Two of Edelweiss’s group companies are in trouble. The Reserve Bank of India (RBI) has imposed business restrictions on the group 's lending and asset reconstruction arms citing concerns over malpractices and evergreening of loans.

The RBI has ordered Edelweiss Asset Reconstruction Company Ltd (EARCL) and ECL Finance Ltd (ECL) to cease and desist from undertaking fresh activity with immediate effect.

The two group entities, according to the RBI, had acted in concert “by entering into a series of structured transactions for evergreening stressed exposures of ECL, using the platform of EARCL and connected AIFs (alternative investment funds), thereby circumventing applicable regulations".

During the course of supervisory examinations, the regulator also found incorrect valuations of security receipts in both ECL and EARCL.

ECL’s Malpractices

The RBI found that ECL had indulged in several wrong practices, including submission of incorrect details of its eligible book debts to its lenders for computation of drawing power, non-compliance with loan to value rules for lending against shares.

There were also instances of incorrect reporting to the Central Repository for Information on Large Credits (CRILC) system and non-adherence to Know Your Customer (KYC) guidelines by ECL, it 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," the RBI further stated.

The central bank has asked ECL to cease and desist from undertaking any structured transactions in respect of its wholesale exposures, other than repayment and/or closure of accounts, an official statement said.

Edelweiss ARC’s Malpractices

In the case of EARCL, the violations included not placing the Reserve Bank's supervisory letter issued after the previous inspection for 2021-22 before the company's board, non-compliance with regulations pertaining to settlement of loans and sharing of non-public information of its clients with group entities.

The RBI has asked EARCL to cease and desist from acquisition of financial assets, including security receipts (SRs) and reorganising the existing SRs, into senior and subordinate tranches.

No remedial action taken by Edelweiss

The Edelweiss group entities were 'resorting to new ways to circumvent regulations' instead of taking remedial action on the deficiencies, the central bank said.

The business restrictions are necessitated because 'no meaningful corrective action has been evidenced so far', it added.

"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 restrictions will be reviewed after the rectification of the supervisory observations by the group to the satisfaction of the Reserve Bank.

The RBI has also been resorting to stringent measures against banks and non-banking financial companies (NBFCs) to ensure regulatory compliance. In March, the regulator imposed business restrictions on IIFL Finance and JM Financial Products Ltd.