Olympus Corp's main lender Sumitomo Mitsui Banking Corp (SMBC) denied it was trying to take control of the firm's board by stealth, but said it might well agree to send a former banker to be chairman of the disgraced camera and medical device maker.

Foreign investors in the Japanese firm, which is engulfed by a $1.7 billion accounting fraud, have called for an entire renewal of the board, bringing in outside talent unconnected to the company, its banks or major owners.

But they say their suggestions have been blocked by Olympus's main banks which, in their powerful roles as both major creditors and shareholders, appear to be lining up a company insider and a senior banker to take over the reins.

If we are going to send someone (to be chairman), we are leaning toward Mr. Kimoto, an SMBC executive told Reuters, referring to former SMBC director Yasuyuki Kimoto.

But the decision is up to Olympus and its management reform committee, so it's not as if we are trying to force someone on them, added the executive, who declined to be identified because he was not authorized to speak publicly on the matter.

The Nikkei newspaper said on Tuesday that Olympus' new chairman was expected to be from SMBC, a unit of Sumitomo Mitsui Financial Group Inc, while Olympus executive officer Hiroyuki Sasa would be promoted to president, the most senior executive role at the company.

The CEO's role is usually held by either the president or the chairman of Olympus. If Sasa becomes president, this would mean Kimoto being nominated as chairman-CEO.

TIME-HONOURED TRADITION

The possibility that Olympus's main creditor will control the board by stacking it with affiliated individuals has upset the firm's two largest non-Japanese investors, Southeastern Asset Management and New York-based Indus Capital, who worry the firm would be controlled by its biggest creditor and perhaps driven into what they consider an unnecessary capital tie-up.

Some analysts, however, noted it was a time-honored Japanese tradition for banks to send officials to help a borrower get back on its feet and that often, the tactic worked.

For a lot of foreign investors, the idea of banks both lending and getting involved in day-to-day management is anathema, but it's a very long-standing Japanese practice and usually ends up with a much stronger company, said Brian Waterhouse, a senior banking analyst at CLSA in Tokyo.

The accounting fraud, one of Japan's biggest corporate scandals, came to light in October when former Olympus CEO Michael Woodford blew the whistle. It was later revealed that a few executives kept the fraud going for 13 years in order to hide investment losses off Olympus's books.

Just over half of Olympus's current board is being sued by the company for mismanagement or dereliction of duty. Three former executives were arrested last week for their role in the scandal, and investigations by crime-fighting agencies continue in Japan, the United States and Britain.

An Olympus executive found dead in India in an apparent suicide is likely to have had no link to the Japanese endoscope maker's accounting scandal, a company spokeswoman said on Wednesday.

(Additional reporting by Yoko Kubota; Writing by Linda Sieg; Editing by Ian Geoghegan)

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