RBI imposes restrictions on ECL Finance, Edelweiss ARC due to material supervisory concerns

The Reserve Bank of India (RBI) on Wednesday said it has imposed supervisory actions against ECL Finance Limited and Edelweiss Asset Reconstruction Company (ARC) Limited citing material supervisory concerns. The central bank, in exercise of its powers under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and the Reserve Bank of India Act, 1934 imposed business restrictions on the following supervised entities respectively, belonging to the Edelweiss Group.

The Reserve Bank has directed:

(i) ECL Finance Ltd (ECL) to cease and desist, with immediate effect, from undertaking any structured transactions in respect of its wholesale exposures, other than repayment and/ or closure of accounts in its normal course of business.

(ii) Edelweiss Asset Reconstruction Company Limited (EARCL) to cease and desist from the acquisition of financial assets including security receipts (SRs) and reorganising the existing SRs into senior and subordinate tranches.

"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. Incorrect valuation of SRs was also observed in both ECL and EARCL," the RBI said.

The RBI further noted that 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.

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.

In EARCL, other violations included not placing the Reserve Bank’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.

Instead of taking meaningful remedial action to rectify the said deficiencies, it was observed that the group entities were resorting to new ways to circumvent regulations, the central bank added in its notification.

The business restrictions being placed now shall be reviewed after the rectification of the supervisory observations by the group to the satisfaction of the Reserve Bank of India.