The Reserve Bank of India (RBI) today imposed business restrictions on two entities of Edelweiss Group with immediate effect due to material supervisory concerns.

The RBI directed ECL Finance Ltd. (ECL) to cease and desist from undertaking any structured transactions related to its wholesale exposures, other than repayment or closure of accounts in its normal course of business, the central bank said in a statement.

In addition, the RBI ordered Edelweiss Asset Reconstruction Company Ltd. (EARCL) to cease and desist from acquisition of financial assets, including security receipts (SRs) and reorganizing the existing SRs into senior and subordinate tranches.

ACTION RATIONALE

The RBI said 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 central bank also observed incorrect valuation of SRs in both ECL and EARCL.

Furthermore, 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 system (CRILC) and non-adherence to Know Your Customer (KYC) guidelines.

The RBI said ECL, by taking over loans from non-lender entities of the group for ultimate sale to the group asset reconstruction company, allowed itself to be used as a conduit to circumvent regulations which permit ARCs to acquire financial assets only from banks and financial institutions.

In EARCL, other violations 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.

The RBI noted that instead of taking meaningful remedial action to rectify the observed deficiencies, the group entities resorted to new ways to circumvent regulations.

CORRECTIVE ACTION

The central bank said it engaged with the senior management of both the entities and their statutory auditors over the last few months. However, no meaningful corrective action has been evidenced so far, necessitating the imposition of business restrictions, it added.

The RBI also said both the companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times.

The central bank will review these business restrictions after the rectification of the supervisory observations by the group to the satisfaction of the RBI.

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India Watch List For Thursday - May 9