Regulatory News – October 2008

Shanghai opens gates to foreign investors * Lone Star may sue Korean government * Bohai to clinch Xugong deal

Shanghai opens gates to foreign investors
The city of Shanghai will allow foreign investment firms to register as local equity investment firms, according to a government document obtained by Reuters. Under the new regulations, foreign investors including venture capital funds, private equity funds and hedge funds with a focus on Chinese equities will be permitted to set up a Shanghai-registered entity with initial capital of RMB 100 million ($14.6 million) or more.

Such registration will provide these firms with the same legal status as local groups and will enable them to receive special tax treatment. “With the rapid growth of China’s economy and expansion of domestic capital markets, private equity and other funds are also growing fast and helping companies to increase their value,” the document reportedly said.

Chinese cities such as Beijing and Tianjin have already won permission from the government to give foreign investment funds legal status. The change will put foreign investors such as private equity firms on a more equal footing with China’s domestic alternative investment firms. At this point, foreign investment firms in China typically register as consultants or representative offices.

Lone Star may sue Korean government
US private equity firm Lone Star, which acquired Korea Exchange Bank (KEB) in 2003, is considering suing the Korean government if it does get approval to sell its stake in KEB to HSBC Bank beyond September, according to The Korea Times.

Lone Star decided to sell its stake to HSBC in August 2007 for $6.3 billion, but the deal has consistently bumped into regulatory hurdles as a result of allegations dogging the firm’s 2003 $1.2 billion acquisition of a 51 percent stake in the Seoul-based bank. It still awaits regulatory approval from the authorities.

The buyout fund is under increasing pressure from its investors due to the delay in its plans to sell the Korean lender, according to the report. “Beleaguered with growing complaints from investors, Lone Star is considering returning its KEB shares in-kind to investors as one possible option, together with a block sale option”, if the deal is blocked beyond September, the report quoted an unnamed source as saying.

“In either case, Lone Star plans to file a lawsuit against the Korean government for losses incurred by a delay in the sale of KEB,” the source said. In an interview with the newspaper, a Financial Services Commission director general of the financial services bureau Kim Gwang-soo said that it will take at least two months for a final decision on the deal.

Earlier in June this year, the Seoul High Court cleared Lone Star on a separate allegation of stock price manipulation of KEB’s former credit card unit. Prosecutors, however, were dissatisfied with the ruling of the Seoul High Court and have lodged an appeal with the country’s Supreme Court. Meanwhile, a court ruling on the buyout fund’s 2003 acquisition of KEB is expected by the end of September at the earliest, the paper noted.

Bohai to clinch Xugong deal
The Bohai Industry Investment Fund, a government-backed private equity fund in China, is reportedly looking to acquire a 45 percent stake in Xugong Group Construction Machinery, the 21st Century Business Herald newspaper reported.

Earlier this year, The Carlyle Group and Xugong backed away from an agreed deal after three years of trying in vain to secure regulatory approval of Carlyle as a foreign investor in the company. Had Carlyle’s investment gone through, the firm would have owned a 30 percent stake in Xugong, while Bohai would have held 15 percent, according to the report. The Bohai fund is now likely to pick up the entire 45 percent stake, unnamed sources told the paper.

There is a greater possibility of this deal being approved by the country’s regulators as the Bohai Industry Investment Fund is backed by the government itself, and there are no issues pertaining to foreign ownership. The fund was set up in 2006 as China’s first domestic, RMB-denominated private equity fund and it is raising RMB20 billion ($2.9 billion).