RBI cracks down on CDPQ-backed Edelweiss ARC, ECL Finance for rule violations
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RBI cracks down on CDPQ-backed Edelweiss ARC, ECL Finance for rule violations

By TEAM VCC

  • 29 May 2024
RBI cracks down on CDPQ-backed Edelweiss ARC, ECL Finance for rule violations
RBI Governor Shaktikanta Das | Credit: Reuters

The Reserve Bank of India on Wednesday imposed restrictions on Edelweiss Asset Reconstruction Company Ltd and group company ECL Finance Ltd on concerns related to evergreening of stressed assets. 

The central bank asked Edelweiss ARC to stop acquiring financial assets, including security receipts (SRs), with immediate effect and barred non-banking finance company ECL from undertaking any structured transactions, other than repayment or closure of accounts in its normal course of business. 

The RBI said it took the actions based on concerns that the group entities were entering into a series of structured transactions for evergreening stressed exposures of ECL Finance, using the platform of Edelweiss ARC and connected alternative investment funds, thereby circumventing applicable regulations.  

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Evergreening refers to providing additional loans to companies that are set to default to help them repay existing debts. 

The central bank also observed “incorrect valuation of SRs” in both ECL and Edelweiss ARC, it said in a statement. 

The action comes soon after RBI deputy governor Swaminathan J. said in a speech earlier this month that some Indian asset reconstruction companies had been circumventing regulations and allowed themselves to be used for the evergreening of distressed assets. 

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"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 in the speech uploaded on the RBI’s website earlier on Wednesday. 

Edelweiss ARC and ECL Finance are both backed by Canadian pension fund Caisse de dépôt et placement du Québec, or CDPQ. The pension fund invested $250 million (Rs 1,800 crore) in ECL Finance in 2019 and picked up a 20% stake in Edelweiss ARC in 2021. 

In its statement, the RBI also said that 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. Edelweiss ARC's violations included non-compliance with regulations pertaining to settlement of loans and sharing of non-public information of its clients with group entities. 

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“Instead of taking meaningful remedial action to rectify the said deficiencies, it was observed that the 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,” the RBI said. 

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