RBI imposes business restriction on Edelweiss group's EARCL, ECL Finance

ECL has been accused of not maintaining arm's length with other group companies

The Reserve Bank of India (RBI) on Wednesday barred the Edelweiss group’s asset reconstruction company from acquiring financial assets and security receipts (SRs), and also its non-banking financial arm from undertaking any structured transaction for wholesale exposure, other than repayment and/ or closure of accounts in its normal course of business. The Edelweiss Asset Reconstruction Company Limited (EARCL) has also been barred from reorganising the existing SRs into senior and subordinate tranches.

The RBI stated that the action is based on material concerns observed during supervisory examinations, primarily arising from the group entities’ conduct. EARCL and ECL Finance were found to be “acting in concert” by entering into a series of structured transactions for “evergreening stressed exposure of ECL, using the platform of EARCL and connected AIFs, thereby circumventing applicable regulations”, it said.

Edelweiss Asset Reconstruction Company  in exchange filing said the company takes note of RBI's guidance and will take necessary remedial steps as required immediately. 
 

"We are reviewing the order and will address observations mentioned in the order," the company said.

The regulatory action comes days after Swaminathan J, deputy governor at the RBI, flagged that some Indian ARCs were bypassing regulations and facilitating the evergreening of distressed assets. He also underscored lack of transparency and consistency in the issuance and periodic valuation of SRs.

The business restrictions imposed on EARCL and ECL Finance would be reviewed after the rectification of the supervisory observations by the group to the satisfaction of the RBI.

The Edelweiss group did not respond to queries regarding the RBI’s curbs until the time of going to press.

Edelweiss ARC, one of the large asset reconstruction companies registered with the regulator, saw its assets under management (AUM) fall to Rs 31,590 crore at the end of March 2024, down from Rs 37,100 crore a year ago. 

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It acquired debt assets worth Rs 455 crore in Q4FY24 and Rs 13,187 crore in the entire financial year.

ECL Finance, on the other hand, has been scaling down its wholesale book for over two years. The book declined by 42 per cent on a year-on-year basis to Rs 4,150 crore by March 2024.

In the past two years, its book has shrunk from Rs 10,370 crore at the end of March 2022. It expects the book to run down further to Rs 1,500 crore by March 2026. At present the company is focusing on retail finance.

The RBI has also pointed out several supervisory observations in the case of ECL, including 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 the Central Repository for Information on Large Credits (CRILC) system, and non-adherence to Know Your Customer (KYC) guidelines.

ECL has also been accused of not maintaining arm’s length with other group companies. “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 regulator said.

Some of the violations by Edelweiss ARC, according to the regulator, included not placing the RBI’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.

Last year, a first information report (FIR) was registered against the Edelweiss group and the ARC’s top management for alleged abetment to suicide in connection with the death of Bollywood art director Nitin Desai. The group, however, denied allegations that it had put pressure on Desai to repay loans.

Even after the deficiencies were pointed out, the RBI said instead of taking remedial action, the group entities were resorting to new ways to circumvent regulations. “Over the past few months, the Reserve Bank of India has been engaging with the senior management of the captioned entities and their statutory auditors, but no meaningful corrective action has been evidenced so far, necessitating the imposition of business restrictions,” it said, adding both companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit, at all times.