Ethics and integrity: anti-bribery, whistleblowers and insider trading

Integrity is the part of governance that is hardest to see and most damaging when it fails. A bribery case can cost a company its licences and contracts. An insider trading scandal destroys trust in management. A whistleblower complaint that was ignored often becomes the starting point of a later fraud investigation.

Indian law now covers most of these areas. Companies can be held liable for bribes paid on their behalf. Listed companies must run a whistleblower system that reaches the audit committee. Insiders face strict rules on trading in their own company's shares. And listed companies must disclose material events quickly.

For analysts, the rules themselves matter less than the signals companies leave behind: whistleblower complaints, regulatory penalties, delayed disclosures and unusual trading before announcements.

Code of conduct

Under LODR Regulation 17(5), the board must set a code of conduct for all directors and senior management, and they must confirm each year that they have followed it.

Anti-bribery

The Prevention of Corruption Act was amended in 2018. Under Section 9, a commercial organisation commits an offence if any person associated with it gives a bribe to a public servant to win or keep business for it. The company can defend itself by showing it had adequate procedures in place to prevent such conduct. This makes anti-bribery policies, training and controls a legal defence, not just good practice.

Whistleblowers: the vigil mechanism

Section 177(9) of the Companies Act and LODR Regulation 22 require listed companies to set up a vigil mechanism, so that directors and employees can report genuine concerns. It must protect whistleblowers from victimisation and give them direct access to the chair of the audit committee in suitable cases.

Insider trading (SEBI PIT Regulations 2015)

• UPSI: unpublished price sensitive information, such as financial results, dividends, changes in capital, mergers and acquisitions, and changes in key managers. SEBI has widened the list over time.
• Insiders: directors, employees and others with access to UPSI, called designated persons, along with their relatives
• Trading window: closes from the end of each quarter until 48 hours after the results are published
• Contra trades: designated persons cannot make an opposite trade within six months of a trade
• Digital database: companies must keep a structured digital record of everyone with whom UPSI is shared
• Trading plans: insiders can trade under a pre-announced plan that is disclosed in advance
• Informants: SEBI runs an informant mechanism that offers rewards for tips on insider trading

Material event disclosure (LODR Regulation 30)

Listed companies must tell the stock exchanges about material events and information. Since the June 2023 amendments:

• Materiality test: an event is material if its value or impact exceeds the lowest of 2% of turnover, 2% of net worth, or 5% of the average absolute profit or loss of the last three years
• Timelines: within 30 minutes of the end of a board meeting for board decisions; within 12 hours for events that arise inside the company; within 24 hours for events that arise outside it
• Market rumours: large listed companies must confirm, deny or clarify reports of specific material events in mainstream media
• Some events are always material, including fraud or defaults by the company or its promoters and directors, resignations of auditors and independent directors, and orders from regulators

Auditor fraud reporting

Under Section 143(12), auditors must report suspected frauds of ₹1 crore or more to the central government.

BRSR Principle 1

Principle 1 of the BRSR asks for disclosures on ethics: anti-corruption policies, fines and penalties paid, disciplinary action for bribery or corruption, and complaints about conflicts of interest.