Q&A-Why the controversy over Libya's UniCredit stake?

Sept 21 (Reuters) - UniCredit CRDI.MI CEO Alessandro Profumo is expected to be forced out on Tuesday in a row over Libya's stake-building in Italy's biggest bank. [ID:nLDE68K0MS]

Economic ties between Rome and Tripoli have grown recently, helped by good relations between Prime Minister Silvio Berlusconi and Libyan leader Muammar Ghaddafi, but Libya’s investment in UniCredit has not been universally welcomed.

Here are some questions and answers about the controversy surrounding the Libyan stake, the North African state’s intentions and why it has upset other shareholders.

Q: How much does Libya own in UniCredit?

A: Libya’s central bank is UniCredit’s third biggest shareholder with a 4.988 percent stake in the bank. The Libyan Investment Authority (LIA), Tripoli’s $65 billion sovereign wealth fund, holds an additional 2.59 percent stake, bringing Libya’s combined interests to about 7.6 percent.

Libya has held a stake in UniCredit since 1997, when the Libyan Foreign bank bought a 0.56 percent stake. But it didn’t emerge as a sizeable force at UniCredit until October 2008, when the Libyan central bank disclosed it held a 4.23 percent stake.

Q: Has the stake always been controversial?

A: No. In 2008, Libya’s stake and decision to support UniCredit’s plans to raise capital were warmly welcomed by the bank and markets as a vote of confidence in UniCredit while it reeled from the global financial crisis.

Libya came to UniCredit’s rescue again in early 2009 by subscribing to an extra 250 million euros in bonds to help plug a shortfall in the bank’s capital-raising efforts.

Q: So why is it controversial now?

A: The surprise announcement in August that Libya’s sovereign wealth fund had taken a 2 percent stake appears to have caught some powerful shareholders off guard, especially those with links to the separatist Northern League party that is a key partner in Prime Minister Silvio Berlusconi’s government.

The news appeared to undermine Northen League chief Umberto Bossi’s efforts to have his party consolidate its influence over Italy’s strongest banks in its industrial northern homebase. He has warned against Italian banks falling into foreign hands.

Fearing a rising Libyan stake would reduce its influence at UniCredit, influential League politicians have accused Libya of trying to launch a takeover of the bank and running afoul of banking rules related to investors holding over 5 percent.

Q: Does Libya want to mount a takeover?

A: No. Libya has denied any plans for a takeover. The country has been actively sniffing out opportunities for stakes in Italian companies in recent years, but has insisted that all its stakes are long-term financial investments. Its track record on other corporate holdings backs its stance.

Analysts suspect the League is whipping up a storm with charged comments on a potential takeover threat mainly to prevent Libya from widening its influence further at the bank and reducing that of shareholders it is close to.

Q: What is the fuss over Libyan shareholders having a combined stake of over 5 percent?

A: UniCredit’s rules bar a shareholder from having a voting stake of more than 5 percent, which League politicians say Libya violates since the combined holdings of the LIA and the Libyan central bank top that threshold.

The Libyan central bank says it operates independently from the LIA, but League officials say both entities answer to Libyan leader Muammar Gaddafi, making them a single group that should not be allowed to have voting rights of more than 5 percent.

Stock market regulator Consob also requires that it be informed when investors raise their stake over 5 percent, though that would only mean monetary penalties.

The Bank of Italy is also making its own checks to ensure governance of Italy’s biggest bank has not been compromised.

Italy’s government in the past has also signalled its concerns over foreign countries building up sizeable stakes in Italian companies, saying sovereign funds wanting to buy shares should “generally” stay below 5 percent.

Q: Why does CEO Alessandro Profumo appear to be taking the fall for the controversy?

A: Shareholders and politicians upset over Libya’s bigger stake have blamed Profumo for allowing Libya to raise its stake and of not informing other top managers. Newspapers have also speculated that the issue has brought long-running tensions between Profumo and Chairman Dieter Rampl to a head.

Profumo says he didn’t invite the Libyans in and that the bank is asking the Libyan investors to prove they are independent shareholders. (Writing by Deepa Babington, additional reporting by Giselda Vagnoni, Editing by Lin Noueihed)