South Korea’s financial regulator is expected to order Lone Star Funds to sell the bulk of its stake in Korea Exchange Bank after the U.S. buyout firm said it cannot meet the requirements as the major shareholder of the fifth-largest lender, watchers said Tuesday.

Lone Star reported to the Financial Services Commission on Monday, the last day of a one-week deadline, that it cannot find a way to recover its status as KEB’s major shareholder, according to sources.

Lone Star is currently the biggest shareholder of the No. 5 lender, holding a 51.02 percent stake.

Last week, the FSC sent an early notification to the private equity fund ahead of requiring Lone Star to meet legal requirements as KEB’s major shareholder, taking the first administrative step toward ordering the funds to sell the bulk of its stake in KEB.

Although the one-week period was given to Lone Star to submit its opinion, the move was deemed as a de facto order, following the Seoul High Court’s Oct. 6 verdict that found the U.S. firm guilty of stock manipulation charges.

Under local banking law, an executive or corporate entity that has been convicted of violating the law over the last five years is banned from owning more than a 10 percent stake in a lender.

The FSC, which is scheduled to hold a temporary meeting later in the day, is expected to notify Lone Star to meet the legal requirements for a major shareholder.

Up to six months can be granted to the U.S. buyout firm to meet the requirements, but the period is expected to be minimized given the fact that Lone Star has already acknowledged its ineligibility.

If the FSC officially concludes that Lone Star is ineligible as a major shareholder of KEB, the regulator is set to order the U.S. buyout fund to sell its KEB stake that exceeds the 10 percent limit, a move that will help Lone Star make an exit from South Korea after two botched attempts.

Its previous deals with Kookmin Bank in 2006 and HSBC in 2008 failed due to regulatory issues and the global financial crisis, respectively.

The order is also expected to pave the way for Hana Financial Group Inc.’s acquisition of the KEB stake. 

(Yonhap News)