Disqualification of Arbitrator: Does Shareholding Create a Conflict of Interest?
No, not automatically. The Supreme Court has made it clear that an arbitrator holding shares in one of the parties isn’t disqualified just because of that. What matters is whether the shareholding is material, meaning big enough to give the arbitrator a real financial stake or influence over the party.
That sounds simple. In practice, it’s one of the most argued points in arbitration challenges in India, so let’s walk through it properly.
Table of Contents
What the Supreme Court decided
In, a bench looked at a question that comes up more often than you’d think: if an arbitrator owns shares in a company that is a party to the dispute, is the arbitrator ineligible?
The Court said no to a blanket rule. It refused to hold that any shareholding, however small, wipes out the arbitrator’s authority. Instead, it asked whether the interest was significant enough to affect the arbitrator’s independence.
The background in simple terms
Under the Arbitration and Conciliation Act, 1996, there are two separate ways an arbitrator can be pushed out, and people mix them up all the time.
Section 12(5) is the hard one. If the arbitrator’s relationship with the parties or the dispute falls under the Seventh Schedule, the person is simply ineligible. It doesn’t matter what the parties agreed earlier. The arbitrator’s mandate can end by operation of law.
Section 12(3) is softer. It applies where there are justifiable doubts about the arbitrator’s independence or impartiality. Here, the party has to raise the challenge and show why the doubt is reasonable.
So the real question in a shareholding case is: which door are you walking through? If the shareholding fits a Seventh Schedule category, it’s 12(5). If it doesn’t, you’re arguing doubt under 12(3), and a tiny shareholding rarely clears that bar.
Shareholding and Conflict of Interest : Legal Position
Private vs Public Company Distinction
The Court drew a clear distinction between private and public companies:
- Private Companies (Entry 17):
Even minimal shareholding may result in disqualification. This is because ownership is concentrated, and even a small stake can imply control. - Public Companies (Entry 32):
However, disqualification depends on materiality. In other words, only substantial shareholding that creates a real financial interest will attract disqualification.
Thus, minor or portfolio investments such as mutual fund holdings do not automatically disqualify an arbitrator.
Private company vs public company
This is where the distinction really matters.
Private company | Public (listed) company | |
Typical concern | Shares in a closely held business can carry real influence | Small holdings are usually just investments |
How strict the approach is | Stricter. Even a modest holding may be a problem | More relaxed. Only a substantial holding creates a real financial interest |
Practical risk | Disclose and expect a challenge | Disclose, but a challenge is unlikely to succeed on a small holding |
The logic is easy to follow. In a small private company, a shareholder often has a voice in how the business runs. In a large listed company, a few shares in a mutual fund or demat account don’t give anyone a stake in the outcome of a particular dispute.
The test the Court applied
Think of it as an objective test. Would a reasonable, fair-minded person, knowing all the facts, think this arbitrator might lean towards one side because of the shareholding?
The Court looked at things like:
- how many shares the arbitrator held, and what share of the company that represented
- whether the holding was direct or indirect
- whether the shares gave any control or influence over the company
- whether the arbitrator would actually gain or lose depending on the award
If the answer to those is “not really,” the shareholding alone won’t disqualify the arbitrator.
How this fits with earlier cases
The Supreme Court has been fairly firm on neutrality for years. In TRF Ltd. v. Energo Engineering Projects and Perkins Eastman Architects v. HSCC, it held that a person who is ineligible to act as an arbitrator can’t appoint someone else either. In HRD Corporation v. GAIL, it dealt with the line between disclosure and disqualification.
Those cases are about unilateral appointments and statutory ineligibility. The shareholding judgment adds a useful limit: the rule against bias is strict, but it isn’t meant to catch every remote connection.
Objective Test for Disqualification of Arbitrator
The Court emphasised an objective test. In simple terms, the key question is:
Would a fair-minded and informed observer perceive a real possibility of bias?
Accordingly, the Court rejected a blanket rule that any shareholding leads to disqualification. Instead, it focused on whether the interest is significant enough to influence the arbitrator’s decision.
Disclosure Obligations and Practical Guidelines
Mandatory Disclosure by Arbitrators
Arbitrators must disclose:
- Direct and indirect shareholding
- Nature of investment (personal or portfolio)
- Value and percentage of shares
- Any advisory or board relationships
Moreover, upfront disclosure ensures transparency and builds trust in the arbitral process.
Strategy for Challenging Arbitrators
Parties should:
- Provide evidence of materiality (not assumptions)
- Rely on financial disclosures and SEBI filings
- Avoid vague allegations of bias
Consequently, evidence-based challenges are more likely to succeed.
Alignment with Previous Supreme Court Judgments
This ruling aligns with earlier decisions such as:
- HRD Corporation v. GAIL (2018) – Mandatory disqualification under Seventh Schedule
- Perkins Eastman v. HSCC – Ineligibility of interested arbitrators
However, the present judgment introduces a balanced approach, preventing misuse of minor disclosures.
Impact on Arbitration Practice in India
This decision strengthens India’s arbitration framework. On the one hand, it protects impartiality. On the other hand, it prevents unnecessary disqualification of arbitrators with minor investments.
Furthermore, it aligns with international standards like the IBA Guidelines on Conflicts of Interest. As a result, India continues to promote arbitration-friendly reforms.
Recent developments worth knowing
The law on Section 12(5) has kept moving this year.
In Bhadra International (India) Pvt. Ltd. v. Airports Authority of India (5 January 2026), the Supreme Court held that taking part in the proceedings doesn’t waive an arbitrator’s ineligibility. Waiver is possible only through an express written agreement made after the dispute arises.
And on 30 September 2026, a Division Bench of the Delhi High Court held that Section 12(5) can’t be applied retrospectively to knock out a pre-2015 unilateral appointment of a serving employee as sole arbitrator.
Put these together and you get a clear picture: courts take statutory ineligibility seriously, but they also look closely at whether a case really falls within the Seventh Schedule.
Conclusion
The disqualification of an arbitrator for holding shares in a party is not an automatic matter. The Supreme Court has made it clear that a blanket rule would be unfair and unworkable. What counts is whether the shareholding is material enough to give the arbitrator a real financial interest or influence, and whether a reasonable person would see a genuine risk of bias.
For parties, the takeaway is practical. Insist on written disclosure at the start and check the facts against both the Fifth and Seventh Schedules. Raise any objection early, and remember that under Section 12(5) a waiver must be express and in writing. If the shareholding is small, passive and unconnected to the outcome, a challenge is unlikely to succeed. If it’s substantial, or sits in a closely held company, you have a real argument.
Every case turns on its facts, so it’s worth getting advice before you challenge an appointment or defend one. If you’re dealing with a question like this, the team at Anirudh Associates can help.
Frequently Asked Questions
No. The Supreme Court has held that mere shareholding, without material influence or a real likelihood of bias, doesn’t automatically trigger disqualification.
Section 12(5) makes a person ineligible if they fall within the Seventh Schedule, with no need to prove bias. Section 12(3) applies where there are justifiable doubts about independence or impartiality, which the challenging party has to establish.
Yes, but only through an express written agreement made after the dispute has arisen. Participating in the proceedings doesn’t count.
As soon as you learn about the shareholding. Delay can be used against you.
Yes. Holdings in closely held private companies are looked at more strictly than small holdings in listed companies.
