LG Industrial Admits Illegality In Share Sale of Capital Firm

LG Industrial Systems Co. said two weeks ago that it had sold its stake in LG Capital Services Corp. to a foreign buyer, but it has come to light that the real buyers were local financial institutions.

The industrial equipment maker, which was LG Capital's largest shareholder, was circumventing a regulation of the Stock Transaction Act, an LG Industrial official said.

That rule bans the largest shareholder of a company from selling those holdings for one year after the company requests a preliminary examination for a stock listing and six months after getting a listing. But the largest shareholder is allowed to sell the stake to a foreign buyer during those periods. LG Capital is set to get a listing in October.

LG Industrial said July 16 that it sold 8.32 million shares, or an 11.9-percent stake, in the credit card firm to Cherrystone Investment Holdings Ltd., a subsidiary of the investment bank Credit Suisse First Boston, for $223 million.

But after buying the shares, Cherrystone issued to local financial firms $155 million of bonds exchangeable into the shares and $71.5 million of bonds backed by the shares. The institutions took over the bond issues July 19.

Cherrystone then paid LG Industrial on July 23 with the money from the financial institutions, analysts said. One analyst said that LG Industrial may have been trying to boost its stock. "Attracting foreign funds is seen as favorable to boost share prices," he said.

But the LG Industrial official explained that the reason for the indirect transaction was a more practical one. "LG Industrial was not allowed to sell the stake in the credit card firm to local companies," he said, "so we had no choice but to resort to an indirect method."

by Lee Hee-sung