A leniency program, as the name suggests is a mechanism whereby the Authority, who has the power to impose certain punishments for any alleged violations of sort of law, can grant immunity from such punishment or reduce the quantum of such punishment or provide any other benefit. This mechanism more or less can be viewed as a parallel concept to the well-established, much-followed, and widely-accepted “Plea Bargaining”. Just as how an accused pleads guilty in exchange for a concession in the quantum of punishment during or prior to the trial, this mechanism also provides concessions to the person who would otherwise be penalized.
In this article, we will further explore this concept, meaning, the framework, and highlight issues, and challenges by drawing an analogy from the existing laws in the US.
LENIENCY PROGRAM IN THE US
In the US, through the Dodd-Frank Act of 2010, Section 21F-1 to Section 21F-17 were inserted in the Securities Exchange Act of 1934 which provides the provisions for the Whistle Blower program. As per these provisions, a whistleblower will be awarded by the Securities Exchange Commission for providing information revealing possible violations of the federal security laws. The provisions also specify the quantum of an award to be payable to such person, confidentiality, protection, etc. To be able to claim the status of the whistleblower, the informant must first inform the commission. Where an employee informed regarding such violations to the internal management and was then terminated from the job was not given the whistleblower status as he has failed to inform the same to the SEC. Moreover, any confidential agreements made between the employer and the employee which prohibit an employee from approaching the SEC, such agreement itself were considered to be in violation of securities laws. Even trying to determine the identity of a whistleblower was held to be violative of securities laws.
Thus, in the US, a sophisticated program has been in implementation to attract the whistleblowers to give information in exchange for an award and also by providing confidentiality and enough protection to such informants.
EXISTING LENIENCY PROGRAMS IN INDIA
The framework of the Leniency program is not a new arena in India. Under the Competition Law and Direct Taxation laws, we can observe the existence of the Leniency Program. Let us see the program under these regimes in brief.
Under Competition Law
A leniency program is a protection offered to those who come forward and submit information honestly, who would otherwise have to face stringent action by the Competition Authorities if the existence of a cartel is detected on its own. The Competition Commission of India (“CCI”) derives such power from the Competition Act, 2002 wherein if the CCI is satisfied that any producer, seller, distributor, trader, or service provider included in any cartel, which is alleged to have violated section 3 of the Competition Act, 2002, has made full and true disclosure in respect of the alleged violations and such disclosure is vital, it may impose upon such producer, seller, distributor, trader or service provider a lesser penalty as it may deem fit, than leviable under the Competition Act, 2002 or the rules or the regulations made thereunder. In this regard, the CCI also formulated regulations to lay down the procedure for granting such lesser penalties.
As per Section 46 of the Competition Act 2002, if an individual makes a full and true disclosure to the CCI regarding any alleged violation of the laws, then such informant will be imposed a lesser penalty subjected to other rules and regulations. The objective of having such a mechanism is to encourage and incentivize those who come forward to provide such information to the commission. It also provides protection to those who honestly provide such information. Also, if the informant has not complied or cooperated during the procedure after such disclosure, a penalty will be imposed by the commission.
The power to grant such immunity under the Competition Act 2002 is vested with the Commission itself under Section 46 of the Act. To further implement this provision, the Competition Commission of India (Lesser Penalty) Regulations, 2009 were enacted which specify the conditions, procedure, and the quantum of penalty to be waived off.
Under Income Tax Act, 1961
An assessee can make an application under Section 270AA of the Income Tax Act of 1961 to grant immunity from imposing a penalty under Section 270A if he follows certain criteria as specified therein. However, in the case of ex-parte assessment, an assessee can’t apply to seek immunity. Thus, even under IT Act, immunity can be granted upon satisfaction of certain criteria. Even here, the power to grant such immunity is vested with the Assessing Officer. It also provides a specified time period of one month to either accept or reject the application.
Section 24B of SEBI Act, 1992 and Section 23O of SCRA 1956
Under the SEBI framework, the leniency program can be observed under Section 24B of the SEBI Act 1992 and under Section 23-O of the SCRA (Securities Contracts Regulation Act) 1956. Through the SEBI (Amendment) Act 2002, Section 24B was inserted in the SEBI Act which came into effect on October 29, 2002. For SCRA, Section 23-O was inserted by the Securities Laws (Amendment) Act, 2004, Sec 11, with effect from October 12, 2004. Prior to these amendments, there were no such provisions to provide any immunity.
The provision under both SEBI Act and SCRA is the same which is as follows:
“(1) The Central Government may, on recommendation by the Securities and Exchange Board of India, if the Central Government is satisfied, that any person, who is alleged to have violated any of the provisions of this Act or the rules or the regulations made thereunder, has made a full and true disclosure in respect of alleged violation, grant to such person, subject to such conditions as it may think fit to impose, immunity from prosecution for any offence under this Act, or the rules or the regulations made thereunder or also from the imposition of any penalty under this Act with respect to the alleged violation:
Provided that no such immunity shall be granted by the Central Government in cases where the proceedings for the prosecution for any such offence have been instituted before the date of receipt of application for grant of such immunity:
Provided further that the recommendation of the Securities and Exchange Board of India under this sub-section shall not be binding upon the Central Government.
(2) An immunity granted to a person under sub-section (1) may, at any time, be withdrawn by the Central Government, if it is satisfied that such person had, in the course of the proceedings, not complied with the condition on which the immunity was granted or had given false evidence, and thereupon such person may be tried for the offence with respect to which the immunity was granted or for any other offence of which he appears to have been guilty in connection with the contravention and shall also become liable to the imposition of any penalty under this Act to which such person would have been liable, had not such immunity been granted.]”6
Under this framework, if a person has made full disclosure of any alleged violations of the SEBI Act or the SCRA, then the SEBI can forward a recommendation to the Central Government, which if satisfied can grant immunity to such person. This can be by way of providing immunity from prosecution of any offence or by providing immunity from imposing a penalty for any offence either under SEBI Act or under SCRA or any other Rules or Regulations.
As per this provision under the SEBI framework, it is not the SEBI that grants immunity to the informant (whistleblower). SEBI only recommends to the Central Government which in turn has to decide whether such immunity can be granted or not. Thus the power here is not vested with SEBI, unlike the scenario that exists under Competition Act and under Income Tax Act.
When Leniency can be granted
The provision is clear enough that in every case immunity will not be granted. Further, the second proviso to this provision makes it clear that the recommendation given by SEBI is not binding on the Central Government, thus making it complete discretion of the Central Government whether to grant any immunity or not. Also, while granting such immunity, the Central Government can impose conditions while granting the same.
Thus the leniency will be granted only when the Central Government is satisfied that the person has made a full and true disclosure of any violation
Limitations to granting Leniency
There are few instances where the leniency will not be granted even after making a full and true disclosure of the violations of any law or rules or regulations.
- As per the first proviso to the provision, no immunity shall be given if the proceedings to prosecute the person for such offence have already been instituted prior to the making of such disclosure i.e, prior to the receiving of the application to grant the immunity.
- Another situation is where the person who has disclosed the information regarding violation has not been complying with the conditions stipulated while granting the immunity, such immunity can be withdrawn. And, such person can be tried for the offence for which the immunity was granted or for any other offence where he is guilty of any contraventions. Thus, appropriate penalty can be imposed for such offence as if no such immunity has been granted to that person.
- Further, if it was found that the person had adduced false evidence during the course of the proceedings, even in such case, the immunity granted can be withdrawn and the person can be subjected to the proceedings as if no such immunity was granted earlier.
ISSUES AND CHALLENGES UNDER THE INDIAN FRAMEWORK
While it is true that there is a provision to give some sort of leniency to those who honestly approach the SEBI regarding any violations, still the provisions are not strong enough to serve the purpose as intended. The author has thus identified the following issues and challenges that are prone to be faced during the implementation of these provisions.
Lack of Power to SEBI
Under both the SEBI Act of 1992 and the SCRA 1956 the power to grant the immunity is vested with the Central Government. Since a there exists special regulatory body that deals with the issues arising from the securities market concerns, it would be better if the SEBI is vested with such powers. If SEBI has the power, upon satisfaction of full and true disclosure, it can grant the immunity then and there, instead of sending a recommendation to the Central Government and waiting for its approval.
Lack of Limitation Period
Since the power lies with Central Government, it becomes a time-consuming process to get approval from the central government every time such recommendation is made by the SEBI. As, nowhere either under Section 24B of the SEBI Act or under Section 23-O of the SCRA a time period is specified, this leaves a large vacuum. Since no time period is specified, within which the Central Government has to either approve or reject the claim, it may take as much time as it wants, which can delay the whole process and defeat the purpose of having such an immunity program.
Also, no time period is specified within which a recommendation has to be sent to the Central Government by the SEBI. If the Board makes delays in sending the recommendation after receiving an application from a person, this will also retard the entire process.
Lack of Confidentiality
Unlike, the provisions under the US Securities Exchange Act of 1934, in the Indian leniency program there is no provision speaking of the need to maintain the details of the informant or the whistleblower confidential. Maintaining confidentiality of the informants is necessary such that the identity will not be revealed to the outside world. The confidentiality clause is crucial to attracting more and more persons to come forward to the Board and disclose any sort of violations.
Lack of Protection
Lack of confidentiality will result in a lack of protection for the person who approaches the Board to disclose any potential information. This in turn will also affect the number of persons who volunteer to provide such information.
KOTAK COMMITTEE REPORT RECOMMENDATION
The rationale behind having a leniency program is to assist SEBI in the proper implementation of the law, for effective and easy investigation making sure that there is proper compliance to the securities laws, rules, and regulations.9 In this report, the committee recommended that such power has to be vested in SEBI for granting immunity and for providing protection against the victimization of whistleblowers, which will be done one-to-one basis. Further, the committee recommended more rules and regulations to grant such benefits and the procedure for granting the same. Thus, the committee recommended inserting the following section in both SEBI Act and SCRA as following:
“(1) The Board may, if it is satisfied that any person (the informant) who has disclosed to the Board any alleged violation(s) of this Act or rules or regulations made thereunder and has made full, true and vital disclosures in respect of the alleged violation(s), impose a lesser penalty or liability than that prescribed or waive the same, as it may deem fit, in respect of the informant, to the extent and in the manner as may be prescribed:
Provided also that lesser penalty or liability or waiver of the same shall not be imposed/granted by the Board if the informant does not continue to cooperate with the Board till the completion of the proceedings before the Board, and if required, shall cooperate in any further legal proceedings:
Provided also that the Board may, if it is satisfied that the informant had in the course of proceedings,—
a) not complied with the condition on which the lesser penalty or liability was imposed or waiver was granted by the Board; or
b) had given false evidence or material misstatements; or
c) the disclosure made is not vital,
and thereupon the informant may be tried for the violation/offence with respect to which lesser penalty or liability was imposed or waiver was granted by the Board and shall also be liable to the imposition of penalty/liability to which the informant has been liable, had lesser penalty or liability not been imposed or waiver not been granted.
(2) The discretion of the Board, in regard to reduction in penalty or liability or grant of waiver under this Act, shall be exercised having due regard to –
a) the stage at which the informant comes forward with the disclosure;
b) the evidence already in possession of the Board;
c) the quality of the information provided by the informant;
d) role played by the informant in the said violations; and
e) the entire facts and circumstances of the case.
(3) The Board shall treat as confidential the identity of the informant and the information obtained from such informant and shall not disclose the identity or the information obtained unless
a) the disclosure is required by law; or
b) the informant has agreed to such disclosure in writing, which has not been withdrawn in writing until the disclosure is made; or
c) there has been a public disclosure by the informant.”
(4) The Board may require companies to offer protection to the informant or any other person against victimization in the manner as may be prescribed.”
This recommended section seems to be a holistic provision, which would address most of the lacunae that are present in the existing framework under the SEBI Act and SCRA. This will fill the gap with respect to empowering SEBI to grant immunity, when immunity can be granted when a granted immunity can be waived, how the immunity has to be granted, confidentiality, and protection of the whistleblower.
SUGGESTIONS AND CONCLUSION
While the idea of having a leniency program is a way forward approach for better implementation of the securities laws, as discussed above, it is not sufficient enough to cater to all the needs that crop up while enforcing the same. Adopting the recommendation of the Kotak Committee can solve major challenges that are evident with the current legal framework.
However, still, there is no proper rule or regulation regarding the time frame within which such an application for a grant of immunity has to be processed. Also, it needs to be clarified if such approval or rejection of granting immunity is final or can there be an appeal against such approval or rejection. If so, then the forum to which such appeal lies has to be clarified. Another clarity has to be provided on the point that if an employee discloses information, would that attract any legal consequence for breach of any employment contract, containing a confidential clause.
On all, confidentiality and protection of the whistleblowers are a must and unless such a guarantee is given through the law, we can’t expect more people to disclose any alleged violations of laws.
- 15 U.S.C. 78u-6 §§ 240.21F-1 through § 240.21F-17.
- Dig. Realty Tr., Inc. v. Somers – 138 S. Ct. 767 (2018).
- In the Matter of KBR, Inc., Exchange Act Release No. 34-74619, 111 SEC Docket 4 (Apr. 1, 2015) (“KBR Order”).
- In re HomeStreet, Inc. and Darrell Van Amen, Exchange Act Release No. 34-79844, 115 SEC Docket 18 (Jan. 19, 2017).
- Section 270AA(4) of Income Tax Act 1961.
- Section 24B of Securities Exchange Board of India Act, 1992 & Section 23-O of Securities contract (Regulation) Act, 1956.
- Section 24B (2) of Securities Exchange Board of India Act, 1992 & Section 23-O (2) of Securities Contract (Regulation) Act, 1956.
- Chapter X, Leniency Mechanism, Report of the Committee on Corporate Governance- Kotak Committee Report, October 2017, available at: https://www.nfcg.in/KOTAKCOMMITTEREPORT.pdf, (last accessed on March 17, 2021).