Ayush Joshi & Paranjoy Guha Thakurta
In India’s intricate and highly-regulated financial system, virtually every bank, large or small, a scheduled commercial bank or an NBFC (non-banking financial company), has to perforce answer to a single, omnipotent referee: the Reserve Bank of India (RBI), the country’s central bank and apex monetary authority. Among other things, the RBI regulates banks’ capital reserves and supervises how audit ledgers should be prepared, to ensure that the savings of ordinary citizens are shielded from institutional collapses. Yet, for over half a century, a glaring anomaly persisted in the country’s financial system in the form of a bank tucked away in the Himalayas, an entity that appeared insulated from the RBI’s rulebooks and regulatory ambit.
This is the story of the State Bank of Sikkim (SBS) that has not been told yet.
For years, the country’s financial press occasionally whispered about this “rogue” institution. More than five years ago, in early 2021, leading pink dailies published brief, almost perfunctory, reports indicating that the RBI had finally managed to wrest supervisory control over the bank. For many, the tale seemed to have ended there, a bureaucratic quirk quietly resolved.
The story, however, was not that simple. A newly surfaced trove of documents of confidential government correspondence, the draft of a piece of legislation, together with an ongoing legal battle in the Bombay High Court, has blown the lid off the official narrative. These internal documents reveal that integrating the SBS was not a simple bureaucratic handshake. Instead, it was a chaotic, decades-long struggle marked by Constitutional stalemates, desperate pleas to the prime minister of India during the November 2016 demonetisation, and the secret drafting of surgical federal laws designed to bypass a sovereign royal decree.
Here is the previously undisclosed account of how the Indian government finally plugged a leak in its financial ecosystem in the form of the SBS.
>> Sovereign Birth
Before Sikkim merged with the Indian Union in 1975, it was an independent kingdom ruled by the Chogyal dynasty. In 1968, the Chogyal issued a Royal Proclamation that established the State Bank of Sikkim. It was created to act as the state’s treasury and manage its public debt.
When Sikkim became India’s 22nd state, Article 371F of the Constitution of India was enacted to protect its heritage. Article 371F guaranteed that all pre-merger laws would remain active until formally repealed by a competent legislature. Because SBS was born out of a royal decree and not promoted through standard corporate legal procedures, the Banking Regulation Act of 1949 simply did not apply to it. SBS was essentially an “onshore-offshore” bank, operating within India but outside the purview of the country’s banking laws. That is, until a few years ago.
Newly revealed documents highlight how confusion prevailed at the highest levels of the Indian government. In a letter dated September 20, 2012, Shashank Saksena, a director in the Union Ministry of Finance, wrote to the RBI confidently asserting that SBS was “registered as a company under the Sikkim Companies Act” and should therefore be regulated by the RBI.
It took the central bank two years to officially correct this fundamental misunderstanding. In a letter dated December 19, 2014, the then Deputy Governor of the RBI, R Gandhi, wrote to the secretary, financial services, in the Ministry of Finance to set the record straight. SBS was not a company under the Companies Act of 1956 nor the newer Companies Act of 2013. It was a constitutionally protected corporate body that rendered standard regulatory enforcement applicable to other banks impossible.
>> Banking Without a Safety Net
A 2014 RBI memorandum exposes the sheer panic of RBI officials about this anomalous situation. Gandhi explicitly warned that SBS’s financial position posed “serious regulatory concerns”. The bank was carrying on the business of banking entirely outside the purview of the RBI.
For the layperson, the danger of an unregulated bank cannot be overstated. Indian banks are compelled by the RBI to maintain strict capital reserves to ensure they can survive economic downturns or, worse, a collapse. The SBS had no such federal oversight. Even more frightening was the revelation about the absence of insurance for the bank’s deposits.
In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC) guarantees that if a bank collapses, every depositor is insured up to a certain amount (currently ₹5 lakh). Because SBS was not a recognised bank under the Banking Regulation Act, Gandhi noted that the deposits of residents of Sikkim were “not covered by the insurance of DICGC.” What did this imply? If, for whatever reason, the SBS made poor lending decisions and collapsed as an institution, its customers’ life savings would deplete or even evaporate and they would have no recourse to any compensation or redress of their grievances.
>> Chaos of Demonetisation
The theoretical risks of isolating the SBS from India’s banking ecosystem violently collided with reality on November 8, 2016, when Prime Minister Narendra Modi suddenly announced the demonetisation of high-value currency notes. The overnight withdrawal of 86 per cent of the country’s currency in circulation plunged India and its most vulnerable citizens into chaos. In Sikkim, demonetisation led to an unprecedented liquidity crisis, an impending systemic collapse.
On November 25, Pawan Chamling, the then chief minister of Sikkim, sent an urgent, desperate letter to Prime Minister Modi. His letter revealed the sheer scale of the crisis: approximately 50,000 individuals, almost all of them residents of Sikkim, had deposited a total of ₹530 crore in the bank, which also had 1,800 pension accounts of senior citizens.
Because SBS was unregulated, the RBI initially choked access to its currency chests during the cash swap. Chief Minister Chamling warned that depositors were “not able to access their SBS accounts, even for limited withdrawals”. He stressed that many residents in rural areas of Sikkim banked exclusively with SBS, had no alternative financial lifelines and were in dire straits.
The language used by Chamling was stark. He warned that the lack of cash was “creating a panic-like situation” and that the public was “already in an agitational frame of mind”. If cash was not provided on an emergency basis, “there is potential of imminent unrest in a sensitive border region of the country,” the former chief minister stated.
Buried at the end of Chamling’s desperate plea was a historic political concession. For decades, the Sikkim government had fiercely protected the “autonomy” of the SBS to preserve its “independent identity”. Pushed to the corner, Chamling formally conceded: “On our part, we are more than willing to work with (the) GoI (Government of India) and (the) RBI to draw up a transition path for SBS to come within the ambit of the BR (Banking Regulation) Act, 1949.”
>> Secret Legal Blueprint
The RBI then got down to work. But how could it regulate an entity protected by a royal decree and an article in the Indian Constitution?
Recently released documents show that the RBI had explored a “nuclear” option. An obscure 1982 federal law, the State Bank of Sikkim (Acquisition of Shares) and Miscellaneous Provisions Act, technically gave the Union government the power to simply seize the bank and convert it into a state co-operative bank. However, executing this move could be a long, drawn-out process and perhaps, politically explosive.
Instead, the RBI opted for a carefully calibrated legal offensive. An April 2017, a letter from Mohan Yadav, chief general manager, RBI, to the Ministry of Finance forwarded “secret” draft legislation aimed at quietly dismantling the anomaly.
The draft bills proposed amending the Banking Regulation Act of 1949 itself. They sought to insert a new clause into Section 5, explicitly defining the “Sikkim Bank” as the entity “constituted under the State Bank of Sikkim Proclamation, 1968”. The “masterstroke” was a proposed new “Section 51A”, which declared that “Notwithstanding anything to the contrary contained in the State Bank of Sikkim Proclamation… the provisions of this Act… shall apply to (the) Sikkim Bank.”
The draft bills mandated that the SBS formally apply to the RBI for a banking licence within six months of the amendment to the law. Crucially, the RBI also drafted amendments to the DICGC Act of 1961, legally compelling the corporation to “register Sikkim Bank as an insured bank” to guarantee the safety of depositors’ money.
>> 2026 Courtroom Reckoning
It took years of behind-the-scenes manoeuvring following the drafting of the bills in 2017 to set the wheels in motion on Mumbai’s “Mint Street”, where the RBI is headquartered. This brings us back to news reports from 2021. When publications reported that the RBI had assumed supervisory control of SBS, it was treated as a standard regulatory update. The public remained entirely unaware that this seemingly routine “update” was, in fact, the culmination of years of panic within official circles, Constitutional manoeuvring, and repeated warnings of a potential institutional collapse stretching back more than a decade.
The 2021 regulatory embrace meant that while the Government of Sikkim retained ownership of the SBS, the RBI finally had the power to audit the bank’s books, enforce capital adequacy ratios and other regulatory norms, and bring the bank’s thousands of account holders under the protective umbrella of the DICGC.
Despite the apparent resolution in 2021, the ghosts of SBS’s unregulated past continue to haunt the Indian establishment. The story has now culminated in an ongoing case before the Bombay High Court in the form of Writ Petition No. 2588 of 2017, Ashok Kumar Jain versus Reserve Bank of India & Others.
To understand why this courtroom showdown matters, one must look at exactly why Jain filed this Public Interest Litigation (PIL) in 2017, and what he specifically demanded. Jain is an anti-corruption and Right to Information (RTI) activist, and a former employee of the Damodar Valley Corporation (DVC), a central government-owned authority established by the DVC Act of 1948.
Jain alleged to these writers that he decided to file a PIL in Mumbai after learning from “reliable sources” that certain past and present employees of the DVC had obtained illegal gratifications and had parked their black money in the SBS to evade regulatory scrutiny. When asked, he did not elaborate on the evidence he had to substantiate his claims. “Details will be disclosed at the appropriate time,” he said.
Nevertheless, in his petition, Jain had made a series of what he believes are more substantive allegations: the State Bank of Sikkim was operating like a domestic tax haven, akin to a “Swiss Bank”, offering absolute secrecy and refusing to disclose the identities of its depositors to federal authorities. Jain alleged that because SBS operated entirely outside the RBI’s disclosure laws and the Banking Regulation Act, it had become a “safe haven for ill-gotten wealth” and potentially even terrorist funds.
Jain’s demands before the Bombay High Court were clear and sweeping. First, he demanded that the court force the Union government to bring the SBS under strict regulatory scrutiny by the RBI. Second, he demanded the stripping of the bank’s “Swiss Bank-style” secret ways of working, legally compelling SBS to open its ledgers and disclose the identities of its depositors to federal investigators. Finally, Jain demanded that all the black money stashed by corrupt officials in these accounts be legally seized by the government and utilised to revive sick and struggling Public Sector Undertakings (PSUs) across the country.
During a hearing on February 3, 2026, before Justices Manish Pitale and Shreeram V Shirsat, Jain’s counsel directly confronted the RBI with the 2021 media reports. The petitioner argued that if the RBI had indeed taken supervisory control, it must formally answer to the court regarding the historical and current regulatory framework of the bank.
Caught under the spotlight, the RBI’s counsel, Aditi Phatak, sought time from the judges to take official instructions from the central bank. Recognising the gravity of a constitutional banking anomaly, the bench granted the delay but firmly ordered the matter to be listed “high on board” for further consideration. Jain told the writers of this article that he is hopeful that his PIL will be heard “soon” and that the court order would be “favourable” in the sense that past records of the SBS would be made public.
>> Why Sikkim Fought the RBI
To understand why this anomaly persisted for fifty years, one must look beyond the central government’s perception of “systemic risk” and examine the counter-narrative emanating from Gangtok. For the architects of Sikkim’s modern statehood, keeping the SBS independent was not an exercise in harbouring illicit wealth or evading transparency, even if that was an unintended consequence. It was a calculated defence of what they considered their Constitutional rights, financial federalism, and their cultural identity. As has been reported, the resistance to RBI’s control over the SBS was rooted in several deeply held principles.
The primary consideration in this regard was the “absolute” sanctity of Article 371F of the Constitution of India. When the kingdom of Sikkim merged with the Indian Union in 1975, the Sikkimese viewed it not as an unconditional surrender, but as a negotiated integration. Article 371F, specifically clause (k), was the ultimate guarantee from New Delhi that the state’s unique institutions would not be immediately bulldozed or captured by extant Indian laws. The 1968 Royal Proclamation of the Chogyal was a valid, protected law. By “forcing” the Banking Regulation Act of 1949 onto the bank was a direct violation of the spirit of the merger and a breach of the Constitutional promises made to the Sikkimese people, it was argued.
Secondly, the state government had argued for “true” financial federalism. The SBS was not merely any other commercial bank; it functioned as the exclusive treasury of the Government of Sikkim. Allowing a federal body based in Mumbai (the RBI) to “dictate” the terms of operations, capital reserves, and lending policies of a state treasury was seen as a massive dilution of the Sikkim government’s financial sovereignty. By retaining 100 per cent ownership and keeping the RBI at bay, the state government sought to control how the bank’s capital was deployed, tailor its credit policies, structure interest rates, and expedite loan approvals to specifically benefit local contractors, rural entrepreneurs, and infrastructure projects without having to clear the rigid, one-size-fits-all regulatory hurdles mandated by the RBI. This was how the argument was sought to be framed in Gangtok.
Moreover, Sikkim has its distinct financial ecosystem. The Supreme Court recently expanded the definition of Sikkimese individuals to include descendants of original subjects as well as old Indian settlers domiciled in the state before 1975, all of whom are exempt from paying tax on income generated within Sikkim. An autonomous, wholly state government-regulated bank complemented this ecosystem. It allowed the state to manage the wealth of its citizens internally, shielding local enterprises from external economic forces.
It may be recalled that in the late 1970s and early 1980s, manufacturers of highly-taxed products such as cigarettes had descended on Sikkim to exploit the Himalayan state’s no-tax and low-tax regime. The Ministry of Finance eventually moved to plug the loophole, following which cigarette companies such as ITC (earlier India Tobacco Company) and Godfrey Phillips shut down their operations almost as swiftly as they had established them.
To return to the SBS, many local enterprises and contractors found it convenient to use the bank.
Last but not least, there was a psychological angle. Following the 1975 merger of Sikkim with the Indian Union, several private and public institutions entered the state, creating an anxiety among residents that their Sikkimese identity would be swamped by the influx of “outsiders.” The State Bank of Sikkim, born out of a royal decree, was one of the last surviving institutional symbols of the state’s past.
>> End of an Era
For all practical purposes, the operational era of the “Himalayan loophole” has now come to an end. But history has an uncanny habit of catching up with the present. As Jain’s PIL winds its way through the Bombay High Court, will the RBI and the Union government be able to sweep aside half a century of bookkeeping under the rug and call it a resolved bureaucratic quirk? The courts will decide if an autopsy of the historical accounts of the SBS is still required before the federal guardrails were installed, and if there are any secrets still left hidden in vaults in Gangtok.
On May 9, we emailed questionnaires to the following individuals: the Governor of the Reserve Bank of India, Sanjay Malhotra; the chairman and the managing director of the State Bank of Sikkim, Dal Bahadur Gurung and Phurba Wangdi Bhutia, respectively; the former Chief Minister of Sikkim, Pawan Chamling; and the head of the Damodar Valley Corporation, S Suresh Kumar. This article will be updated as and when we receive responses from them.
Attempts to elicit a response from the State Bank of Sikkim were unsuccessful. Detailed queries directed to the bank’s official email address on its website info@statebankofsikkim.com, bounced back as undeliverable. Moreover, several attempts to reach the bank’s headquarters on the landline given went unanswered.
Graphic 1
Why SBS Was Different
Ordinary Indian Banks State Bank of Sikkim
Regulated by RBI Outside RBI framework
Deposits insured by DICGC No deposit insurance
Governed by Banking Regulation Act Protected by royal proclamation
Subject to RBI audits No federal oversight for decades
Standard banking compliance Constitutional exemption under Article 371F
Graphic 2
SBS’s Demonetisation Shock
50,000 depositors affected
₹530 crore deposited in SBS
1,800 pension accounts impacted
‘Panic-like situation’ warning by Pawan Chamling
Rural residents had ‘no alternative financial lifelines’
Graphic 3
The PIL Claims
SBS functioned like a ‘Swiss Bank’
Secrecy about depositors
Claims of black money parking
Demand for disclosure of account holders
Demand for seizure of illicit funds
(Ayush Joshi and Paranjoy Guha Thakurta are independent journalists)
