Extending Vigil Mechanism To Unlisted Companies Is Policy Decision; Delhi High Court Asks MCA To Consider After Consultation

The Delhi High Court has observed that the question of extending the vigil/whistleblower mechanism prescribed under Section 177 of the Companies Act, 2013, to unlisted companies is a matter of legislative policy and cannot be directed by courts through judicial orders.

A Division Bench of Justices Prathiba M. Singh and Madhu Jain thus directed the Union Ministry of Corporate Affairs to undertake a stakeholder consultation in this regard, and thereafter take a decision, within a reasonable period, as to whether establishment of vigil mechanism needs to be extended to any other companies beyond what is already prescribed.

“This Court is of the view that it is for Government to decide from time to time as to for which categories of companies or other legal entities, the vigil mechanism is to be mandatorily established and such a decision would be taken by the Government after adequate stakeholder consultation from time to time as a matter of its policy,” it observed.

The court was dealing with petitions challenging provisions of the Companies Act, 2013, the Companies (Meetings of Board and its Powers) Rules, 2014, and SEBI's Listing Obligations and Disclosure Requirements Regulations, 2015, on the ground that they do not provide adequate safeguards for whistleblowers and are limited in their application.

Petitioners, former employees of private companies, contended that the existing vigil mechanism framework is inadequate and does not sufficiently protect employees from victimisation. They further argued that such mechanisms should be made mandatory for all companies, including unlisted entities.

Opposing the plea, the Union Government and SEBI submitted that the Companies Act and the Rules already mandate a vigil mechanism for listed companies and certain classes of companies, including those accepting public deposits or having significant borrowings.

The Court, after examining Section 177 of the Companies Act and Rule 7 of the 2014 Rules, noted that the law already prescribes categories of companies where such mechanisms are mandatory, and also provides safeguards against victimisation along with access to the Audit Committee.

It thus held that whether such mechanisms should be extended to other categories of companies, including unlisted entities, is a matter of policy.

“No Mandamus or direction can be issued by the Court directing the Government to extend vigil mechanisms to other categories of companies, than those already prescribed. At best, the Court can only direct the Government to hold a stakeholder consultation in this regard and take a decision as to whether the vigil mechanism is to be extended to other classes of companies or not,” the Court said and disposed of the petition.

For Petitioner: Advocates Tishampati Sen, Riddhi Sancheti, Mukul Kulhari, Anurag Anand

For Respondents: Rajesh Gogna, CGSC for R1; Dhaval Mehrotra and Aditi Desai, Advs. for SEBI; Amit Acharya, GP. Pravin Bahadur, S. Anjani Kumar, Advs. for R3.