Shares of Edelweiss Financial Services Ltd crashed 17% on Thursday after banking regulator Reserve Bank of India (RBI) imposed business restrictions on two of its entities citing "material concerns" during the course of supervisory examinations.

The stock opened at ₹64 against its previous closing price of ₹77.45 on the BSE.

On Wednesday, the RBI directed ECL Finance, a subsidiary of Edelweiss Financial Services, to cease and desist, with immediate effect, from undertaking any structured transactions in respect of its wholesale exposures, other than repayment or closure of accounts in its normal course of business.

The banking regulator also ordered Edelweiss Asset Reconstruction Company Limited (EARCL) to cease and desist from acquisition of financial assets including security receipts and reorganising the existing security receipts into senior and subordinate tranches.

The central bank says its 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, 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.

Incorrect valuation of security receipts was also observed in both ECL and EARCL, the RBI says.

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, says the RBI.

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, it says.

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, says the RBI.

Instead of taking meaningful remedial action to rectify the said deficiencies, the RBI says it 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 regulator says, adding that both the companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times.

In a stock exchange filing, ECL Finance says the RBI order is with reference to the company’s wholesale exposure. “In the last Financial Year, the company passed a Board Resolution to discontinue this business, which was disclosed in its financial statements for the period ending 31 March 2024. The Company, therefore, believes these directions will not materially impact its strategy and its business. Reduction of the wholesale exposure will continue as permitted, in the normal course of business,” it says.

Edelweiss ARC

Edelweiss Financial shares tank 17% post RBI curbs

RBI imposes business curbs on 2 entities of Edelweiss Group