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Lawmakers agree to imprison illegal short-sellers
By Park Jae-hyuk
The government is facing a severe backlash for its plan to learn from Japan's short-selling system to enable retail investors here to get better access to the investment method, which refers to a method in which an investor sells borrowed shares in the belief that the price will fall and can buy the shares back at a discount, keeping the profits and returning the borrowed shares.
Retail investors are still calling for a complete ban on short-selling in the local stock market, although the financial authority has claimed that its plan is intended to create a level playing field.
"If retail investors have better access to short-selling, it is quite obvious that they will fall victim to foreign and institutional investors," Korea Stockholders Alliance head Chung Eui-jung said.
The leader of the group comprised of 18,000 retail investors picketed, Wednesday, in front of the Korea Federation of Banks headquarters building which hosted the Korea Securities Finance Corp.'s (KSFC) forum that day, regarding short-selling by individual investors.
Kangnam University professor Liu Won-suk suggested in the forum that the Korean government should review the case of Japan, before finalizing its plan on short-selling rules.
According to the professor, the proportion of retail investors in Korea engaging in short-selling was just 1 percent last year, although their proportion in all stock trading reached 65 percent. In contrast, the proportion of individuals in Japan engaging in short-selling was higher than those of foreign and institutional investors, although the proportion of retail investors in Japan's entire stock trading stood at 19.6 percent.
"Japan did not ban short-selling despite the outbreak of the COVID-19 pandemic," the professor said. "Retail investors there are open to short-selling because it took root as one of the methods in the market during its long history."
KSFC manager Kim Tae-wan said his company can build the infrastructure for investors and securities firms to avoid risks inherent in the "Japanese-style" short-selling system, such as momentary naked shorting, the practice of conducting short-selling without actually borrowing the stocks first, which is prohibited in Korea.
The Financial Services Commission (FSC) will announce its measures to boost short-selling by retail investors, taking into account the suggestions made at the forum. The financial regulator plans to lift its temporary ban on short-selling next March, as planned.
The Korea Stockholders Alliance head, however, said punitive damages against illegal short-sellers and systems that can uncover naked short-selling should precede the FSC's plan to allow retail investors better access to short-selling.
From that standpoint, attention is being focused on possible moves by the National Assembly over the passing of a bill that would introduce prison terms for illegal short-sellers.
On the day of the forum, ruling and opposition lawmakers at the National Policy Committee's legislative subcommittee on the deliberation of bills agreed with the bill to imprison illegal short-sellers for more than a year and to impose a heavier fine on their unfair profits.
If the bill is passed in the plenary session, Dec. 9, the punitive measures will be imposed starting from March 15, the day when short-selling is resumed in the local stock market.
