Supervisory Actions Imposed on ECL Finance and Edelweiss ARC for Regulatory Breaches

The Reserve Bank of India (RBI) has taken supervisory actions against ECL Finance Limited (ECL) and Edelweiss Asset Reconstruction Company (ARC), both part of the Edelweiss Group, due to significant supervisory concerns and regulatory circumventions.

The central bank has directed ECL to immediately cease any structured transactions involving its wholesale exposures, except for the repayment or closure of accounts in the normal course of business.

RBI’s investigation revealed that ECL was involved in transactions that circumvented regulations by acquiring loans from non-lender entities within the group and then selling them to the group’s ARC. This practice allowed ECL to act as a conduit, enabling the ARC to acquire financial assets only permitted from banks and financial institutions.

Consequently, Edelweiss ARC has also been ordered to halt the acquisition of financial assets, including security receipts (SRs), and to stop reorganizing existing SRs into senior and subordinate tranches.

The supervisory actions were effective immediately.

The RBI’s examination also uncovered issues such as incorrect valuation of security receipts and the submission of inaccurate eligible book debt details by ECL to its lenders for computing drawing power. Discrepancies were also found in ECL’s reporting to the Central Repository for Information on Large Credits (CRILC) system and non-compliance with Know Your Customer (KYC) guidelines.

Despite discussions with senior management and statutory auditors of the entities, the RBI noted a lack of effective remedial measures. Instead, the entities continued to find new ways to circumvent regulations, prompting the imposition of these business restrictions.

The RBI has mandated that both ECL and Edelweiss ARC strengthen their assurance functions to ensure full regulatory compliance. The central bank will review the effectiveness of these measures at a later date.