-pulse/2021/08/11/has-health-tech-investing-changed-since-theranos-797079

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[6] Naresh Kataria, Corporate Frauds in India, lawstreetindia.com, (December 14, 2022, 2:00 PM)

?https://www.lawstreetindia.com/experts/column?sid=488.

[7] NWC, South Korea’s Whistleblower Protection and Reward System, National Whistleblowers Center, ( December 12,2022,

??2:40 PM)

??www.whistleblowers.org/south-koreas-whistleblower-protection-and-reward-system..

[8] ?Id at 4.

[9] Supra note 4.