RBI takes Supervisory Action against Edelweiss ARC and ECL Finance

The Reserve Bank of India (RBI) has started supervisory action against ECL Finance Limited and Edelweiss Asset Reconstruction Company and barred both of them from acquiring new loans and financial assets.

By exercising its powers under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and the Reserve Bank of India Act 1934, RBI imposed such business restrictions.

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 above directions will have an immediate effect.

The action is based on material concerns raised 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 to circumvent applicable regulations.

Incorrect SR valuation was also seen in ECL and EARCL. Aside from the foregoing, supervisory observations at ECL included the submission of incorrect details of eligible book debts to its lenders for the computation of drawing power, non-compliance with loan-to-value norms for lending against shares, incorrect reporting to the Central Repository for Information on Large Credits system (CRILC), and non-compliance with Know Your Customer (KYC) guidelines. 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 in 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 disclosing non-public client information to group organizations.

Instead of taking effective corrective action to address the aforementioned shortcomings, it was discovered that the group entities were using new methods to bypass restrictions. The Reserve Bank has been communicating with the senior management of the captioned firms as well as their statutory auditors in recent months, but no substantial corrective action has been demonstrated, necessitating the implementation of business restrictions. Furthermore, both organizations have been advised to strengthen their assurance functions to ensure full regulatory compliance at all times.