SEBI to consider new whistle-blower mechanism for auditors and other gate-keepers

In an endeavor to bring to light financial irregularities and other fraudulent transactions at listed companies, capital market regulator Securities and Exchange Board of India (SEBI) is planning to set up a new whistle-blower mechanism for auditors and other 'gate-keepers' to report such cases.

The proposed move has assumed significance in the wake of several auditors in the recent past deciding to exit from their audit mandate after certain listed companies failed to take remedial actions despite financial wrongdoings having been flagged in their auditors’ observations.

According to SEBI officials, a confidentiality mechanism can help in cases of financial frauds being reported at an early stage by auditors, independent directors and others considered to be ‘gate-keepers’ or ‘conscience keepers’.

SEBI has announced a new mechanism to reward informants with up to Rs. 1 crore cash for any credible inside information i.e. information on insider trading at listed companies. However, this is not applicable to corporate entities and professionals such as auditors and lawyers.

There were suggestions that auditors, lawyers and consultants on behalf of their firms should also be allowed to avail the ‘informant mechanism’. But, SEBI is of the view that corporate entities were as such under a duty to report. Moreover, lawyers are bound of confidentiality and it would be considered as unethical for them to complain against their clients.

However, as far as gate-keepers such as auditors are considered, a separate confidentiality mechanism is being proposed.

SEBI has also put in place sufficient safeguard to weed out unwanted tip-offs and frivolous information. SEBI is faced with several challenges in establishing links and procuring proof while probing cases like insider trading and other fraudulent activities, due to which investigation into such cases takes much longer than in other cases of market manipulation.