Edelweiss Financial Services plunges 12% after RBI imposes restrictions on ECL Finance, Edelweiss Asset Reconstruction Company

Shares of Edelweiss Financial Services plunged 12% on Thursday morning after the Reserve Bank of India (RBI) imposed business restrictions on two of its entities, ECL Finance and Edelweiss Asset Reconstruction Company (EARCL).

The RBI directed ECL Finance to cease and desist, with immediate effect, from undertaking any structured transactions in respect of its wholesale exposures, other than repayment or closure of accounts in its normal course of business. At the same time, the regulator directed Edelweiss Asset Reconstruction Company to cease and desist from the acquisition of financial assets including security receipts (SRs) and reorganising the existing SRs into senior and subordinate tranches.

The RBI said that the action is based on material concerns observed during the course of supervisory examinations. The regulator expressed concerns about the conduct of the group entities acting in concert, by entering into a series of structured transactions for ever-greening stressed exposures of ECL, using the platform of EARCL and connected alternative investment fund (AIFs), thereby circumventing applicable regulations.

Incorrect valuation of SRs was also observed in both ECL and EARCL, it said.

In ECL, supervisory observations included submission of incorrect details of its eligible book debts to its lenders for computation of drawing power, non-compliance with loan-to-value norms for lending against shares, incorrect reporting to the Central Repository for Information on Large Credits system (CRILC) and non-adherence to Know Your Customer (KYC) guidelines.

In EARCL, other violations included not placing the RBI’s supervisory letter issued after the previous inspection for 2021-22 before the Board, non-compliance with regulations pertaining to the settlement of loans and sharing of non-public information of its clients with group entities.

ECL Finance clarified that in the last financial year, the company passed a board resolution to discontinue this business, which was disclosed in its financial statements for the period ending March 31, 2024. “The company, therefore, believes these directions will not materially impact its strategy and its business. Reduction of the wholesale exposure will continue as permitted, in the normal course of business,” it said.

“We reaffirm our commitment to complying with the RBI recommendations and hope to resolve this within three weeks, as directed by the RBI,” it added.

Meanwhile, EARCL said that the firm is reviewing the order and will address the observations mentioned. “We are dedicated to maintaining transparency and upholding the highest standards of corporate governance and committed to compliance with regulatory requirements. There will not be any material impact on the company’s resolution and recovery efforts which would continue normally,” it said.

Shares of Edelweiss Financial Services have declined over 13% since the beginning of the year. The stock has lost 0.59% in the last one year.