RBI imposes business restrictions on two Edelweiss Group firms

The Reserve Bank of India (RBI) has imposed business restrictions on ECL Finance Ltd. (ECL) and Edelweiss Asset Reconstruction Company Ltd. (EARCL) belonging to the Edelweiss Group based on material supervisory concerns.

The Reserve Bank of India (RBI) has imposed business restrictions on ECL Finance Ltd. (ECL) and Edelweiss Asset Reconstruction Company Ltd. (EARCL) belonging to the Edelweiss Group based on material supervisory concerns. ECL Finance Ltd. has been directed to cease and desist, with immediate effect, from undertaking any structured transactions in respect of its wholesale exposures, other than repayment and/ or closure of accounts in its normal course of business. Similarly, Edelweiss Asset Reconstruction Company Ltd. (EARCL) has been asked to cease and desist from acquisition of financial assets including security receipts (SRs) and reorganising the existing SRs into senior and subordinate tranches. “The action is based on material concerns observed during the course of supervisory examinations, essentially arising out of conduct of the group entities acting in concert, by entering into a series of structured transactions for evergreening stressed exposures of ECL, using the platform of EARCL and connected Alternative Investment Funds (AIFs), thereby circumventing applicable regulations,” the RBI said in the directive.  Incorrect valuation of SRs was also observed in both ECL and EARCL. Apart from this, ECL was found to have submitted incorrect details of its eligible book debts to its lenders for computation of drawing power.  It has been held guilty of non-compliance with loan to value norms for lending against shares, incorrect reporting to Central Repository for Information on Large Credits system (CRILC) and non-adherence to Know Your Customer (KYC) guidelines.  “ECL, by taking over loans from non-lender entities of the group for ultimate sale to the group ARC, allowed itself to be used as a conduit to circumvent regulations which permit ARCs to acquire financial assets only from banks and Financial Institutions,” the RBI said. In EARCL, the other violations included not placing the Reserve Bank’s supervisory letter issued after the previous inspection for 2021-22 before the Board, non-compliance with regulations pertaining to settlement of loans and sharing of non-public information of its clients with group entities. “Instead of taking meaningful remedial action to rectify the said deficiencies, it was observed that the group entities were resorting to new ways to circumvent regulations,” the regulator said.  The RBI said over the last few months it had been engaging with the senior management of both the entities and their statutory auditors, but no meaningful corrective action had been evidenced so far, necessitating the imposition of business restrictions.  “Both the companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times,” RBI said.