Leumi May Have to Sell Stake in Paz or Israel Corp.

The Bank of Israel is expected to hold discussions in the next few days on two issues related to banking laws, concerning a deal which is being struck between the Israel Corporation and Paz. The discussions, between the supervisor of banks and the central bank's legal advisors, will focus on whether Bank Leumi's stakes in Paz and in the Israel Corporation are in violation of the regulation that forbids a bank from holding more than 20 percent of a holding company.

One of the questions that will be raised is whether Paz will be defined as a corporation rather than a company following its purchase last week of the Ashdod oil refinery, which enlarges its field of operations from gas stations to gas production. Precedent shows that Bank Leumi had to sell its stake in Migdal, because it also had stakes in a variety of other operations. If Paz is redefined as a corporation, the central bank may demand that Bank Leumi sell its stake in it, or in the Israel Corporation.

If the answer is negative, the second question that the bank will examine is whether Bank Leumi has exceeded the 20-percent limit in its stake in Paz, which it holds both directly and via the Israel Corporation. If the entry of the Israel Corporation into Paz does not involve a dilution of Bank Leumi's stake, it will hold 19 percent of Paz directly and a further 7 percent via the Israel Corporation. As far as the Bank of Israel is concerned, this is unprecedented.

Under the merger deal, the Israel Corporation will by 33 percent of Paz shares for $300-400 million. The possibility has been discussed that shareholders' stakes will be diluted, mostly those of the controlling group headed by Zadik Bino and Bank Leumi. As a result of this, Leumi holdings in Paz would be reduced from 19 percent to 13 percent.

Bank Leumi said in response that the banking law does not cover holdings which are not held directly, so that even if the bank's direct and indirect holdings in Paz exceed 20 percent, it will not have to sell the excess.