When I install emacs using the --prefix directory and name the prefix
directory as EM-L, functionality of eshell gets affected.

This has been discussed in the following emacs-devel thread:

https://lists.gnu.org/archive/html/emacs-devel/2012-08/msg00599.html

Please see below for an example:

Welcome to the Emacs shell

~/EM-L/bin $ which ls
~/EM-L/bin $ /bin/ls

~/EM-L/bin $ which which
~/EM-L/bin $ /usr/bin/which

~/EM-L/bin $ which pwd
~/EM-L/bin $ /bin/pwd




In GNU Emacs 24.2.5 (x86_64-unknown-linux-gnu, X toolkit, Xaw3d scroll bars)
 of 2012-09-23 on Vishwam
Windowing system distributor `The X.Org Foundation', version 11.0.11103000
Configured using:
 `configure '--prefix=/home/rajanikanth/EM-L''

Important settings:
  value of $LC_ALL: nil
  value of $LC_COLLATE: nil
  value of $LC_CTYPE: nil
  value of $LC_MESSAGES: nil
  value of $LC_MONETARY: nil
  value of $LC_NUMERIC: nil
  value of $LC_TIME: nil
  value of $LANG: en_US.UTF-8
  value of $XMODIFIERS: nil
  locale-coding-system: utf-8-unix
  default enable-multibyte-characters: t

Major mode: EShell

Minor modes in effect:
  tooltip-mode: t
  mouse-wheel-mode: t
  tool-bar-mode: t
  menu-bar-mode: t
  file-name-shadow-mode: t
  global-font-lock-mode: t
  font-lock-mode: t
  blink-cursor-mode: t
  auto-composition-mode: t
  auto-encryption-mode: t
  auto-compression-mode: t
  line-number-mode: t
  transient-mark-mode: t

Recent input:
M-x e s h e l l <return> w h i c h SPC l s <return>
<return> w h i c h SPC w h i c h <return> <return>
w h i c h SPC p w d <return> <return> <help-echo> M-x
r e p o <tab> r <tab> <return>

Recent messages:
Loading em-cmpl...done
Loading em-dirs...done
Loading em-glob...done
Loading em-hist...done
Loading em-ls...done
Loading em-prompt...done
Loading em-script...done
Loading em-term...done
Loading em-unix...done
Making completion list...

Load-path shadows:
None found.

Features:
(shadow sort gnus-util mail-extr emacsbug message format-spec rfc822 mml
mml-sec mm-decode mm-bodies mm-encode mail-parse rfc2231 mailabbrev
gmm-utils mailheader sendmail rfc2047 rfc2045 ietf-drums mm-util
mail-prsvr mail-utils help-mode easymenu view em-unix pcomplete comint
regexp-opt ansi-color em-term term disp-table ehelp electric em-script
em-prompt em-ls em-hist em-pred em-glob em-dirs em-cmpl em-basic esh-opt
em-banner em-alias ring esh-var esh-io esh-cmd esh-ext esh-proc esh-arg
eldoc help-fns esh-groups eshell esh-module esh-mode esh-util time-date
tooltip ediff-hook vc-hooks lisp-float-type mwheel x-win x-dnd tool-bar
dnd fontset image fringe lisp-mode register page menu-bar rfn-eshadow
timer select scroll-bar mouse jit-lock font-lock syntax facemenu
font-core frame cham georgian utf-8-lang misc-lang vietnamese tibetan
thai tai-viet lao korean japanese hebrew greek romanian slovak czech
european ethiopic indian cyrillic chinese case-table epa-hook
jka-cmpr-hook help simple abbrev minibuffer loaddefs button faces
cus-face files text-properties overlay sha1 md5 base64 format env
code-pages mule custom widget hashtable-print-readable backquote
make-network-process dynamic-setting system-font-setting
font-render-setting x-toolkit x multi-tty emacs)


-- 
Rajanikanth