RBI bars Edelweiss Asset Reconstruction Company from acquiring financial assets

The Reserve Bank of India (RBI), India’s central bank, has taken action against Edelweiss Asset Reconstruction Company (EARCL) and its affiliated company ECL Finance, just one week after calling on asset reconstruction companies to improve their business practices. Edelweiss ARC was previously the largest such company in the country, until the establishment of a national bad bank.

The RBI has barred both companies from acquiring new loans and financial assets. This action was taken after the regulator found evidence that the two entities were working together to bypass regulations. Their scheme involved ECL using the platform of Edelweiss Asset Reconstruction Company and associated investment funds to disguise troubled loans as healthy ones, essentially hiding the true financial condition of the loans (a practice known as evergreening).

The specific penalties imposed on the companies differ slightly. Edelweiss Asset Reconstruction Company is completely restricted from acquiring new financial assets, including purchasing security receipts (SRs, financial instruments issued by ARCs to acquire distressed assets) and reorganizing existing SRs into senior and subordinate tranches (which would redistribute risk). ECL Finance, on the other hand, is prohibited from engaging in any complex financial transactions for its large loans. The only exceptions allowed are standard repayments or closing accounts in the normal course of business.

The RBI also identified issues with how these companies valued certain financial instruments (security receipts) and found other regulatory violations by ECL. These included submitting incorrect information about eligible book debts to lenders to calculate borrowing capacity, failing to comply with loan-to-value norms for loans secured by shares, providing inaccurate reports to the Central Repository for Information on Large Credits (CRILC), and not following Know Your Customer (KYC) guidelines.

In its order, the RBI noted that instead of taking corrective actions to address these problems, the companies appeared to be devising new methods to circumvent regulations. The central bank had been communicating with the senior management of these companies and their auditors for several months, but no meaningful improvements were observed. Therefore, the RBI felt it necessary to impose operational restrictions.

These restrictions will only be lifted after the RBI is satisfied that Edelweiss has addressed the identified issues and brought its practices into compliance with regulations.

Also See: RBI meets heads of ARCs amid reports of use of unfair recovery methods