RBI bars Edelweiss ARC from acquiring assets, cites supervisory concerns

The Reserve Bank of India barred Edelweiss Asset Reconstruction Company Limited (EARCL) from acquiring financial assets based on material concerns during a supervisiory examination, the central bank said on Thursday.

RBI also directed ECL Finance to stop undertaking structured transactions with respect to its wholesale exposures. This excludes repayment and closure of accounts in the normal course of business.

"The Reserve Bank of India has directed 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 statement read.


RBI said it took the action based on material concerns that it observed during supervisory examination. These conerns arose 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.

By doing this, the company allegedly circumvented applicable regulations, RBI said.

Evergreening is the practice of granting further credit to firms close to defaulting to help them repay existing loans.

Furthermore, RBI also noticed incorrect valuation of security receipts in ECL and EARCL.

RBI noticed that ECL had submitted incorrect details of its eligible book debts to its lenders for computation of drawing power. In addition, RBI saw incorrect reporting to Central Repository for Information on Large Credits system (CRILC) and non-adherence to Know Your Customer (KYC) guidelines on ECL's part.

"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," RBI said in a statement.

EARCL, ECL didn't take action: RBI

RBI highlighted that the companies did not take 'meaningful' remedial actions and instead, its 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," RBI said.

ECL and EARCL have now been asked to strengthen their assurance functions to ensure compliance. RBI will review the actions later on to its satisfaction.

RBI's warning

Earlier today, RBI's Deputy Governor Swaminathan J said that certain Indian ARCs have been circumventing regulations and have allowed themselves to be used for the evergreening of distressed assets.

"Some ARCs, while enjoying the full benefits of the special position granted to them... have been found to be using innovative ways to structure transactions in a manner to circumvent regulations," Swaminathan said.

"During the course of our onsite examinations, we have come across instances where ARCs have been used or allowed themselves to be used, if I may say so, as a conduit to evergreen distressed assets."