SEBI is investigating if Franklin Templeton Mutual Fund (FTMF) borrowed far beyond what it was permitted and how it managed to subsequently get a ‘special permission’ to enhance its borrowing limit, mainly to meet the redemptions in the six debt schemes that were shut in April 2020.

This has been revealed in investor complaints to the Finance Ministry, the Central Vigilance Commission (CVC) and SEBI’s vigilance department highlighting that FTMF got special permission to hike the borrowing of the debt schemes from 30 per cent to 40 per cent just one day before it announced the controversial decision to shut them. The complaints have drawn data from FTMF’s own disclosures to the court including SEBI’s special permission.

Enhanced borrowing limits

Disclosures made by FTMF itself show that “SEBI by a letter dated March 23, 2020 increased the borrowing limits from 20 per cent to 30 per cent for two funds, i.e., Franklin India Low Duration Fund and Franklin India Short Term Income Plan (FISTIP). Additionally, borrowing limits were enhanced by letter dated April 13, 2020 Franklin India Income Opportunities Fund (FIIOF) and again by letter dated April 22, 2020 in Franklin India Credit Risk Fund and from 20 per cent to 40 per cent in FISTIP and FIIOF),”

However, it suspected that FTMF may have exceeded the borrowing limits even before it got the nod for 40 per cent borrowing. This is being probed by SEBI and the CVC as well, according to sources.

In the weeks leading to the shutting of the debt schemes, FTMF saw redemptions of more than ₹20,000 crore for which it had to borrow. SEBI is also probing if the fund house allowed withdrawals or passed information to its close associates before the schemes were shut.

Also, the regulator is looking if top FTMF officials withdrew their funds just before the schemes were shut. SEBI has issued show-cause notices to FTMF for fraudulent trade practices while the Enforcement Directorate is probing money laundering charges.

Redemptions allowed

The complainants cited court filings to conclude that FTMF allowed redemptions worth ₹363 crore on April 24, 2020, the day the schemes were shut. Also, it repaid borrowings of ₹2,794 crore and ₹151 crore to its own Asset Management Company between April 24 and September 2020. Repayments of nearly ₹250 crore were made between September and December 2020.

SEBI regulations allow MFs to borrow up to 20 per cent of the total assets of a scheme. This cap was raised to 30 per cent for a few MFs by simple letters due to Covid but to 40 per cent only for FTMF, sources said. The limits were raised despite FTMF holding a portfolio of over 90 per cent illiquid securities for several quarters and its losses having little to do with the lockdown.

FTMF's response

In a late evenning reply to an email query, FTMF said, "All the borrowings have been made in accordance with regulations. We are unable to comment on factually incorrect and speculative queries. Our focus has been, and remains, on returning monies at the earliest, by supporting SBI Funds Management in the monetization process. The schemes have already distributed INR 9,122 crores to investors and have accrued another INR 1,180 crores in cash as on February 26, 2021."

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