The Reserve Bank of India (RBI) announced on Wednesday that it has taken supervisory action against ECL Finance Limited and Edelweiss Asset Reconstruction Company (ARC) Limited, citing material supervisory concerns. The central bank imposed business restrictions on the following supervised entities of the Edelweiss Group in accordance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and the Reserve Bank of India Act, 1934.
The Reserve Bank directed:
(i) ECL Finance Ltd (ECL) to cease and desist, with immediate effect, from engaging in any structured transactions relating to its wholesale exposures other than account repayment and/or closure in the normal course of business.
(ii) Edelweiss Asset Reconstruction Company Limited (EARCL) will cease and desist from acquiring financial assets, including security receipts (SRs), and will restructure existing SRs into senior and subordinate tranches.
"The action is based on material concerns discovered during supervisory examinations, primarily as a result of the group entities acting in concert by entering into a series of structured transactions for evergreening stressed ECL exposures using the EARCL platform and connected AIFs, thereby circumventing applicable regulations. The RBI also found incorrect SR valuations in both ECL and EARCL.
The RBI also noted that in ECL supervisory observations, incorrect details of its eligible book debts were submitted to its lenders for the computation of drawing power, loan to value norms for lending against shares were not followed, incorrect reporting to the Central Repository for Information on Large Credits system (CRILC) was not followed, and Know Your Customer (KYC) guidelines were ignored.
ECL, by taking over loans from non-lender firms of the group for final sale to the group ARC, permitted itself to be utilized as a conduit to evade restrictions that require ARCs to acquire financial assets only from banks and financial institutions.
Other infractions at EARCL included failing to present the Reserve Bank's supervisory letter issued following the last inspection for 2021-22 to the Board, failing to comply with loan settlement regulations, and exchanging non-public client information with group entities.
Instead of taking effective corrective action to address the aforementioned inadequacies, the group firms were spotted using new methods to bypass restrictions, according to the central bank's letter. The business limits imposed currently will be revisited if the group corrects the supervisory observations to the satisfaction of the Reserve Bank of India.
