RBI Imposes Business Restrictions on Edelweiss Group’s EARCL and ECL Finance

The Reserve Bank of India (RBI) has taken strict action against the Edelweiss group, barring its asset reconstruction company from acquiring financial assets and security receipts (SRs). Additionally, the non-banking financial arm of the group has been prohibited from undertaking structured transactions for wholesale exposure, except for repayment and closure of accounts.

The RBI’s decision was based on concerns identified during supervisory examinations, which revealed that the group entities were engaging in activities that circumvented regulations. Specifically, the Edelweiss Asset Reconstruction Company Limited (EARCL) and ECL Finance were found to be collaborating to “evergreen” stressed exposure of ECL, using the platform of EARCL and connected AIFs.

This regulatory action comes in the wake of Deputy Governor Swaminathan J’s warning about Indian ARCs bypassing regulations to facilitate the evergreening of distressed assets. The RBI emphasized the lack of transparency and consistency in the issuance and valuation of SRs.

The Edelweiss group has not responded to queries regarding the RBI’s restrictions. Edelweiss ARC’s assets under management fell to Rs 31,590 crore, while ECL Finance has been scaling down its wholesale book. The RBI has highlighted several supervisory observations, including non-compliance with loan-to-value norms and KYC guidelines.

Despite previous warnings and engagements with the group entities, the RBI found that they continued to circumvent regulations. The RBI has directed both companies to strengthen their assurance functions to ensure regulatory compliance at all times. The business restrictions imposed on EARCL and ECL Finance will be reviewed once the supervisory observations are rectified to the satisfaction of the RBI.