The finance minister of South Korea defended the government’s decision to outlaw short sales of stocks, which was made in advance of the country’s general elections the following year and has come under fire from industry observers who fear it may damage South Korea’s reputation abroad.

In response to an inquiry from a lawmaker on whether he supported the regulator’s recent prohibition on the practice of selling borrowed shares or if he believed the action was a ploy to garner support before the general elections, Choo Kyung-ho responded, “Yes, it is rightfully done,” on Tuesday.

To provide a “level playing field” for institutional and ordinary investors, the banking regulator on Sunday reinstated a complete ban on short sales through the end of June 2024.

The announcement of this move, made in advance of the April parliamentary elections, appeals to the populist side of ordinary investors, who have typically felt negatively about selling borrowed shares since it frequently causes significant price fluctuations.

Analysts view the action as generally bad for the market, especially in light of the Philippines’ plan to permit short selling of stocks starting on November 6 to stimulate more significant trading activity.

They said that while South Korea gets ready to gain a seat in the coveted developed-market category of the index next June, it hinders new investment and exacerbates foreign accessibility concerns raised by global index producer MSCI Inc.

The action ultimately defeated Korea’s attempts to persuade MSCI that it deserved a spot in the developed market classification. It also happened strangely since the market was rising rather than falling, and we weren’t experiencing a crisis,” SK Securities analyst Cho Jun-kee stated.

Even though the market capitalization of the country’s primary Kospi and Kosdaq combined exceeds some of the nations currently on the developed market list, such as Portugal, the index provider maintained South Korea in its emerging market category in June of this year.

In recent years, the retail investor has emerged as a significant voting group. Approximately 14 million retail stock trading accounts exist now, having more than quadrupled since 2017. About one in five Koreans own an account. In October, the Financial Supervisory Service of South Korea said it would probably impose fines on two investment banks in Hong Kong that it had found to have participated in naked short-selling transactions valued at 40 billion won ($29.58 million) and 16 billion won, respectively.

A short sale of shares without first obtaining a loan or confirming that the shares may be borrowed is known as naked short selling, and it resulted in fines for five international companies, including Credit Suisse, earlier this year.