ECL Finance, Edelweiss ARC assure compliance after RBI crackdown

edelweiss

ECL Finance and Edelweiss Asset Reconstruction Company Ltd (EARCL) have assured stakeholders that they will comply with the recommendation of the Reserve Bank of India (RBI).

On May 29, the central bank announced supervisory actions against ECL Finance and Edelweiss Asset Reconstruction Company citing material supervisory concerns.

“We assure all our stakeholders that we are taking immediate steps to address the concerns raised by the RBI and to align our operations with regulatory expectations,” Edelweiss ARC said in a release on May 30.

ECL Finance said the company reaffirmed its commitment to complying with the RBI recommendations and hoped to resolve the issue within three weeks, as directed by the central bank.

The RBI has directed ECL Finance to immediately stop undertaking any structured transactions in respect of its wholesale exposures, other than repayment and/ or closure of accounts in its normal course of business.

EARCL has been barred from acquiring financial assets, including security receipts (SRs), and reorganising the existing SRs into senior and subordinate tranches.

Announcing the action on Edelweiss group entities, the RBI said the action is 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.

ECL flouted regultions

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 said.

Further, in the case of EARCL, 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, the central bank said.

“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 RBI added.