RBI enforces business restrictions on Edelweiss Group entities: Here's why
What's the story
The Reserve Bank of India (RBI) has imposed strict business restrictions on two Edelweiss Group entitities, namely ECL Finance Limited (ECL) and Edelweiss Asset Reconstruction Company Limited (EARCL). This regulatory action is an answer to supervisory concerns identified during recent examinations, as per an RBI release. The central bank invoked its authority under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), and the Reserve Bank of India Act, 1934.
Directives
Specific restrictions imposed on ECL and EARCL
The RBI has ordered ECL to immediately stop engaging in any structured transactions that involve wholesale exposures. This is barring the repayment or closure of accounts in the normal course of business. Meanwhile, EARCL has been ordered to pause the acquisition of financial assets, including security receipts (SRs), and to avoid reorganizing current SRs into senior and subordinate tranches.
Examination findings
Supervisory examinations reveal regulatory breaches
The supervisory examinations conducted by the RBI revealed that ECL and EARCL, engaged in several structured transactions, aimed at evergreening the stressed exposures of ECL. This was achieved via EARCL and connected Alternative Investment Funds (AIFs), effectively circumventing applicable regulations. Additionally, incorrect valuation of SRs was seen in both ECL and EARCL.
Regulatory concerns
Specific supervisory concerns for ECL and EARCL
For ECL, supervisory concerns included incorrect information of eligible book debts to lenders, and non-compliance with loan-to-value rules for lending against shares. Faulty reporting to the Central Repository for Information on Large Credits system (CRILC), and non-adherence to KYC guidelines, were also causes of worry.
Information
Non-compliance with loan settlement rules
ECL served as a conduit by taking over loans from non-lender group entities for ultimate sale to EARCL. Meanwhile, EARCL failed to place the RBI's supervisory letter before its Board. Also, it did not comply with loan settlement regulations and shared non-public client information with group entities.
Compliance measures
RBI directs Edelweiss entities to strengthen regulatory compliance
Though engagement is ongoing with the senior management and statutory auditors of ECL and EARCL, no corrective action has been taken yet. Hence, RBI has directed both firms to strengthen their assurance functions, to ensure full regulatory compliance. The imposed restrictions will be reviewed post satisfactory rectification of the supervisory observations by the Edelweiss Group entities. These measures are in addition to any other regulatory/supervisory actions that the RBI may initiate against ECL and EARCL.