[THE INVESTOR] The National Pension Service has lent out some 700 billion won ($617 million) worth of its shares to other parties, a lawmaker revealed on July 26.

A large part of these stocks may have been used for short-selling.

“Although there is no data available on how the (loaned) shares are being used, it is a prevailing market view that securities borrowing is for short sale,” said Rep. Park Yong-jin of the liberal opposition Minjoo Party, citing data his office has compiled.

Short-sellers borrow stocks and sell the shares on the expectation that the prices will fall, enabling them to buy the securities at cheaper prices later when the original owners want their assets back. Short sellers profit from the bearish bets, while the owners earn interest.

Retail investors here are widely critical of the practice, seeing it to cause volatility in the local stock markets.

Park's office also noted that the pension fund’s stock loaning has risen steadily from an average balance of 425 billion won in 2013 to 697.9 billion in 2015.

As of June 30, the balance has risen to 718 billion won, with shares in 216 companies loaned out.

Hotel Shilla was the stock the fund loaned out the most, followed by stocks of renewable energy firm OCI, aerospace manufacturer LIG Nex1 and mobile messenger company Kakao.

According to Rep. Park’s office, 2.61 percent of Hotel Shilla’s total outstanding shares, or 1.04 million shares worth 74.5 billion won, are lent by the fund.

Shares in Hotel Shilla are trading at around 61,000 won, down from about 140,000 won a year ago.

However, the NPS argued that 700 billion won is not much considering that as the world's third-largest pension fund, it manages up to 500 trillion won (US$439.44 billion) worth of funds.

“Stock lending and borrowing market in Korea was worth 53 trillion won last year. The NPS presence in it is just 1.3 percent,” a NPS spokesperson said. "The NPS is not a major source of stocks for short sellers."

In 2015, the NPS earned 19 billion won in interest income on the loaned stocks.

Earlier this month Korea adopted a new rule that requires investors who short sell over 0.5 percent of any company’s total outstanding shares to report it. The mandatory disclosure rule also applies when the sum of short selling transactions exceeds 1 billion won.

By Lee Sun-young and Kim Ji-hyun / The Korea Herald ()