RBI recommends shrinking J&K government share in Jammu and Kashmir Bank

Five years after New Delhi scrapped Jammu and Kashmir’s special status under Article 370 of the Indian Constitution, the Reserve Bank of India has recommended changes that might radically change the ownership of the erstwhile state’s premier financial institution – the Jammu and Kashmir Bank Limited.

The bank has a unique status in the country’s banking sector. For one, the major shareholder of the bank was the government of the erstwhile Jammu and Kashmir state – and, currently, the Union territory governments of Jammu and Kashmir and Ladakh. Second, while in other banks, the voting rights of shareholders are capped at 10%, no matter the size of their stake, the Jammu and Kashmir Bank Limited is exempt from that ceiling.

In a communication dated December 6, 2023, the RBI has urged the Union government to withdraw this exemption. Scroll has seen a copy of this letter.

The Reserve Bank of India has also recommended reducing the Jammu and Kashmir and Ladakh governments’ shareholding in the bank to below the regulatory threshold of 26%. As of March 2024, the governments of Union territories of Jammu and Kashmir and Ladakh hold a majority stake of 59.4% in the bank.

A 65-year-old exemption

The Banking Regulation Act, 1949, restricts shareholders in a banking company from exercising voting rights in excess of 10% of the total voting rights of all the shareholders of the company.

Section 12 (2) of the Act states: “No person holding shares in a banking company shall, in respect of any shares held by him, exercise voting rights on poll in excess of ten per cent of the total voting rights of all the shareholders of the banking company.”

It essentially means that an investor will not have more than 10% voting rights even if he holds shares above 10%. Voting rights give a shareholder a say in the decision-making of a company.

While this provision of the 1949 act applied to all banks in India, in June 1959, the central government, on the recommendations of the Reserve Bank of India, had notified that the provision will not apply to the state of Jammu and Kashmir.

That translated into Jammu and Kashmir Bank having a unique position within India’s banking sector. “It meant that the Jammu and Kashmir government owned and controlled the bank,” said an expert who understands the banking industry in Jammu and Kashmir, and who asked not to be identified.

Sixty-five years later, the banking regulator seems to have reconsidered its stance.

In the December 6, 2023 communication to the secretary of the department of economic affairs in the Union finance ministry, the Reserve Bank of India has underlined the need for aligning the Jammu and Kashmir Bank with standard regulatory frameworks.

“The exemption mentioned above is not available to any other banking company operating in India,” the communication reads while referring to the exemption granted to Jammu and Kashmir in 1959.

If acted upon, the decision will bring a pivotal shift in the regulatory treatment of Jammu and Kashmir Bank and will place it within the broader framework governing banking institutions nationwide.

“The withdrawal of this exemption means that now there is a window in which the local government of Jammu and Kashmir and Ladakh will lose its ownership. At best, their ownership or stake can go up to a maximum 26% and not beyond that,” the expert said.

This will also open the door to other investors. “When the stake of an investor is capped at 26%, it means the stake held by him will be overtaken by some other investor,” he added.

A unique bank in India

Incorporated in 1938, Jammu and Kashmir Bank is listed as an “old private-sector bank” under the Banking Regulation Act of 1949.

This unique status, granted a decade after the accession of the princely state of Jammu and Kashmir to India, was a “guarantee from the government of India that the ownership of the bank will always remain with the state government”, said the banking expert. “This was meant to protect the interests of Jammu and Kashmir state, which was yet to emerge from the effects of a long despotic Dogra rule.”

Jammu and Kashmir was ruled by the Dogra kings from 1846 to 1947 – a period believed to be particularly exploitative for the majority Muslim community, who had no land rights, and were subject to heavy taxation, lack of education and job opportunities.

“The arrangement [at the bank] brought the government of Jammu and Kashmir on a par with the government of India in terms of the powers to own a bank,” explained another banking expert, who also did not wish to be identified.

This has continued even after the scrapping of Jammu and Kashmir’s special status and statehood. While the Jammu and Kashmir government owns 55.24% stake in the bank, the Ladakh government owns 4.16%.

The bank also enjoys the status of being an exclusive agent for carrying out banking business for the governments of Jammu and Kashmir and Ladakh.

‘Mainstream the bank’

The RBI’s directive argued that reducing the shareholding of the “promoters to below 26%” can “provide an opportunity to the bank to tap markets, raise capital from other investors and reduce dependency on the Government for raising capital.”

Under the categorisation of banks in India, the Jammu and Kashmir Bank falls in the private bank category. In private banks, promoters can have 26% shareholding. Their voting rights will also be on the same basis.

“While considering the above position, we would like to emphasise on the need to mainstream the bank by withdrawing the special status and exemptions,” the communication said, insisting this was needed to ensure the bank's long-term sustainability.

“Therefore, the Government of India may consider withdrawing the notification dated June 30, 1959 exempting the J&K Bank from the applicability of Section 12(2) of the BR Act, 1949,” it reads. “The timeline for such a dilution may be decided by the Government of India.”

So far, the Union government has not acted on the recommendations of the Reserve Bank of India.