RBI stated that the action stems from significant concerns noted during supervisory examinations.
Edelweiss Financial Services stock plummeted 16% on May 30 after RBI imposed restrictions on two of its financial services entities due to significant supervisory concerns. The central bank’s actions on May 29 targeted ECL Finance and Edelweiss Asset Reconstruction Company. RBI instructed ECL Finance to cease structured transactions for its wholesale exposures immediately, except for account closure or repayment. EARCL is prohibited from acquiring financial assets, including security receipts, and restructuring existing SRs into senior and subordinate tranches.
Edelweiss Financial Services Faces RBI Scrutiny
RBI, in its announcement regarding Edelweiss group entities, cited significant supervisory concerns arising from coordinated actions of the group entities observed during examinations. The entities utilized structured transactions through EARCL and affiliated AIFs to perpetuate stressed exposures of ECL, circumventing regulations, according to RBI. ECL Finance and Edelweiss Asset Reconstruction Company have pledged to adhere to RBI’s recommendations. Both companies are swiftly addressing RBI’s concerns to ensure alignment with regulatory standards. ECL Finance aims to resolve the issue within the stipulated three-week period as directed by the central bank.
Edelweiss Financial Services shares plunged 17% to Rs 64 on the BSE in Thursday’s intraday trading following RBI’s restrictions on the company’s asset reconstruction arm from acquiring financial assets and SRs. RBI, on May 29, also prohibited the company’s NBFC arm from engaging in structured transactions for wholesale exposure except for account closure or repayment. EARCL is also restricted from restructuring existing SRs into senior and subordinate tranches.
RBI cited significant concerns from supervisory examinations, primarily due to coordinated actions of the group entities. EARCL and ECL Finance were found collaborating on structured transactions to evade regulations. RBI will review the directives upon satisfactory resolution of their concerns. EARCL acknowledged RBI’s guidance and pledged immediate remedial actions. The company is reviewing the order and is committed to transparency, corporate governance, and regulatory compliance. EARCL assured no material impact on its resolution and recovery efforts, which will proceed as usual.
ECL Finance stated that in the previous fiscal year, it passed a Board Resolution to halt the wholesale business, disclosed in its financial statements for the period ending March 31, 2024. Consequently, the company believes the directives will not significantly impact its strategy and operations. The reduction of wholesale exposure will continue as permissible in regular business operations, ECL Finance assured. At 09:30 AM, Edelweiss was trading 11% lower at Rs 68.56, contrasting with a 0.24% decline in the S&P BSE Sensex. Trading volume surged 1.5 times, with 11.19 million equity shares exchanged on the NSE and BSE combined.
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