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South Korea threatens jail terms for breaking stock market rules

Stronger penalties brought in against practice of 'naked' short selling

Dealers at Hana Bank in Seoul on Dec. 11. The Kospi index has powered ahead this year.   © EPA/Jiji

SEOUL -- South Korea's financial regulator has revealed plans to impose jail sentences on some short selling on the country's stock market, saying current financial penalties are too weak to stop the practice.

The move to strengthen curbs on so-called "naked" short selling comes after months during which all short selling has been banned in South Korea. The measure was imposed when the market was sliding in the early days of the coronavirus pandemic.

Now the stock market is powering ahead but the Financial Services Commission said it wanted to adopt criminal punishment for naked short sellers. They will face at least one year of imprisonment. Currently fines of up to 100 million won ($92,000) can be levied.

"We expect to stop intentional illegal short selling in advance," said the FSC in a statement. "We also anticipate the new regulation may prevent investors from violating it by mistake."

Short selling refers to betting that the price of a stock will fall, often by borrowing a share in anticipation of returning it to the lender at a lower price. Naked short selling refers to doing so without borrowing or owning the stock in question.

The new regulation will be implemented after a three-months grace period. The regulator also made it mandatory for short sellers keep their contracts to borrow stocks for five years, so that they can submit them immediately when the authorities want to see them.

Short sellers of a stock are also prohibited from taking part in a capital increase for a company to prevent them from manipulating the share price.

The announcement comes as the Kospi exchange has reached fresh highs as foreign investors load up on stocks, spurred by a strong local currency and a bright forecast for the tech and bio sectors.

South Korea's benchmark stock index reached 2,770.06 on Friday, up 0.86% from the previous close. It has jumped 11.4% in the past month.

The Korean won has gained more than 8% against the U.S. dollar for the last three months, while the country's semiconductor makers are enjoying rising demand for their chips thanks to teleworking and the stay-at-home economy.

"[The] Kospi has often been called a 'boxpi' as it was moving within a range, but it broke the upper side this year and will continue to soar next year," said CW Chung, a senior analyst at Nomura. "We believe the Korea discount should gradually narrow, thanks to higher dividend yield versus the deposit rate and the positive impact of improving corporate governance and shareholder returns."

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