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MUMBAI : Shares of Edelweiss Financial Services Ltd fell 5% after a report that the ministry of corporate affairs (MCA) has started investigating allegations of financial irregularities at the conglomerate’s asset reconstruction arm.

According to online news website Moneycontrol, the MCA has ordered an inspection of the company’s books following a shareholder’s complaint to the Prime Minister’s Office (PMO) and the Reserve Bank of India (RBI).

Paras Kuhad, former additional solicitor general of India, has alleged that Edelweiss Group, the controlling shareholder of Edelweiss Asset Reconstruction Co (EARC), along with its partner Canadian pension fund Caisse de dépôt et placement du Québec (CDPQ) diverted at least 1,800 crore from EARC.

Kuhad and his family own about 14% in EARC, which manages 45,000 crore in assets, according to the report.

Edelweiss ARC on Thursday strongly denied the allegations. In a notice to the stock exchanges, it said it had not received any intimation of any inspection being conducted by the MCA.

“We deny each and every allegation, contention, statement and/or assertion against us, as contained in the article. EARC is in full compliance with the applicable laws, and has been conducting its business and operations in a fair and transparent manner. We have always acted responsibly and discharged our fiduciary responsibilities, and these allegations seem to be motivated," it said.

Kuhad had first raised these issues with the board in November 2019 and followed up with the RBI and the PMO last year. Following these complaints, Edelweiss set up an external committee to look into the matter, according to a person familiar with the matter.

Mint has partially seen the contents of Kuhad’s 100-page letter.

In the letter, Kuhad alleged that Edelweiss diverted money from EARC in four ways. According to Kuhad, Edelweiss Group allotted 20% equity shares in EARC to CDPQ for less than the fair value. This was done by allowing CDPQ to convert its compulsory convertible preference shares (CCPS) to equity at no additional cost other than the 500 crore it paid at the time of allotment.

The fair value of EARC’s 20% equity is at least 800 crore, wrote Kuhad.

He also alleged that a registered valuer had not determined the price for the CCPS conversion as required by law. The report also alleged that a sum of 300-1,100 crore was siphoned off through the route of allotment of 20% equity shares of EARC to a CDPQ subsidiary.

In November 2019, EARC took a 1,250-crore loan from Farallon Capital, a US investment firm, at a rate of 17% to help its parent company through a liquidity crunch.

The letter alleged that EARC used 700 crore from the Farallon loan to pay back a loan taken from Edelweiss Group at 14%—one which was not due to be repaid at that time.

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