By Leslie Lopez, Senior Regional Correspondent

KUALA LUMPUR, MALAYSIA - Malaysia's central bank has directed a sweeping overhaul in the board of directors of the country's largest banking group Maybank, in an unprecedented government censure on a board of a financial institution.

The little-publicised revamp followed government displeasure at the controversial acquisition of an Indonesian lender by Malayan Banking (Maybank) last year, officials say.

Bank Internasional Indonesia (BII) was bought from a consortium led by Singapore's Temasek Holdings at a price that was deemed too high.

Prime Minister Najib Razak, who directed Bank Negara to review the transaction, has endorsed the central bank's decision calling for a Maybank board revamp, the government officials say. 'The decision was also made that the board revamp will be carried out in stages and directors who are retiring won't be re-elected to the board,' said a senior government official who was involved in top-level discussions on Maybank's Indonesian venture.

Maybank's main shareholders are national equity fund Permodalan Nasional and pension fund Employees Provident Fund.

Bank Negara declined comment for this article, citing its policy of not discussing issues involving individual financial institutions.

Maybank executives, including its chief executive officer Abdul Wahid Omar, also declined repeated requests for comment for this article.

But the bank did announce the retirement of two directors and the appointment of three new members mid-last month. Between end-October last year, when the acquisition of BII was completed, and this March, three directors have resigned.

'This is part of the reforms that the PM is pushing for and it will raise the sense of greater accountability in the boards of government-linked companies,' said a senior adviser to PM Najib who is familiar with the central bank's decision on Maybank.

In March last year, Maybank entered into an agreement to buy a 55 per cent interest in BII from Sorak Financial Holdings, which is majority-owned by Singapore's Temasek Holdings. The Malaysian bank agreed to pay US$1.5 billion (S$2.2 billion) for the stake and then make a tender offer for the remaining 44 per cent for roughly US$1.2 billion.

But the global financial meltdown raised questions over the health of banks in general and reignited criticisms that Maybank was paying too high a price for BII. Maybank's position was further undermined when Indonesia introduced changes to its corporate takeover rules, which called on the Malaysian financial institution to sell down 20 per cent of its holdings in BII within two years of its takeover.

Bankers close to Maybank had argued that the disposal was surely to lead to massive losses.

Faced with the prospect that the deal could adversely hit Maybank and the Malaysian banking system, Bank Negara had revoked its approval for the BII acquisition.

The approval was later reinstated. The deal was finalised after the Temasek-led consortium lowered the purchase price for the transaction by US$220.5 million for the 55 per cent interest in BII.

In Bank Negara's review, which was completed in April this year, it concluded that Maybank's purchase price for BII was too expensive. The central bank also concluded that the Malaysian financial institution did not put in place adequate measures to protect itself in the event that the deal encountered problems, the government officials said.

This article was first published in The Straits Times.