Hyundai Motor chairman Chung Mong Koo was sentenced to three years' jail yesterday for embezzling company funds that were used to buy political favours.

Chung, South Korea's richest man, was found guilty of siphoning off around 103 billion won (S$170 million) from Hyundai Motor, the world's No. 6 automobile maker.

The sentence poses a major setback for ailing Hyundai as it battles sluggish growth, a militant union, the high Korean currency, which makes its cars more expensive abroad, and competition from elsewhere, including China.

Chung, who has been the company's undisputed leader, could find himself with less room to manoeuvre because of the continuing legal battle as he prepares his appeal.

"Chairman Chung will remain at the helm of management, but his room for manoeuvring will be curtailed by today's sentence," Hyundai spokesman Jake Jang was quoted as saying in an International Herald Tribune report.

"The verdict means that he will have one leg tied in a legal battle at a time when he has to run with both legs for the company," he added.

Chung had used the money to set up a slush fund to pay for political favours and to approve dubious deals that allegedly protected his financial interests and facilitated the transfer of managerial control to his son Eui Sun.

The younger Chung heads Hyundai affiliate Kia Motors, the country's second-largest carmaker.

At an earlier hearing, Chung said he would assume 'overall responsibility' as the chief executive, even though he denied any knowledge of why the funds were diverted.

Judge Kim Dong Oh said yesterday: "This clear-cut criminal behaviour hurts the soundness of corporate management and self-regulation. Wrong customs must be eradicated to make the...economy an advanced one."

He added that the case showed that "there's something wrong in the corporate culture of Korea".

The judge said the sentence, which is half the six-year jail term sought by the prosecutors, was justified because of Chung's "big contributions to the development of the country's economy".

The court decided to allow him to remain out on bail, citing the need to protect the national economy and to give him time to prepare his appeal.

The combined exports of Hyundai Motor and Kia Motors account for about 7 per cent of the country's automobile exports. Auto exports account for about of 10 per cent of the country's total exports.

This case has once again exposed management flaws at the all-powerful chaebols, or family-run conglomerates, where a top-down management culture effectively centres key decision-making powers on one person.

Chung's arrest last year was widely seen as a move by the South Korean government to foster sound corporate governance.

But if previous trials involving convicted corporate bigwigs are any guide, he is unlikely to serve out his full jail term. In many of these cases, the businessmen either had their jail sentences suspended by the appeals court or were released on presidential pardons.