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FSC punishes Chinatrust Financial over takeover bid

The Financial Supervisory Commission yesterday decided to punish Chinatrust Financial Holding Co (中信金控) for its flawed takeover bid on larger rival Mega Financial Holding Co (兆豐金控) by restricting certain parts of the company's business.

The commission would suspend its review of Chinatrust Financial's applications for setting up overseas outlets until improvements in the firm's overall risk management are made, the commission spokesperson Susan Chang (張秀蓮) said.

This may obstruct flagship unit Chinatrust Commercial Bank's (中國信託商銀) attempt to upgrade its representative office in Tienjing, China, to a branch.

The regulator would also freeze approval of Chinatrust Financial's investment applications, including plans to step up its shareholding in Mega Financial, Chang said.

Last Friday, Chinatrust Financial, the nation's fourth largest financial group by assets, won four out of 15 board seats in Mega Financial, the third largest financial holding firm. It currently holds a 15.6 percent stake in Mega Financial.

Chinatrust's future fundraising applications could also be overruled, as the commission found that the firm was not using funds raised for the purposes stated in its applications, Chang said.

To facilitate its investment in Mega Financial, Chinatrust Financial bought a tailor-made package of US$390 million in structured bonds through its Hong Kong branch from an unnamed foreign securities house, with a majority of the derivatives linked to Mega Financial stocks equal to a 3.9 percent stake.

The deal increased Chinatrust Commercial's shareholding in Mega Financial to 9 percent, which violated the Banking Law's (銀行法) stipulation that a bank can have no more than a 5-percent stake in any listed firm. The stipulation exists to minimize investment overexposure.

The bank funded the purchase with US$500 million it raised through the issuance of subordinated bonds, money which it said would be used in overseas lending, the commission said.

The bank sold the derivatives one day before parent Chinatrust Financial's investment in Mega Financial was approved by the regulator in February. The linked Mega Financial shares were mostly acquired by Chinatrust Financial in the open market, according to the commission.

"The approach was flawed but not illegal, and was used to reduce investment costs as the [bank knew that its] targeted rival's share prices would soar after the disclosure of the takeover bid," Chang said.

In response, Chinatrust Financial said in a statement that it had reported the details of the deal, and believed it was in compliance with the law.

The company disagreed with the commission's remarks that its management was flawed and would communicate with the regulator and make any necessary improvements, the statement read.

To close regulative loopholes, the commission is planning to include the derivatives banks hold in the 5 percent maximum stake allowed by the Banking Law.

The commission will also demand that banks use their funds in compliance with their fundraising applications, and overrule future fundraising plans from banks that did not comply, it said.

Meanwhile, the regulator said it had decided to scrap the automatic approval mechanism and return to a 15-day review period in the wake of Chinatrust Financial's controversial investment.

Financial holding firms' board directors, supervisors and managers cannot double as board members and supervisors of their competitors unless their shareholding in those firms exceeds 25 percent, the commission said.

Late on Monday, Chinatrust Financial defended its management team after the government became involved in personnel arrangements in state-controlled Mega Financial and the high-profile boardroom tussle that ended last week.

"The investment was made in light of Mega Financial's long-term investment value and to seek opportunity for further cooperation in the future in response to the government's financial reform and privatization policy," a statement released by Chinatrust Financial read.

A combined 15.6 percent stake held by Chinatrust Financial and its subsidiaries was approved by the regulator and had not been increased, the statement said, adding "there is no hidden shareholding."

Chinatrust Financial made the statement amid public criticism about the government's inability to defend state assets and concern that the Mega Financial board reshuffle was intended to benefit the Koo family.

The company said it would wait for the government' to spell out its position on the direction of financial reform at an economic forum next month.
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