Edelweiss ARC stated in a late-evening statement that it is examining the RBI ruling and that it will take care of the points raised in the order. "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 AIFs, thereby circumventing applicable regulations," it stated.
"There will not be any material impact on the Company's resolution and recovery efforts which would continue normally," stated Edelweiss ARC.
The Reserve Bank of India (RBI) has expressed apprehension over the usage of alternative investment funds (AIFs) for loan evergreening and has requested that lenders provide additional capital for these kinds of investments.
Additionally, the central bank has started putting limits on businesses. Previously, the regulator imposed restrictions on J M Financial Products and prohibited IIFL Finance from offering gold loans. Regarding the action taken against the Edelweiss Group firms overseen by Rashesh Shah, the central bank stated that it also discovered improper SR value in both ECL and EARCL.
The RBI discovered that ECL had engaged in a number of improper activities, including providing its lenders with inaccurate information about its eligible book debts in order to calculate drawing power and failing to adhere to loan to value standards for lending against shares.
It also stated that there have been instances of ECL failing to follow Know Your Customer (KYC) regulations and improper reporting to the Central Repository for Information on Large Credits (CRILC) system.
"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," it stated.
According to the report, EARCL violated rules regarding loan settlement, sharing confidential client information with group entities, and failing to present the Reserve Bank's supervisory letter, which was issued following the previous inspection for 2021–22, to the company's board.
Rather than correcting the problems, the central bank said that the entities of the Edelweiss group were "resorting to new ways to circumvent regulations".
It further stated that "no meaningful corrective action has been evidenced so far," which makes the business limitations necessary.
"Both the companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times," according to the RBI. Once the group has corrected the supervisory observations to the Reserve Bank's satisfaction, the limitations will be reevaluated.
"We are dedicated to maintaining transparency and upholding the highest standards of corporate governance and committed to compliance with regulatory requirements," stated Edelweiss ARC.
