The Reserve Bank of India (RBI) has recommended changes that may greatly impact the ownership of the Jammu and Kashmir Bank Limited, the premier financial institution of the erstwhile state of Jammu and Kashmir. This recommendation comes five years after New Delhi revoked Jammu and Kashmir’s special status under Article 370 of the Indian Constitution.
Unique Status and Exemption of Jammu and Kashmir Bank
The Jammu and Kashmir Bank holds a unique position in India’s banking sector. Firstly, the major shareholder of the bank is the government of Jammu and Kashmir, and currently, the Union territory governments of Jammu and Kashmir and Ladakh. Secondly, unlike other banks where voting rights are capped at 10% regardless of the stake size, the Jammu and Kashmir Bank is exempt from this ceiling.
RBI Urges Withdrawal of Exemption
In a communication dated December 6, 2023, the RBI has urged the Union government to withdraw the exemption that allows the Jammu and Kashmir Bank to exceed the 10% voting rights limit. The RBI also recommended reducing the shareholding of the Jammu and Kashmir and Ladakh governments in the bank to below the regulatory threshold of 26%.
Background on Banking Regulation Act and Exemption
The Banking Regulation Act of 1949 restricts shareholders in a banking company from exercising voting rights exceeding 10% of the total voting rights of all shareholders. However, in June 1959, the central government, based on the RBI’s recommendations, exempted the state of Jammu and Kashmir from this provision. As a result, the Jammu and Kashmir Bank enjoyed a unique position within India’s banking sector, with the government of Jammu and Kashmir owning and controlling the bank.
RBI’s Call for Alignment with Standard Regulatory Frameworks
The recent communication from the RBI emphasizes the need to align the Jammu and Kashmir Bank with standard regulatory frameworks. The exemption granted to Jammu and Kashmir in 1959 is not available to any other banking company operating in India. If the recommendation is implemented, it will bring the bank under the broader framework governing banking institutions nationwide.
Potential Impact and Future Ownership
Withdrawal of the exemption would limit the ownership or stake of the local governments of Jammu and Kashmir and Ladakh to a maximum of 26%. This change opens the door for other investors, as any stake held by a local government above 26% would be overtaken by another investor.
Historical Background and Protection of Interests
The Jammu and Kashmir Bank, incorporated in 1938, has enjoyed a unique status since the accession of the princely state of Jammu and Kashmir to India. It was a guarantee from the government of India that the ownership of the bank would always remain with the state government. This arrangement aimed to protect the interests of Jammu and Kashmir, which had suffered under the despotic Dogra rule.
Need for Mainstreaming the Bank
The RBI’s directive argues that reducing the promoters’ shareholding to below 26% would allow the Jammu and Kashmir Bank to tap markets, raise capital from other investors, and reduce dependency on the government for raising capital. The communication emphasizes the need to mainstream the bank by withdrawing its special status and exemptions to ensure its long-term sustainability.
Union Government’s Response
As of the current information available, the Union government has not yet acted on the RBI’s recommendations regarding the Jammu and Kashmir Bank.
