South Korea will prohibit stock short-selling until June 2024 to allow regulators to “actively” improve rules and systems, the Financial Services Commission said.

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Trading with borrowed shares, an essential component of short selling, will be banned for companies in the Kospi 200 Index and Kosdaq 150 Index from Monday until the end of June, the commission said on Sunday.

“Amidst market turmoil, we’ve discovered massive illegal naked short-selling by global investment banks and circumstances of additional illegal activities,” Financial Services Commission Chairman Kim Joo-hyun told a briefing. “It’s a grave situation where illegal short-selling undermines fair price formation and hurts market confidence.”

South Korea will seek a “fundamental improvement” to level the playing field for retail investors in the coming months, including seeking ways to narrow the different short-selling requirements and conditions between institutions and individual investors, Kim said.

Authorities will also seek stronger punishments on illegal short-selling activities. They will continue to look into short-selling transactions of global banks with the introduction of a special investigation team on Monday.

Lee Bokhyun, governor of the Financial Supervisory Service watchdog, told reporters about 10 global banks will face investigations which account for most short-selling transactions in South Korea.

South Korea started allowing short-selling of stocks on the two indexes in May 2021 while keeping a pandemic-era ban in place for more than 2,000 equities. Reimposing the full ban on the widely used trading practice could hinder the nation’s efforts to seek an upgrade in a key global index, according to Smartkarma Holdings Pte. analyst Brian Freitas.

“The short-sell ban will further jeopardize Korea’s chances of moving from Emerging Market to Developed Market,” Freitas said. “Expect bubbles to form in pockets of the market that are favored by retail investors as short selling no longer acts as a brake on absurd valuations.”

Short selling accounts for a tiny portion of the nation’s $1.7 trillion stock market — about 0.6% of the Kospi’s market value and 1.6% of the Kosdaq’s, according to exchange data.

The regulator’s announcement comes ahead of general legislative elections to select National Assembly members in April. Some ruling party lawmakers have urged the government to temporarily end stock short-selling in response to demands by retail investors who have staged protests against the practice.

The investors say short-selling leads to unfair advantages for foreign and institutional investors.

South Korean President Yoon Suk Yeol and his party have campaigned on reforms, including changes to the pension system and the prevention of market monopolies. Yoon’s popularity has edged up in recent months to a high of 34% on Friday, after dipping last year.

The regulator’s ban coincides with a nascent recovery in the main South Korean equity benchmark index. The Kospi has climbed in November after suffering its worst monthly drop in October amid foreign selloffs. The index is still down more than 10% from its August peak.

The small-cap Kosdaq Index also bounced back from the lowest level since January, but is down 17% from its July peak.