The Reserve Bank of India on Wednesday ordered Edelweiss Asset Reconstruction Company Limited (EARCL) to cease and desist from the acquisition of financial assets, including security receipts (SRs), and reorganising the existing SRs into senior and subordinate tranches. In the same order, the banking regulator also ordered ECL Finance Ltd (ECL) to cease and desist from undertaking any structured transactions in respect of its wholesale exposures with immediate effect.
EARCL and ECL both are entities under the Edelweiss group or the Edelweiss Financial Services Limited, based in Mumbai.
On the same day, SEBI slapped a ₹5 lakh penalty on packaging products company AGI Greenpac for “failure to provide accurate, adequate, and explicit disclosure resulting in misrepresentation to the stock exchanges”.
The action comes after OpIndia reported on the questionable role of Edelweiss in the insolvency proceedings against Hindustan National Glass & Industries Limited (HNG) and how it worked in favour of AGI Greenpac in the proceedings.
In a press release, the RBI said that the action is based on material concerns observed during the course of supervisory examinations, essentially arising out of the conduct of the group entities acting in concert. As per RBI, the entities entered into a series of structured transactions for evergreening stressed exposures of ECL, using the platform of Edelweiss and connected AIFs (Alternative Investment Funds), thereby circumventing applicable regulations.
Edelweiss is accused of non-compliance with regulations pertaining to the settlement of loans and sharing of non-public information of its clients with group entities. The company also failed to RBI’s supervisory letter issued after a previous inspection before the board.
On the other hand, ECL Finance Ltd is accused of 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 Central Repository for Information on Large Credits system (CRILC) and non-adherence to Know Your Customer (KYC) guidelines. ECL took over loans from non-lender entities of the group for ultimate sale to the group ARC, and allowed itself to be used as a conduit to circumvent regulations that permit ARCs to acquire financial assets only from banks and Financial Institutions, the RBI said.
The regulator added that instead of taking meaningful remedial action to rectify the 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 companies and their statutory auditors, but no meaningful corrective action has been evidenced so far, necessitating the imposition of business restrictions.
RBI added that both companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times.
In the SEBI order against AGI Greenpac, the market regulator said that the company withheld crucial information regarding its deal to acquire Hindustan National Glass. It also failed to disclose material developments with respect to disclosures made by it to the exchanges “dated October 31, 2022, and March 16, 2023”.
SEBI further stated that AGI Greenpac failed to disclose crucial information related to a show-cause notice issued by the Competition Commission of India (CCI) to it in the HNG acquisition case. Before the SEBI order, Justice Vikramajit Sen, the former Chief Justice of the Karnataka High Court and judge of the Supreme Court, had said that AGI made “partial and deceitful disclosure” about the CCI approval.
In the HNG insolvency case, the role of Edelweiss and its collusion with other entities were revealed. Notably, DBS Bank initiated insolvency proceedings against HNG in 2021, and Ernst & Young was appointed as the company’s advisor.
Edelweiss ARC was one of the creditors to Hindustan National Glass & Industries Limited, and thereby part of the Committee of Creditors formed in the insolvency process. AGI Greenpac won the bid to acquire HNG in the Committee of Creditors, leading to a monopoly in the market as it was the second largest Indian container glass maker, while HNG was the largest. The deal was approved by the CoC without the mandatory Competition Commission of India (CCI), violating norms.
AGI won the bid thanks to Edelweiss voting against INSCO, another bidder. Ignoring appeals by other players in the industry, CCI approved the deal later. However, the matter was taken to the courts and now the deal is pending before the Supreme Court.
Now, it has been revealed recently that Edelweiss was also the funding partner of AGI Greenpac, in whose favour Edelweiss voted in the HNG insolvency case. Edelweiss Alternate Asset Advisors had promised to give ₹1,100 crore to AGI for the acquisition of HNG. And one of the conditions for this deal was that the funding will be provided only if CoC selects AGI. It was revealed that someone had objected to Edelweiss ARC voting in the CoC, but this was ignored.
Edelweiss was also to get non-convertible debentures of HNG after the insolvency process was concluded. Therefore, Edelweiss was essentially on both sides of the deal – funding AGI to acquire HNG and also voting in HNG CoC to ensure that AGI’s proposal was passed.
All these indicated a collusion among Edelweiss, AGI and Ernst & Young to ensure that HNG was acquired by AGI under insolvency procedures.
The OpIndia report explained in detail how Edelweiss group has been exploiting the Insolvency and Bankruptcy Code formulated by the Modi govt to resolve insolvencies, including the insolvency procedure of Hindustan National Glass & Industries Limited. It is suspected that there is a collusion between Edelweiss and Ernst and Young to subvert the insolvency process.
CCI granted approval to AGI Greenpac’s takeover of HNG in March 2023, even though INSCO had emerged as winner in the bid. The decision was cleared by the National Company Law Appellate Tribunal (NCLAT) in July 2023, rejecting a complaint by rival bidder INSCO. However, after more complaints and litigation, the CCI in February 2024 gave the clean chit to INSCO to acquire HNG.
