SEOUL : Global banking giant HSBC should not be allowed to buy Korea Exchange Bank (KEB) until all legal investigations into the domestic lender are resolved, South Korea's finance minister says.

Kwon O-Kyu's comments in Thursday's Financial Times could signal a setback to hopes of sealing the 6.3 billion dollar deal quickly.

Kwon said South Korea's watchdog the Financial Supervisory Service (FSS) was correct in withholding approval for the deal until all court cases regarding KEB's previous sale are concluded.

"The court will decide whether all the legal procedures were met...so I think the FSS should decide after the (court's) decision," Kwon told the Financial Times.

His ministry confirmed the remarks.

British-based HSBC last month agreed to buy a 51.02 percent stake in KEB for 6.3 billion dollars in cash from US private equity fund Lone Star.

But Korea's Fair Trade Commission has said it plans to "carefully review" legal issues in the deal. The FSS has said separately it would only approve the deal after court cases are settled.

Lone Star sparked controversy locally by buying a majority stake in KEB, the country's sixth largest lender, for 1.5 billion dollars in 2003.

Prosecutors have accused six people, including a former KEB president, of conspiring to manipulate figures on KEB's financial health to pave the way for the Dallas-based fund to acquire the bank.

Lone Star was separately accused of manipulating the share price of KEB's credit card unit so it could be acquired cheaply by the main bank.

The US firm has denied the allegations and says the charges were driven by a latent hostility towards foreign investors. It says there are no legal obstacles to the planned sale to HSBC.

But Kwon said the legal issues could not be overlooked, according to the Financial Times.

"The FSS is worried about whether the (2003) sale process was against the law or not and in that case they need to think about how seriously the law was violated," he said.

Kwon said the Lone Star case did not represent any change to Seoul's policy toward foreign investors.

"The Lone Star case is not at all related to any change in government policy," he told the paper. "We still maintain that (foreign direct investment) is encouraged and we are going to invite more foreign capital into Korea."

- AFP/ir