South Korea's financial regulator on Monday said it had imposed its largest ever fine on two Hong Kong-based investment banks for illegally practicing short selling on the domestic stock market.

The Financial Services Commission said its Securities and Futures Commission decided during a meeting on Friday to fine the Hong Kong unit of French investment bank BNP Paribas and its securities affiliate operating in Korea as well as HSBC's Hong Kong arm 26.52 billion won ($20.35 million) for violating the Capital Markets Act's regulation banning naked short selling. The two banks will also be referred to prosecutors.

Condemning the activities as "grave misconduct undermining the order of capital markets and investors' trust" in its statement Monday, the FSC said the fine was the largest since the country introduced a penalty system for naked short selling in 2021.

In October, the Financial Supervisory Service revealed it discovered that two Hong Kong-based banks illegally shorted a combined value of up to 56 billion won in stocks in the Korean stock market.

BNP Paribas' Hong Kong unit placed naked short selling orders worth 40 billion won against 101 listed stocks here, including the shares of tech conglomerate Kakao, between September 2021 and May 2022.

HSBC's Hong Kong unit ordered 16 billion won of short sales for nine listed stocks, including Shilla Seoul, between August and December 2021.

BNP Paribas' Korea brokerage unit, which had been entrusted with handling the naked short sales will also share the 26.52 billion won fine, the FSC added.

The two banks' illegal trading prompted Korea to ban short selling altogether until June 2024.

The FSC on Monday said it is strictly monitoring for short selling in the meantime, promising severe punishment for violations. A thorough investigation into global investment banks, and the securities firms they entrust with their investments, is underway, the regulator added.

To eradicate further concerns rising from illegal short selling, the FSC added the South Korean government and the related financial agencies plan to start building a computerized system for detecting short selling within the first half of next year.

Naked short selling -- which refers to the practice of selling shares without first borrowing them or confirming they could be borrowed -- is not permitted in South Korea and can be punished with a fine up to five times the profits gained or one year or more in prison.g