In a significant blow to Edelweiss Financial Services (EFSL), the company’s shares plummeted over 17% in early trading today. The stock price dropped to Rs 64 from the previous close of Rs 77.45 on the BSE, leading to a substantial decline in the firm’s market capitalization, which now stands at Rs 6512.67 crore.
The sharp decline in the share price was precipitated by the Reserve Bank of India’s supervisory actions against two key subsidiaries of Edelweiss, ECL Finance Ltd and Edelweiss Asset Reconstruction Company Ltd. The RBI’s directives came after identifying several material supervisory concerns during their examinations, primarily focused on regulatory compliance and governance issues.
ECL Finance has been ordered to cease all structured transactions related to its wholesale exposures, except for the repayment and closure of accounts in the ordinary course of business. This decision was based on findings that ECL had been involved in a series of structured transactions aimed at evergreening stressed exposures.
These transactions, conducted in concert with EARCL and associated Alternative Investment Funds, were essentially circumventing applicable regulations.
The RBI also directed Edelweiss Asset Reconstruction Company to stop the acquisition of financial assets, including security receipts, and to cease reorganizing existing security receipts into senior and subordinate tranches. This move is intended to address concerns over incorrect valuation practices and regulatory breaches within the company.
The central bank’s scrutiny revealed several regulatory violations at ECL. These included the submission of incorrect details of eligible book debts to lenders for the computation of drawing power, non-compliance with loan-to-value norms for lending against shares, and incorrect reporting to the Central Repository for Information on Large Credits. Additionally, ECL was found to have non-adhered to KYC guidelines, further compounding the regulatory breaches.
One of the more troubling findings was that ECL allowed itself to be used as a conduit to circumvent regulations. By taking over loans from non-lender entities within the group for ultimate sale to the group ARC, ECL violated rules that permit Asset Reconstruction Companies (ARCs) to acquire financial assets only from banks and financial institutions. This practice undermined the integrity of the financial regulatory framework and posed significant risks to the financial system.
For Edelweiss Asset Reconstruction Company, the violations extended to 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 the sharing of non-public information of its clients with group entities. These breaches reflect a broader pattern of non-compliance and poor governance within the group.
Despite the RBI’s ongoing engagement with the senior management and statutory auditors of the affected entities, the bank observed a lack of meaningful corrective action. This inaction necessitated the imposition of business restrictions. The RBI has now mandated that both companies strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times.
The business restrictions imposed by the RBI are subject to review upon satisfactory rectification of the supervisory observations. However, these restrictions are without prejudice to any other regulatory or supervisory action that may be initiated by the central bank. This adds a layer of uncertainty about the future operational and financial stability of Edelweiss Financial Services and its subsidiaries.
Investors reacted swiftly to the news, leading to the steep drop in share prices. The market’s response underscores the gravity of the RBI’s findings and the potential long-term implications for Edelweiss. The company’s immediate challenge will be to address the regulatory concerns raised by the RBI and restore investor confidence.
