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

In 1959, an exception had been carved out in banking law to allow the state government to become a majority shareholder of the bank. This may now change.

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.