Lone Star Funds is ineligible as Korea Exchange Bank's major shareholder since the U.S. private buyout fund's 2003 acquisition of the South Korean lender may be illegal, a lawmaker said Tuesday.

The remarks come as Lone Star Funds is in talks with Hana Financial Group Inc., the country's No. 4 banking group, to settle the sale of its 51.02 percent stake in KEB for 4.69 trillion won ($4.3 billion).

If Lone Star jointly acquired KEB with other investors, it will indicate that the Financial Services Commission (FSC)'s approval of the 2003 takeover carries serious flaws, said Rep. Ooh Che-chang of the main opposition democratic Party (DP).

According to Ooh, other overseas investors such as ABN Amro Bank, Quebec Pension Plan and Stanford University had invested US$100 million, $240 million and $30 million, respectively, in KEB.

If the FSC only approved Lone Star Fund's stake acquisition, excluding the other investors, doubts would be raised on the top regulator's decision, said Ooh.

The lawmaker further argued that Lone Star did not submit any documents or regulatory filings on this matter, casting suspicions the U.S. private buyout fund intentionally concealed relevant information.

On Ooh's argument, FSC Chairman Kim Seok-dong said the regulator would have to look into legislations at that time to conclude on the issue.

Lone Star and Hana Financial's agreement on KEB has been at an impasse since the FSC indefinitely delayed regulatory permission for the No. 4 banking group's KEB purchase.

Due to a pending court case over Lone Star's alleged wrongdoing in its 2003 purchase of a credit card unit affiliated with KEB, the FSC deferred its decision over whether Lone Star is legally eligible to become the biggest shareholder of KEB. Granting eligibility is deemed a prerequisite for the FSC to permit Hana Financial's transaction with Lone Star.

(Yonhap News)