Lime fiasco clouds Shinhan Investment's mega IB prospects

Shinhan Investment's headquarters on Yeouido, Seoul / Korea Times file

By Kim Bo-eun

Shinhan Investment's prospects of joining the five major brokerages in becoming a mega investment bank have been clouded by its involvement in a scandal involving Lime Asset Management.

Shinhan's brokerage unit not only distributed Lime's trade finance fund, but was also involved in designing the investment vehicle with Lime. Investors have been unable to redeem their investments based on Lime's mismanagement of funds. Lime has been disbanded after its executives were found to have been involved in multiple irregularities. The executives are currently on trial.

The Financial Supervisory Service alleged that Shinhan Investment drew investors for the fund despite being aware at the time of the possibility that investors may not be able to retrieve their investments.

Prosecutors have sought an eight-year prison term for a manager at the brokerage who headed its prime brokerage service division.

Shinhan Investment has denied the allegations raised against its prime brokerage division.

“We cannot accept the part of the FSS' dispute settlement document regarding the prime brokerage division,” the brokerage said in a statement last week.

If the court rules that Shinhan teamed up with Lime in covering up mismanagement of funds, as the FSS contends, it will likely pay a heavy price.

The major distributors of Lime's trade finance fund, including Shinhan, have decided to adhere to the FSS' order to nullify contracts with investors of the funds and pay back their principal investments, considering the uproar from investors and to avoid an uncomfortable situation with financial authorities.

Meanwhile, the three other distributors of the Lime fund ― Woori and Hana banks and the brokerage Mirae Asset Daewoo ― contend that they were unaware of the situation regarding the fund. They are preparing to receive compensation from Shinhan Investment , which they claim shares primary responsibility with Lime for the situation.

Apart from having to compensate other distributors of Lime's funds, Shinhan Investment also faces FSS sanctions that will possibly bar the brokerage from being able to become a mega investment bank, as it had been planning.

The FSS will hold a meeting reviewing sanctions for Shinhan Investment next month.

In the case the authority decides to issue an institutional warning, order suspension of business activity, or revoke Shinhan's license, this will bar Shinhan Investment from receiving regulatory approval to become a mega investment bank for up to five years.

This also applies in the case executives or employees of the firm receive warnings, are suspended from work or advised to be dismissed.

Shinhan Financial Group in August last year issued 660 billion won in capital for Shinhan Investment, to help its brokerage unit raise its equity capital to 4 trillion won. Shinhan Investment also conducted an organizational overhaul in July last year to expand investment banking divisions.

Brokerages need to meet the equity capital requirement of 4 trillion won to apply for a license from the Financial Services Commission to operate as a mega investment bank.

Shinhan Investment had intended on applying for the license before the end of this year.

Shinhan had hoped to become the sixth brokerage to become a mega investment bank. The existing five are Mirae Asset Daewoo, NH Investment & Securities, Korea Investment & Securities, Samsung Securities and KB Securities. Hana Financial Investment and Meritz Securities are also vying for the position.