» Kim Sang-jo at a KEB's shareholer meeting.

Major South Korean civic organizations said that Texas-based fund Lone Star, which was investigated last year for tax evasion here, is holding shares of Korea Exchange Bank (KEB) in violation of banking law.

According to the law, a non-financial fund cannot have shareholder voting rights if it owns 4 percent or more of a bank's stake. Lone Star, a U.S. private equity fund, was originally not eligible to be a majority shareholder of any bank in South Korea, according to a domestic law stipulating a ban of non-financial institutions from acquiring a South Korean bank. But based on an exception clause applied under emergency circumstances, namely, financial troubles at KEB, Lone Star became KEB's largest shareholder in October 2003. It currently holds 64.62 percent of KEB's shares, and retains shareholder voting rights equivalent to that percentage.

However, according to rules set forth by another article of the same banking law, Lone Star could be judged as a non-financial fund, and thus not eligible for shareholder voting rights due to its large share of KEB. Under the law's article, investors are deemed to be a non-financial fund if they invest more than 25 percent of their assets or more than 2 trillion won (US$2.13 billion) into non-financial sectors. This regulation is aimed at keeping

Korea 's financial sectors independent from direct control from large conglomerates, which in Korea are largely involved in the manufacturing or service sectors rather than the financial sector.

The Solidarity for Economic Reform and the People's Solidarity for Participatory Democracy commented on Lone Star's holdings of KEB while taking part in a general meeting of KEB shareholders on March 29.

PSPD director Kim Sang-jo said, "It is easily predicted that Lone Star's assets in non-financial companies total more than 2 trillion won. If so, regardless of whether or not the Financial Supervisory Commission (FSC)'s approval for Lone Star's takeover of KEB violated the law, Lone Star's more-than-64-percent stake in KEB is against the law. Therefore, Lone Star's shareholder voting rights should automatically restricted within 4 percent and the U.S. fund should sell its excess shares immediately," added Kim.

As the controversy surrounding Lone Star's purchase of KEB has focused on other alleged illegal transactions, the fund's ownership in shares of the bank has been overlooked.

In response, KEB Chairman Robert Fallon said that Lone Star was approved to invest in KEB by South Korean authorities. Therefore, Lone Star is guaranteed shareholder voting rights, he added.

An FSC official said, "Just as in foreign large shareholders of other domestic banks, the FSC has already confirmed Lone Star's eligibility as KEB's majority shareholder and continues to confirm it upon every financial quarter."

But in order to confirm the overseas investments of Lone Star, the watchdog authority receives data from the company itself, as opposed to other foreign majority shareholders of financial companies in South Korea , such as CitiBank and SC First Bank, which have their overseas investments confirmed by watchdog authorities based in their respective countries.

In a related case, when Temasek Holdings, the Singaporean government's investment arm, applied for approval to purchase 9.99 percent shares of Hana Bank in 2004, the FSC deemed the company as non-financial fund considering Temasek's record of worldwide investment. Temesek won approval to purchase the Hana Bank shares on condition that it abandon voting rights per the 4-percent excess rule and forfeit any participation in the bank's management.

Please direct questions or comments to [englishhani@hani.co.kr]