March 12 (Bloomberg) -- Citigroup Inc. may have to increase its $10.8 billion bid for Nikko Cordial Corp. after the Japanese brokerage's four biggest shareholders rejected the offer as too low.

The Tokyo Stock Exchange added to the pressure on Citigroup today when it decided against delisting Nikko shares over an accounting scandal. This means investors in Japan who can only hold shares of publicly traded companies won't be forced to sell. Nikko's stock closed today 4 percent above Citigroup's offer of 1,350 yen ($11.43) a share.

``Nikko's shares may get a boost,'' said Yoji Takeda, who helps manage $900 million at RBC Investment (Asia) Ltd. in Hong Kong. Investors are becoming increasingly reluctant to sell to Citigroup at the offer price, he said.

Harris Associates LP of Chicago, Orbis Investment Management Ltd. in Bermuda, Southeastern Asset Management Inc. of Memphis, Tennessee, and Toronto-based Mackenzie Financial Corp., which together control 27 percent of Nikko, have dismissed Citigroup's approach, saying Nikko is worth closer to 2,000 yen a share.

``We are continuing our discussions with Nikko Cordial regarding the takeover bid,'' Citigroup spokeswoman Atsuko Yoshitsugu said in an interview, declining to say whether the company would raise its offer. The companies are committed to a ``comprehensive strategic alliance,'' she said.

Revelations that former Nikko executives inflated profit in 2004 left the Tokyo-based brokerage in disarray and gave New York-based Citigroup an opportunity to jumpstart its Japan expansion by buying Nikko.

Wall Street Losses

Nikko would give Citigroup control of more than 100 branches, enabling it to offer services such as wealth management to the brokerage's clients. Regulators in 2004 shut Citigroup's private bank in Japan because it failed to comply with money-laundering rules.

Wall Street firms have failed to crack the $4.5 trillion banking industry in Japan, the world's second-biggest economy. Merrill Lynch & Co. and Morgan Stanley closed their retail- brokerage operations in the country after racking up multimillion-dollar losses.

Harris, Orbis and Southeastern said Nikko's shares are worth at least 2,000 yen per share. Citigroup's bid is almost 10 percent lower than Nikko's closing price on Dec. 15, the last trading day before the accounting irregularities were disclosed.

The offer values Nikko at about 1.62 times book value, compared with 2.3 for Nomura Holdings Inc., Japan's largest brokerage. Daiwa Securities Group Inc., the No. 2, trades at 2.41 times book value, according to data compiled by Bloomberg.

Citigroup, Mitsubishi

Citigroup entered Japan in 1902 and has about 25 branches and 4 trillion yen of deposits there. Mitsubishi UFJ Financial Group Inc., Japan's largest bank, has 672 domestic outlets and had 116 trillion yen of deposits as of Sept. 30.

Douglas Peterson, 48, Citigroup's CEO in Japan, said in January that the bank expects to double its retail outlets in the country to 50 in the next few years to increase lending and services to individuals.

Nikko, whose shares began trading in 1961, would have been the largest Japanese company ever to be delisted for falsifying accounts. The stock peaked at 6,300 yen on April 20, 1987. It declined in 11 of the past 17 years as Japanese stocks endured a decade-long bear market.

``I will respect and support Tokyo Stock Exchange's decision,'' Yuji Yamamoto, the minister in charge of the Financial Services Agency, told reporters today in Tokyo.

Kanebo Ltd., a cosmetic and food producer, had its shares removed in 2005 after the company said former management overstated earnings by 210 billion yen over five years.

Delisted Companies

The exchange also delisted Livedoor Co., an Internet portal, and Seibu Railway Co., a railway and resort operator, in the past three years. Prosecutors filed criminal charges against the founders of Livedoor and Seibu. No charges against former Nikko managers have been filed.

Japan's Securities and Exchange Surveillance Commission on Dec. 18 said Nikko overstated profit in documents related to a corporate bond sale in November 2005. Since then, six top executives have quit and Nikko has sued three of them.

Nishimuro said Nikko's offense didn't meet its criteria for delisting a stock. The exchange has asked the company to file a ``business compliance report'' by March 26, he said.

``We deeply apologize for causing investors and clients great trouble,'' Shoji Kuwashima, who took over as chief executive at Nikko in December, said in a statement. ``We harmed the market, and we will make every effort to restore confidence.''

Last Updated: March 12, 2007 08:08 EDT