Establishment of a Vigil Mechanism

  • Act/Rule/Legislation

  • Online Link to Act/Rule/Legislation

  • Initial Setup or Ongoing Maintenance

    Ongoing compliance requirement

  • Filing and Maintenance Requirements

    The vigil mechanism is required to provide for adequate safeguards against victimization of persons who use such mechanism and make provision for direct access to the chairperson of the audit committee in appropriate or exceptional cases. However, the details of establishment of such mechanism are required to be disclosed by the company on its website, if any, and in the board’s report.

    The following classes of companies are required to establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances:
    (a) Every listed company;
    (b) companies which accept deposits from the public;
    (c) companies which have borrowed money from banks and public financial institutions in excess of Rs. 50,00,00,000 (Rupees Fifty Crores only).

    The following sections govern various parts of the "Vigil Mechanism"

    Sec 177 (9) - Establish a vigil mechanism
    •Every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed

    Sec 177(10) - Safeguard against victimization
    •Policy against victimization of persons using the mechanism
    •Provide for access to Chairperson of Audit Committee in appropriate or exceptional cases
    •Display policy on the company website, if any

    “Vigil mechanism” to be included in Board’s report
    •Schedule IV - Code for independent directors
    •Ascertain and ensure that the company has an adequate and functional mechanism
    •Ensure that interests of a person who uses the mechanism are not prejudicially affected

  • Penalty

    The company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

  • Application Guidelines / Responsible Persons / Comments

    Applicability
    Listed companies
    Companies which accept public deposits
    Companies which have borrowed money from banks and public financial institutions in excess of 50 crores
    Operation of the vigil mechanism
    The Audit Committee to oversee the operation of the mechanism
    For companies that do not need an audit committee, a director to be nominated by the Board to oversee
    Companies may consider developing a fraud response plan and obtaining Audit Committee's approval
    Audit Committee member to recuse if conflicted
    If a member of the Audit committee is conflicted in a given case, he should recuse himself
    Safeguard against victimization
    The mechanism should provide for adequate safeguards against victimization
    Frivolous complaints
    Audit committee or the director to take suitable action (including reprimand) against repeated frivolous complaints
    Vigil mechanism acts as a buffer for the management. As per the guidance note issued by ICAI on fraud reporting under section 143 (12), in case a fraud has been reported through the company’s vigil mechanism and has been remediated by the management and informed to the auditor, then he will not be required to report the same under section 143(12), as he has not per se identified the fraud.