South Korea's financial watchdog decided Wednesday to delay its deliberation on the approval of Hana Financial Group Inc.'s takeover of Korea Exchange Bank (KEB) following a recent court conviction of an executive at KEB's largest shareholder.

   The Financial Services Commission (FSC) said Hana Financial's request for regulatory approval for putting KEB under its wing was not on the agenda for its regular meeting and that decision will be delayed for an unspecified time.

   The regulator said it took up only the issue of determining the eligibility of U.S.-based Lone Star Funds as the biggest shareholder of KEB. Lone Star bought a controlling 51.02 percent stake in KEB for 1.4 trillion won (US$1.2 billion) in 2003.

   "We agreed that the decision over whether to permit the KEB sale will not be dealt with in the latest regular meeting," an FSC official said. "(We) will first examine Lone Star's eligibility, which is a prerequisite for the bank sale," he said.

   If Lone Star is determined eligible, the financial watchdog could go ahead and discuss the approval of the bank's sale, but if not, the fund's process of selling KEB could derail.

   Hana Financial struck a deal with Lone Star to take over the KEB stake for 4.69 trillion won in November last year and is awaiting the FSC's final permission to consolidate the bank unit as its affiliate.

    The FSC's decision not to deal with the approval issue deals a blow to Hana Financial's plan to acquire KEB, the fifth-largest bank in South Korea, within March.

   The FSC had reportedly planned to grant permission for the transaction this month but reversed its plan after the Supreme Court convicted the head of Lone Star's local unit on March 10 for issuing a false disclosure to manipulate stock prices before his company bought the credit card unit of KEB in 2003.

   The court said Yoo Hoi-won unveiled the capital write-down plan to buy the card firm at a below-market price, overturning a lower court's decision. Lone Star later integrated the card unit into KEB, which the buyout fund had previously purchased.

   The court ruling stirred public controversies over Lone Star's allegedly illegal acquisition of KEB and pressed the FSC to refrain from delivering the final green light for Hana Financial's takeover of KEB.

   A higher court ruling could take several months, and Lone Star, if ruled guilty, would become disqualified as the top shareholder in KEB in accordance with local laws.

   KEB's labor union lauded the FSC decision to put off permission that came after days of unionized sit-ins by KEB workers in front of the FSC headquarters, staged to protest Hana Financial's acquisition of their bank.

   "The Supreme Court conviction should mean Lone Star should be deprived of its eligibility as the biggest KEB shareholder and the FSC must give up approval for the transaction," a KEB union worker said.

   The FSC move is the latest setback to Lone Star's repeated plan to exit from the Korean bank. Lone Star's previous two sale deals with Kookmin Bank in 2006 and HSBC in 2008 failed due to regulatory issues and the global financial crisis, respectively. (Yonhap News)