Edelweiss ARC Lands In The Middle Of Whistleblower Allegations, Shareholder Tiff

Edelweiss Asset Reconstruction Company, the country’s largest ARC, finds itself facing whistleblower allegations from a large shareholder of the unit.

The Ministry of Corporate Affairs has initiated an investigation into accounts of Edelweiss ARC following the whistleblower complaints, Moneycontrol first reported on Thursday. Bloomberg confirmed that the ministry has ordered an inspection of the firm’s books of accounts, even though Edelweiss ARC, in a statement, denied receiving any intimation from authorities of the same.

The letter alleging wrongdoing at Edelweiss ARC was sent by Paras Kuhad, a former additional solicitor general of India, who owns about 14% in the ARC, along with his family, a person with direct knowledge of the matter told BloombergQuint.

In his letter, Kuhad has alleged that Edelweiss ARC entered into preferential transactions with Canadian pension fund Caisse de dépôt et placement du Québec, purchased assets from the broader Edelweiss Group at unjustifiably high valuations and borrowed money from U.S.-based investor Farallon Capital to repay debt owed to Edelweiss Group because the latter was facing a liquidity crunch, this person said.

BloombergQuint has not reviewed a copy of the whistleblower letter.

The ARC on its part has rejected the allegations and has claimed that these are motivated in nature. “We have always acted responsibly and discharged our fiduciary responsibilities, and these allegations seem to be motivated,” the company said in a statement on March 18.

The Backstory

Kuhad, a commercial lawyer, had built his banking experience over the years by working with Bank of Rajasthan, according to two people with direct knowledge of the matter.

As part of his legal experience, he had also represented debtors being restructured under the now repealed Sick Industrial Companies Act. Owing to his experience in banking and specifically in dealing with stressed assets, Kuhad joined hands with Rashesh Shah of Edelweiss Group to set up an ARC in 2008, the people said.

At the time, the two investors became sponsors for the ARC and started operations. In 2012 though, Kuhad was appointed as an additional solicitor general for the Government of India. This led to Kuhad exiting from Edelweiss ARC’s board and transferring the shareholding in the company to his family members, the people said. Kuhad’s wife and his son-in-law have been representing the family’s interests on the ARC’s board.

Trouble between the sponsors began in 2016, when Edelweiss ARC wanted to raise funds through a rights issue and the company’s promoters didn’t approach Kuhad to participate, the first of the two people said. This would have meant that when external investors infused capital, his stake would have been diluted.

At the time, Kuhad had fought against his stake dilution by reaching out to promoters. He eventually participated in the capital infusion at a price of Rs 22 per share to maintain his stake, according to the two people. Over the years, Kuhad and his family have invested Rs 40-50 crore in Edelweiss ARC, the people said.

A Protracted Fight

Some of the allegations made by Kuhad in his letter date back to 2019.

At that time, Kuhad expressed concerns regarding certain transactions the company participated in with the Edelweiss Group’s lending business. According to the two people cited earlier, Kuhad had approached the company’s board with his concerns.

Kuhad alleged that the ARC had paid too much money to purchase loan assets from Edelweiss Group, without clarifying the reasons for doing so. ARCs tend to typically purchase loans at a discount from lenders. In December 2019, the Reserve Bank of India issued a notification disallowing ARCs from purchasing assets from sponsors through bilateral deals.

According to the second of the two people cited earlier, the audit committee of the ARC’s board conducted an investigation into the concerns which didn’t yield any material findings against Edelweiss ARC.

Edelweiss ARC has not disclosed the complaints received or the investigation into them in its annual reports or statutory filings since 2016-17, which are available on the company’s website.

Unhappy with the outcome of the board’s investigation, Kuhad wrote to the RBI in July, August and September 2020, seeking an intervention in the matter. This time, Kuhad also brought up concerns regarding an arrangement with CDPQ where the pension fund was allotted convertible shares which were priced lower than fair value, according to the first person cited earlier.

However, the banking regulator didn’t directly respond to Kuhad’s request, the two people said. Alongside approaching the RBI, Kuhad also wrote to the Prime Minister’s Office with his concerns.

“The investigative agencies are looking into the matter. We should let the process play out,” said Kuhad when contacted by BloombergQuint, refusing to answer any further questions. While Edelweiss ARC has denied allegations made by Kuhad in its exchange filing, it did not respond to a detailed questionnaire mailed on Thursday. The ministry didn’t respond to queries mailed on Thursday either.

Investigations Into Allegations

While the RBI did not respond to Kuhad directly, it undertook an inspection of Edelweiss ARC’s books due to the complaints, the second person cited earlier said. The investigation looked into the details of all of Edelweiss ARC’s transactions with its promoter entities and the rationale behind investing in certain assets.

This is in addition to the RBI’s annual inspections into the company’s business, which the regulator regularly undertakes, the second person cited earlier said.

The regulator doesn’t disclose findings of such inspections unless it chooses to impose a penalty on the concerned entity. A third person familiar with the issue, said the matter may not be fully closed yet.

Queries sent to the RBI on March 19 remained unanswered.

News of the MCA’s scrutiny comes at a time when the ARC business has slowed.

For the year ended March 31, 2020, Edelweiss ARC’s standalone net profit fell 30.67% year-on-year to Rs 301.55 crore. Total income fell 15% year-on-year to Rs 1,166 crore, while total expenses rose 18% to Rs 817 crore.

In the last financial year, Edelweiss ARC purchased assets worth Rs 8,185 crore for a consideration of Rs 4,922 crore. It also reported recoveries worth Rs 11,213 crore during 2019-20, according to its latest annual report. As of March 31, 2020, the company’s assets under management stood at Rs 43,012 crore, the report showed.

“The fact is that like much of the financial services industry, the Edelweiss Group has suffered due to the NBFC credit crunch over the last few years. This could explain some of the allegations about the ARC borrowing money from the market and repaying the group,” said Hemindra Hazari, an independent banking analyst. “But then the allegations about the ARC paying close to par value for purchasing loan accounts from the group need to be investigated further.”