South Korea's financial regulator said Monday the country will take stern actions against illegal activities involving stock short selling as it allowed a partial resumption of short selling after a 14-month ban.

The Financial Services Commission (FSC) partially lifted its ban on short selling of some listed stocks after it imposed a six-month ban on the trading strategy in March last year and later extended it to ease market routs caused by the pandemic.

Short selling is a trading strategy in which investors sell stocks they borrowed on the belief that share prices will fall in the near future. When the prices decline, they can buy back the stocks at lower prices, pocket the profit and return the shares to the original owner.

FSC Vice Chairman Doh Kyu-sang said the country will closely monitor stock market movements and take stern actions against any illegal moves.

"The government will actively respond to market-disturbing activities, including illegal naked short selling, by imposing punishment that can be applied to the fullest extent of the law," Doh said at a meeting on responses to financial risks.

South Korea bans naked short selling, or the sale of shares without borrowing stocks. Under law, those who engage in naked short selling can face a prison term of one year or more, or a fine amounting to three to five times the illegal profits.

The country partially resumed short selling after enhancing protection measures for retail investors, who have demanded an outright ban on short selling to level the playing field with institutional and foreign investors.

Individual investors have been a new horde of strong buyers of local stocks since 2020. The country's key stock index jumped about 30 percent last year alone.

The financial regulator overhauled a stock lending scheme to enable retail investors to easily borrow stocks for short selling.

After choppy trading, the benchmark Korea Composite Stock Price Index (Kospi) closed at 3,127.20 points, down 20.66 points, or 0.66 percent, from the previous session.

The total value of short selling transactions came to 1.09 trillion won ($971 million) on the main and secondary stock markets on Monday, according to the bourse operator Korea Exchange.

Short selling by foreigners accounted for 87 percent of the total with 956 billion won.

Financial authorities lifted the short selling ban on 200 market heavyweights on the main bourse and 150 companies on the tech-laden Kosdaq market. (Yonhap)