RBI Bars ECL Finance, Edelweiss ARC from Some Operations for Circumventing Regulations, Evergreening Stressed Exposures

Moneylife Digital Team 29 May 2024

Investor Interest

Reserve Bank of India (RBI) has imposed business restrictions on two entities of the Edelweiss Group, including ECL Finance Ltd (ECL) and Edelweiss Asset Reconstruction Company Ltd (EARCL), for circumventing regulations.

In a release, RBI says, "The action is based on material concerns observed during supervisory examinations, essentially arising out of the 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 AIFs, thereby circumventing applicable regulations. Incorrect valuation of SRs was also observed in both ECL and EARCL."

ECL has been barred from undertaking any structured transactions concerning its wholesale exposures other than repayment and/or closure of accounts in its normal course of business.

EARCL is also directed to cease and desist from acquiring financial assets, including security receipts (SRs) and reorganising the existing SRs into senior and subordinate tranches.

RBI says, in ECL, supervisory observations included submission of incorrect details of its eligible book debts to its lenders for computation of drawing power, non-compliance with loan-to-value norms for lending against shares, incorrect reporting to Central Repository for Information on Large Credits (CRILC) system 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," RBI says.

In EARCL, RBI says other violations included not placing RBI's supervisory letter issued after the previous inspection for FY21-22 before the ARC's board, non-compliance with regulations about settlement of loans and sharing non-public information of its clients with group entities.

"Instead of taking meaningful remedial action to rectify the deficiencies, it was observed that the group entities were resorting to new ways to circumvent regulations. Over the last few months, RBI has been engaging with the senior management of these entities and their statutory auditors, but no meaningful corrective action has been evidenced so far, necessitating the imposition of business restrictions. Further, both companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times," the banking regulator says.

According to RBI, the business restrictions placed on ECL and EARCL will be reviewed after the group rectifies the supervisory observations to the satisfaction of the central bank. "These restrictions are without prejudice to any other regulatory or supervisory action against these entities that may be initiated by the RBI."

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