ATHENS Jan 23 Greek investment group Marfin (MIG) launched legal action against Cyprus on Wednesday for diluting its stake in Cyprus Popular Bank through nationalisation.
Popular, Cyprus's second-largest lender, was nationalised in mid-2012 after its capital base was severely hit by a writedown in Greek government debt, to which it was heavily exposed.
The 9.5 percent stake of MIG, which invested 824 million euros ($1.09 billion) in Popular in 2006, was diluted to less than 1.5 percent.
"MIG has been grossly wronged by Cyprus. We are seeking to protect our investment," MIG Chairman Andreas Vgenopoulos said after the group served a notice of dispute on the Cyprus government.
"Not doing so would be a breach of faith towards MIG shareholders," he said.
MIG will give Nicosia up to six months to restore private ownership in the bank. If this fails, it will seek compensation via an international arbitration tribunal for its entire investment plus incurred losses.
MIG has said it expects other private investors in Popular to join its legal action. It has put up its Hilton Hotel holding in Nicosia up for sale and wants to withdraw completely from Cyprus, Vgenopoulos said.
Vgenopoulos said Cyprus Popular's management, which was elected by its shareholders, was arbitrarily and illegally replaced by a government-appointed management team, which led to subsequent losses at the bank.
He said Cypriot authorities rejected a request by the previous management to keep the bank in private hands and raise at least 51 percent of Popular's recapitalisation needs from private investors.
Instead, he said, the Cypriot government used a law which provides that if the state contributes even one euro, it can appoint the majority of the bank's board.
"They secured the nationalisation of the bank without the state pumping in money in the end but just a bond, and they think that this way our investment disappeared," Vgenopoulos said.
Cyprus's government spokesman declined to comment.
Cyprus now owns an estimated 84 percent of Popular Bank. Its attempts to save the country's banks forced it to seek financial aid from EU partners and the IMF to recapitalise them and put its economy back on a stable footing.
The bailout is estimated at around 17 billion euros, equal to the entire output of the Cypriot economy.
Cyprus applied for financial aid last June but some euro zone states like Germany are uneasy about bailing out a country they say lacks financial transparency. (Editing by David Cowell)