Reserve Bank of India (Photo: Reuters)
The Reserve Bank of India (RBI) on Wednesday banned the asset reconstruction company of Edelweiss group from acquiring financial assets and securities securities (SRs) and also the non-banking financial arm from conducting any structured transaction for large scale exposure, other than reimbursement and/or reimbursement. or closing accounts in the normal course of business. The Edelweiss Asset Reconstruction Company Limited (EARCL) is also not allowed to reorganize the existing SRs into senior and subordinate tranches.
The RBI stated that the action is based on material concerns observed during supervisory investigations and arising primarily from the conduct of the group entities. It was found that EARCL and ECL Finance “acted in concert” by entering into a series of structured transactions for “increasingly greening ECL’s stress exposure, utilizing EARCL’s platform and associated AIFs, thereby circumventing applicable regulations,” the report said.
The regulatory action comes days after Swaminathan J, deputy governor at the RBI, noted that some Indian ARCs were circumventing regulations and allowing the increasing greening of distressed assets. He also highlighted the lack of transparency and consistency in the issuance and periodic valuation of SRs.
The business restrictions imposed on EARCL and ECL Finance would be reviewed after rectification of the group’s supervisory observations to the satisfaction of the RBI.
The Edelweiss group did not respond to queries on the RBI’s curbs until the time of going to press.
Edelweiss ARC, one of the major asset reconstruction companies registered with the regulator, saw its assets under management (AUM) fall to Rs 31,590 crore at the end of March 2024, from Rs 37,100 crore a year ago. It acquired debt worth Rs 455 crore in Q4FY24 and Rs 13,187 crore in the entire financial year.
ECL Finance, on the other hand, has been reducing its wholesale portfolio for more than two years. The book fell 42 percent year-on-year to Rs 4,150 crore in March 2024.
In the last two years, the portfolio has shrunk from Rs 10,370 crore at the end of March 2022. It expects the portfolio to decline further to Rs 1,500 crore by March 2026. Currently, the company focuses on retail financing.
The RBI has also pointed out several supervisory observations in the case of ECL, including providing incorrect data on eligible book debts to its lenders for calculating leverage, non-compliance with loan-to-value norms for borrowing against shares, improper reporting to the Central Repository for Information on Large Credits (CRILC) system, and failure to adhere to Know Your Customer (KYC) guidelines.
ECL has also been accused of not keeping distance with other group companies. “ECL, by acquiring loans from non-borrowing entities of the group for eventual sale to the ARC group, allowed itself to be used as a channel to circumvent regulations that allow ARCs to acquire financial assets only from banks and financial institutions,” said the spokesman. the supervisor said.
Some of the violations by Edelweiss ARC, according to the regulator, included failure to submit to the board the RBI’s supervisory letter issued after the previous inspection for 2021-2022, failure to comply with regulations relating to loan settlement and sharing non-public data of its clients with group entities.
Last year, a first information report (FIR) was registered against the Edelweiss group and the ARC’s top management for allegedly abetting suicide in connection with the death of Bollywood art director Nitin Desai. The group, however, denied allegations that it had pressured Desai to repay loans.
Even after noticing the shortcomings, the RBI said that instead of taking corrective measures, the group entities resorted to new ways to circumvent the regulations. “Over the past few months, the Reserve Bank of India has been in contact with the senior management of the said entities and their statutory auditors, but no meaningful corrective actions have emerged to date that necessitated the imposition of business restrictions,” the report said. In addition, both companies have been instructed to strengthen their assurance functions to ensure compliance with the letter and spirit of regulations at all times.
First print: May 29, 2024 | 10:18 PM IST
