Section 177 of Companies Act 2013

 

Introduction 

Section 177 of the Companies Act, 2013 is an important provision that outlines the duties and responsibilities of the board of directors of a company with respect to the establishment of a vigil mechanism. A vigil mechanism is a system designed to enable the directors and employees of a company to report any instances of unethical or illegal conduct without fear of retaliation. In this blog, we will explore the key aspects of Section 177 and look at some relevant lawsuits that have helped to shape the interpretation of this provision.

Objective of Section 177 of Company Act, 2013

The main objective of Section 177 is to ensure that companies have an effective mechanism for reporting and dealing with misconduct. The provision requires every listed company and every other company to have paid-up share capital of Rs. 10 crores or more to establish a vigil mechanism for directors and employees to report genuine concerns about unethical behaviour, actual or suspected fraud, or violation of the company's code of conduct.

 Key requirements of Section 177

One of the key requirements of Section 177 is that the vigil mechanism must provide adequate safeguards against the victimization of persons who use such a mechanism. This means that employees or directors who report concerns about misconduct must be protected from any adverse action taken against them by the company or its employees.

 Relevant case

A relevant case in this regard is that of Satyam Computer Services Limited. In 2009, Satyam's chairman B. Ramalinga Raju admitted to financial irregularities in the company that had been ongoing for several years. It was alleged that the company's auditors had failed to detect the fraud and that the board of directors had also been complicit in the wrongdoing. The Satyam scandal prompted the Indian government to introduce stricter corporate governance rules, including the Companies Act 2013, which included Section 177. 

Another relevant case is that of Infosys. In 2017, an anonymous whistleblower alleged that the company's top executives had engaged in unethical practices to boost revenue and profits. The whistleblower claimed that the company's CEO had bypassed standard review processes to approve large deals and that the company had inflated revenues and profits in order to meet targets. Infosys conducted an investigation into the allegations and found no evidence of wrongdoing. However, the case highlights the importance of having a robust vigil mechanism in place to enable employees to report concerns about misconduct.

 Conclusion 

In conclusion, Section 177 of the Companies Act 2013 is an important provision that emphasizes the need for companies to establish effective vigil mechanisms to address concerns about unethical conduct, fraud, or violating the company's code of conduct. The provision underscores the importance of protecting whistleblowers from victimization and ensuring that the board of directors takes responsibility for establishing an effective vigil mechanism. Satyam Computer's case serves as reminder of the need for companies to take the provisions of Section 177 seriously and ensure that they have an effective system in place to address any concerns that may arise.