Edelweiss Financial Services shares tumble over 17% in early deals, here's why

Shares of Edelweiss Financial Services tanked over 17% in early deals today after the Reserve Bank of India (RBI) on May 29 announced supervisory actions against ECL Finance and Edelweiss Asset Reconstruction Company, citing material supervisory concerns. The banking regulator directed 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.

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

The above directions will have immediate effect, the RBI said. The stock fell 17.36% to Rs 64 against the previous close of Rs 77.45 on BSE. Market cap of the firm fell to Rs 6512.67 crore.  At 9:24 am, the stock was down 11.26% at Rs 68.73 on BSE. 

The action on Edelweiss group entities, RBI said, was based on material concerns observed during the course of supervisory examinations, essentially arising out of conduct of the group entities acting in concert,

This was done 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, the RBI said.

Incorrect valuation of security receipts was also observed in both ECL and EARCL, the RBI added.

Apart from the above, 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.

The apex bank said 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.

With respect to EARCL, the RBI said 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. Over the last few months, the Reserve Bank has been engaging with the senior management of the captioned entities and their statutory auditors, but no meaningful corrective action has been evidenced so far, necessitating the imposition of business restrictions,” the RBI added.

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

“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. These restrictions are without prejudice to any other regulatory or supervisory action against the captioned entities, that may be initiated by the RBI,” the apex bank added.