Explainer: Why SC saw a class action suit as a fit case for private arbitration

Why has the SC ruling become controversial?

The controversy stems from the fact that the Supreme Court (SC) has effectively brought India’s first successful shareholder class action under Section 245 of the Companies Act to an abrupt halt and referred the dispute to arbitration.

The case had been hailed as a landmark for minority shareholder rights because it was the first class action suit to clear the maintainability stage before both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT).

Critics argue that once a class action is admitted, it becomes a representative proceeding on behalf of thousands of shareholders. Some question whether a substituted petitioner and the firm can effectively agree to move such a dispute to arbitration without the consent of the wider shareholder class.

Others say the SC merely recorded a consensual arrangement between the parties and left all substantive issues open for adjudication before an arbitrator. The decision has sparked a debate over whether arbitration can override a statutory class action mechanism designed to protect dispersed minority shareholders.

What exactly was the dispute about?

The dispute originated from allegations by minority shareholders that Jindal Poly Films (JPF) had undertaken a series of related-party transactions involving promoter-linked entities at undervalued prices, allegedly causing losses exceeding Rs 2,500 crore.

A group of minority shareholders holding 4.99% of the company’s equity approached the NCLT to seek relief on behalf of a larger class of investors. JPF argued that the dispute was more akin to oppression and mismanagement proceedings under Sections 241 and 242 rather than a class action under Section 245.

It contended that Section 245 was intended primarily for preventive relief and should not apply to past or completed transactions. Both the NCLT and the NCLAT rejected these objections and allowed the proceedings to continue.

The case was therefore seen as a test of whether India’s shareholder class action framework could become a meaningful corporate governance tool.

Why was this case so significant?

Section 245 was introduced after the Satyam scandal to strengthen investor protection. It allows shareholders or depositors to collectively sue management, directors, auditors or advisers when company affairs are conducted in a manner prejudicial to their interests.

Yet, it remained largely untested. The JPF matter changed that. In February 2026, the NCLT admitted the petition, making it the first major shareholder class action to clear the threshold stage. The NCLAT also upheld that order. More importantly, both held that Section 245 can be used against ongoing conduct as well as past and concluded transactions.

Many corporate lawyers viewed the decision as potentially transformative. It suggested that minority shareholders could challenge large transactions, seek compensation and hold promoters accountable through a collective mechanism. The case was therefore seen as a possible turning point in India’s corporate governance framework.

What did the SC actually decide?

The SC did not rule on whether the allegations were correct. Instead, it acted on a joint request from JPF and Monet Securities (the substituted petitioner after the original lead petitioner exited the proceedings on selling his shares) and referred the dispute to arbitration.

It appointed former Chief Justice Manindra Mohan Shrivastava as the sole arbitrator and specified Delhi as the seat of arbitration. It kept all substantive claims and defences open for adjudication before the arbitrator.

The controversy arises because arbitration is a private dispute resolution mechanism, whereas a class action is intended to represent a wider body of affected shareholders.

Critics argue that the ruling may allow a representative action to be converted into a private proceeding, potentially diluting protections available to investors. Supporters, however, argue that the Court merely facilitated an agreed dispute-resolution route.

What could be the long-term impact?

The big question is whether the ruling weakens or merely postpones the evolution of shareholder class actions in India.
On one hand, the order may discourage future class action suits if investors believe that even a successfully admitted petition can eventually be diverted into private arbitration.

This can reduce the deterrent value of Section 245 and make minority shareholders less willing to undertake the cost and effort involved in such proceedings. On the other hand, the underlying legal principles established by the NCLT and the NCLAT remain influential. Those tribunals clarified issues such as share-holder thresholds, maintainability and the applicability of Section 245 to completed transactions.

The larger issue is whether class actions should be treated as purely private disputes or as public-interest corporate governance mechanisms. As Indian capital markets deepen and retail participation expands, courts may increasingly have to balance the efficiency of arbitration against the need to protect dispersed shareholders.

The JPF case has thus become far more than a dispute about one firm—it is now a debate about the future of shareholder rights in India.