The Reserve Bank of India (RBI) today imposed business restrictions on the two entities of the Edelweiss Group -- ECL Finance Ltd (ECL) and Edelweiss Asset Reconstruction Company Limited (EARCL) -- with immediate effect.

"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. Edelweiss Asset Reconstruction Company Limited (EARCL) to cease and desist from acquisition of financial assets including security receipts (SRs) and reorganising the existing SRs into senior and subordinate tranches," the apex banks says in its latest order.

The RBI says its action is based on "material concerns". These have been observed during the course of supervisory examinations. The central bank says the concerns have arisen out of the "conduct of the group entities acting in concert, 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 also observed "incorrect valuation" of SRs (security receipts) in both ECL and EARCL. Besides, in ECL, the probe found 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 says 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.

In 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 RBI adds.

"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 central bank finds out.

Notably, over the last few months, the Reserve Bank has been engaging with the senior management of these entities and their statutory auditors. It says "no meaningful corrective action" has been seen so far, which necessitated the imposition of business restrictions.

Now the central bank has directed both entities to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times.

The RBI says it will review the business restrictions after the "rectification of the supervisory observations" by the group to the satisfaction of the Reserve Bank.