The state financial regulator referred Kakao Corporation, Kakao Entertainment and three executives to the prosecution over the company's alleged stock manipulation while acquiring SM Entertainment.

The Financial Supervisory Service(FSS) said on Thursday that it had referred the three executives, including chief investment officer Bae Jae-hyun, Kakao and its affiliate with a recommendation to indict on violations of the special law on the capital market.

The company's management is suspected of inflating the share prices of SM, one of the country's major K-pop management firms, in a bid to obstruct a takeover earlier this year by Hybe, the parent company for BTS' management agency BigHit.

The FSS suspects Kakao schemed with a private equity fund operator to inject around 240 billion won, or some 177 million U.S. dollars, into the market, thereby surpassing 120-thousand won per share Hybe was offering small shareholders.

Hybe eventually suspended the bid, allowing Kakao and its subsidiary to jointly secure nearly a 40-percent stake in SM to gain management control.

Kakao is also accused of failing to fulfill the compulsory declaration on their stock acquisition.

The regulator said the alleged illegalities have marginalized the unfair trade rules and public offering system that strive for fair market trading and competition for corporate control.

Meanwhile, Kakao founder Kim Beom-su, who was grilled by the FSS earlier this week, was not named in the referral on Thursday, with the regulator revealing plans to swiftly refer other suspects following further investigation.