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| The Shinhan Investment headquarters on Yeouido, Seoul / Korea Times file |
Shinhan Investment is facing a major setback in its grand scheme of becoming a "mega investment bank (IB)" as the brokerage house is suspected of being an accomplice to alleged financial fraud involving Lime Asset Management, according to financial authorities, Monday.
Lime, the country's largest hedge fund, has come under suspicion that it continued to sell fund options to investors despite allegedly being aware of the fact that the options invested in involved a U.S. hedge fund that engaged in fraud.
The Financial Supervisory Service (FSS) suspects that Shinhan Investment sold the fund to investors despite being aware of the fact, because the securities firm was a prime brokerage service provider that extended loans to Lime.
Against this backdrop, the financial watchdog decided to refer both Lime and Shinhan Investment to the prosecutors.
This seems to be a stumbling block to Shinhan Investment being designated as a mega IB.
Shinhan Investment plans to apply for a mega IB license within 2020, as it met the 4 trillion won ($3.4 billion) equity capital requirement in September 2019. The equity capital requirement is a prerequisite to seeking the license from the Financial Services Commission.
"The year 2020 will be the first year for our company to solidify our status as a mega IB and the nation's best brokerage house," Shinhan Investment CEO Kim Byung-chul said in his New Year's message.
The FSS, however, said the mega IB license may not be available for Shinhan Investment if the prosecutors reveal the charge the company is facing is true.
"Regarding a mega IB, we screen a company to check whether it is capable enough to do business," said Moon Sang-seok, head of the securities market team under the capital market supervision department of the FSS.
"If Shinhan Investment apply for the license, we will check whether it has a problem in its internal controls. The screening may not be difficult for companies under normal business conditions, but those with controversial issues will face stricter screenings."
In addition, Shinhan Investment is expected to face more difficulties in getting an approval for the short-term financing license, which allows issuance of promissory note with the maximum limit of 200 percent of its equity capital.
Short-term financing is regarded as the key for mega investment bank, because it significantly enhances the company's capability of raising funds.
The financial authorities take the largest shareholders' eligibilities into account when giving an approval for the short-term financing license.
Before the Lime fiasco, a corrupt hiring scandal involving Shinhan Financial Group Chairman Cho Yong-byoung was regarded as the biggest obstacle to the approval.
The Lime fiasco, however, will likely cause greater hardships to Shinhan, because it may show risks inherent in the company's whole system, not just those pertaining to an individual.
A Shinhan Investment spokesman said his company will apply for an approval for a mega IB license this year as planned, but has yet to have any plan for the short-term financing license.
"After finishing up our balance sheet for 2019, we will apply for a mega IB license this year," he said. "We will consider participating in the short-term financing if market conditions and interest rates become favorable to us."
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