South Korea’s fair trade authorities are investigating KT for alleged collusion in a government-issued business project -- a development that could hurt the telecom company’s chances of gaining approval to increase its stake in its internet-only bank, K bank.

According to industry sources Wednesday, the Fair Trade Commission is currently investigating local telcos KT, SK Telecom, LG Uplus and Sejong Telecom on suspicions of collusion in a circuit line business project.

KT has notified the Financial Services Commission -- the body carrying out the adequacy review to determine a company’s eligibility to become a majority shareholder in an internet-only bank -- of the latest proceedings.

If the FTC files criminal charges and refers the case to the prosecution, it may hamper the FSC’s review process, which could block KT from obtaining a bigger stake in K bank. The commission is expected to make its final decision next month. 

According to the FSC, KT filed an application to the FSC seeking to secure up to a 34 percent stake in K bank on March 12. However, the regulator said Tuesday that it was considering temporarily suspending its majority stakeholder adequacy review for KT in light of the recent investigation.

The FSC has up to 90 days to carry out its adequacy review for KT. But local banking business surveillance regulations stipulate that if a firm is undergoing criminal trial procedures with Korea’s regulatory bodies over an issue with an outcome that could affect the adequacy review, the criminal proceedings period is exempted from the 90 days, the regulator said.

A KT spokesperson said the company is awaiting the FSC’s decision on its application and declined to further comment.

KT’s move to raise its stake ownership in K bank came after a new regulatory change allowing nonfinancial institutions to own and operate online-only banks took effect in January.

The new law, designed to ease ownership rules for internet-only banks, enables information and communication technology companies to own up to 34 percent of an internet-only bank, up from the 4 percent (10 percent without voting rights) threshold stipulated by Korea’s Banking Act.

The change allows current operators of internet-only banks -- KT, which runs K bank, and Kakao, which operates Kakao Bank -- to step up as majority shareholders. It also enables new corporate players in the information and communications technology sector to create internet-only banks.

Both K bank and Kakao Bank were launched in 2017 as Korea’s first online banks to operate without brick-and-mortar branches. But in line with local banking laws, they were formed with financial companies as majority shareholders.

K bank’s majority shareholder is Woori Bank, while Kakao Bank’s majority shareholder is Korea Investment Holdings.

With the new legal change, KT had sought to increase its shares in the internet-only bank to 34 percent, by purchasing the new shares K bank plans to issue to raise new capital. The move was set to inject a much-needed source of funds into K bank to finance its business operations.

However, there had been some legal hurdles to this end.

The special law on internet-only banks includes a clause stipulating that a company applying to possess more than a 10 percent stake in an internet-only bank must not have violated laws related to fair trade or taxes in the past five years. But the FSC can make an exception if it determines that the violations are minor enough to be overlooked.

At the moment, KT has two fair trade violations at issue. In addition to the ongoing circuit line business collusion case, KT was slapped with a 70 million won ($61,700) fine in 2016 for violating fair trade laws in placing a bid for a project to develop a subway advertisement information technology system.

Kakao also has a FTC violation record. Kakao M, which was merged into Kakao last year, received a 100 million won fine in 2016 for violating fair trade regulations in fixing the prices of online music content.

The mobile messaging giant has yet to officially file an application for a majority stakeholder adequacy review to increase its stake in Kakao Bank.

Meanwhile, a slew of new players are seeking a new license to operate Korea’s third, or possibly fourth, internet-only bank.

A consortium led by Viva Republica, the operator of mobile money transfer app Toss, and a consortium led by Kiwoom Securities have risen as major bidders. The FSC is scheduled to announce the final applicants on Thursday. Up to two licenses are up for grabs.

By Sohn Ji-young (jys@heraldcorp.com)