The Reserve Bank of India (RBI) on Wednesday, May 29, has imposed business restrictions against ECL Finance Limited (ECL) and Edelweiss Asset Reconstruction Company Limited (EARCL), due to concerns regarding regulatory breaches and improper conduct by the entities.
Supervisory Action against ECL and EARCL
The RBI has directed ECL to cease and desist from engaging in structured transactions related to its wholesale exposures, other than repayment and/ or closure of accounts in its normal course of business. Similarly, it has also instructed EARCL to halt the acquisition of financial assets, including security receipts (SRs) and reorganising the existing SRs into senior and subordinate tranches.
Roots of Concern
The action is based on the RBI's findings during its supervisory examinations, that the group entities entering into a series of structured transactions, aims to rejuvenate stressed exposures within ECL. These transactions used the EARCL platform and associated Alternative Investment Funds (AIFs), thereby sidestepping regulatory frameworks. Moreover, incorrect valuation practices were noted within both ECL and EARCL, according to the RBI press release.
ECL faced various supervisory criticisms, including 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 share-based lending, and incorrect submissions to the Central Repository for Information on Large Credits system (CRILC) and non-adherence to Know Your Customer (KYC) guidelines, added in the release.
Reserve Bank of India (RBI) | Image Source: Wikipedia (Representative)
Moreover, ECL's involvement in transferring loans from non-lender group entities to the group's asset reconstruction company (ARC) raised concerns of regulatory circumvention.
In the case of EARCL, regulatory violations ranged from failure to present the RBI's supervisory directives to the board, non-compliance with regulations pertaining to settlement of loans and unauthorised sharing of client information with affiliated entities.
Also, the RBI also found insufficient remedial measures taken by the entities to address these identified deficiencies.
It also added that the imposed business restrictions will remain in effect until satisfactory rectification of supervisory concerns is demonstrated to the RBI's satisfaction.
