RBI Bars Edelweiss ARC From Acquiring Stressed Assets

Reserve Bank of India has stopped Edelweiss Asset Reconstruction Co. from acquiring any stressed assets, according to a supervisory action notification on Wednesday.

Edelweiss ARC has been asked to stop acquisition of stressed assets with immediate effect, including security receipts and re-organising the existing SRs into senior and subordinate tranches.

In its notification, the regulator also barred ECL Finance from undertaking any structured transactions, with respect to its wholesale exposures, with immediate effect. However, it can continue to conduct repayment and/or closure of accounts.

"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 RBI said.

According to the regulator, the action has been taken after material concerns were observed, arising out of the conduct of group entities, where they were entering into a series of transactions for evergreening the stressed exposures of ECL Finance.

For this, the platform of Edelweiss ARC and connected alternate investment funds were being used, which were going against the regulations, the central bank said.

It added that other supervisory observations were also made in ECL Finance. These were related to:

• Submission of incorrect details of eligible book debts to lenders for computation of drawing power.

• Non-compliance with loan-to- norms for lending against shares.

• Incorrect reporting to central repository for information on large credits system.

• Non-adherence to Know Your Customer guidelines.

RBI observed that ECL Finance also allowed itself to be used as a conduit to circumvent some regulations for ARCs.

"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," the regulator said.

Apart from this, the regulator also observed instances of incorrect valuation of SRs in both the entities.

Specific to Edelweiss ARC, the regulator said that the company did not place RBI's supervisory letter after the inspection for 2021-22 before the Board, and was non-compliant with rules on settlement of loans and sharing of non-public information of its clients with group entities.

The supervisory action comes after RBI, over the last few months, did not witness any "meaningful corrective action" after engaging with senior management and statutory auditors.

The regulator has also asked both the companies to strengthen their assurance functions for regulatory compliance. The restrictions, however, would only be reviewed after rectification to the satisfaction of RBI.

ECL Finance had passed a board resolution in the last financial year to discontinue its wholesale business, the company said in an exchange filing.

"We are reviewing the order and will address the observations mentioned in the RBI order. We are dedicated to maintaining transparency and upholding highest standards of corporate governance and committed to compliance with regulatory requirements," Edelweiss ARC said in a statement on Wednesday.

Edelweiss ARC assured stakeholders of immediate action to address the concerns raised by the RBI. It also said that there will be no material impact on the company's resolution and recovery efforts.