Evergreening refers to a practice where new loans are given to stressed borrowers to enable them to repay existing loans. The RBI has publicly warned against the practice, which is typically aimed at masking the amount of stressed loans a firm holds.

The entities, Edelweiss Asset Reconstruction Co Ltd (EARCL) and non-bank firm ECL Finance (ECL), had entered into a series of structured transactions for evergreening stressed loans of ECL, the Reserve Bank of India said in a release.

The RBI added that the firms circumvented applicable regulations by using the platform of EARCL and connected alternative investment funds.

By taking over loans from non-lender entities of the group for ultimate sale to the group ARC, ECL allowed itself to be used as a conduit to bypass regulations, the RBI said.

According to the central bank's norms, asset reconstruction companies can acquire financial assets only from banks and financial institutions.

EARCL and Edelweiss Group did not immediately respond to a Reuters email seeking comment.

Incorrect valuation of security receipts was also observed in both ECL and EARCL, the RBI said.

"Instead of taking meaningful remedial action to rectify the said deficiencies, it was observed that the group entities were resorting to new ways to circumvent regulations," the central bank said, directing them to ensure regulatory compliance "in letter and spirit at all times".

The RBI has increased supervision of regulated entities to prevent systemic risks and to ensure that regulations are followed.

RBI Deputy Governor Swaminathan J recently said that some ARCs were allowing themselves to be used for the evergreening of distressed assets.