RBI bans Edelweiss ARC from acquiring distressed assets

The Reserve Bank of India has placed Edelweiss Asset Reconstruction Co. on hold, according to a Wednesday regulator’s notification. from acquiring any distressed assets.

Edelweiss ARC was asked to immediately cease the acquisition of distressed assets, including collateral proceeds, and reorganize existing SRs into senior and subordinated tranches.

In its notification, the regulator also banned ECL Finance from entering into any structured transactions in respect of its wholesale exposures with immediate effect. However, you may still make repayments and/or close accounts.

“Instead of taking meaningful remedial action to address the said deficiencies, group entities have been observed resorting to new ways to circumvent the regulations,” the RBI said.

According to the regulator, the action was taken after observing significant concerns resulting from the behavior of entities from the group, which concluded a number of transactions aimed at strengthening ECL Finance’s extreme exposures.

The Edelweiss ARC platform and related alternative investment funds were used for this purpose, which was contrary to regulations, the central bank said.

She added that other supervisory observations were also made at ECL Finance. They were related to:

• Submitting incorrect data regarding eligible accounting debts to lenders for the purpose of calculating drawing power.

• Non-compliance with lending norms in case of share collateral loans.

• Incorrect reporting to the central repository of information on the large credit system.

• Failure to follow “Know Your Customer” guidelines.

In this regard, the RBI observed that ECL Finance had taken over loans from non-lender group entities which were to be ultimately sold to the ARC Group. In this way, it allowed itself to be “used as a channel to circumvent regulations” that allow ARC to seize financial assets only from banks and financial institutions.

In addition, the regulator also observed cases of incorrect valuation of SR in both entities.

Specific to Edelweiss ARC, the regulator found that the company failed to submit an RBI supervisory letter to the Board after its inspection for 2021-22 and also failed to comply with the rules on loan settlement and disclosure of non-public information of its clients to group entities.

The supervisory action comes after the RBI observed no “significant corrective action” after engaging with senior management and auditors over the past few months.

The regulator has also asked both companies to strengthen their regulatory compliance functions. However, the restrictions will be reviewed only after they are revised to the satisfaction of the RBI.