Though Rep. Hong said he would continue to make efforts for the bill’s entry to the committee deliberation list, various hurdles involving a tough backlash from corporate investors are expected, according to financial market insiders.

Securities-related online bulletin boards show that there have been ceaseless complaints among small investors on short-selling positions of local corporate investors. Though foreign funds are also allowed to conduct short-selling trading, small investors are barred.

Small investors are only entitled to lend their stocks to institutions in return for certain service fees in Korea.

Short-selling is said to be a legitimate trading skill. Both local and foreign corporate investors can reap gains by continuously dumping borrowed stocks first and repurchasing them at lower prices later -- which is dubbed short-covering -- before they hand back the shares to the original holders.

But according to financial consumer advocates, the problem stems from the situation that large sums of money held by the NPS -- raised from Korean citizens -- is frequently used as a big barrier hampering the gains of the KOSPI and KOSDAQ indexes.

Critics, including a great number of small investors, allege that some local institutions -- such as brokerage firms and commercial banks -- often dump their borrowed shares irrespective of a listed company’s earnings performance or fundamentals.

As a result, stock prices of some companies -- despite their robust operating profits -- may dip to their lowest level of the year.

Hong said the lending service charges totaling 26 billion won ($22.3 million) earned by the NPS verifies the state pension fund has been used in stirring the market.

“Small investors have suffered huge losses from the NPS’ stock-lending and borrowers’ short-selling,” he said. “The public capital should no longer be used against the citizens’ will.”

Institutions are refuting Hong’s view, arguing that only negative aspects of short-selling have come into the spotlight.

“The NPS’ lending is not always linked to short positions. And short-selling is not a tool to artificially pull down prices, but an investment in anticipation of a price drop when the price is believed to stay above a company’s optimum value,” said an official in the brokerage sector.

An NPS official was quoted by a news provider as saying that the fund’s lending “takes up only 1.6 percent of the market’s total equity lending volume.”

He also reportedly clarified that the fund has used the money in accordance with the law, without elaborating on the state-controlled agency’s stance -- for, against or neutral -- on the motion to revise the law.

A stock analyst predicted on TV that other major public pension funds could follow suit -- refraining from lending -- if the bill passes the Assembly, while some critics cite the fairness issue between a ban on the NPS and no legal obligations held by other pension funds.

The NPS has been ranked third among the world’s 300 major state pension funds with its volume of $429.8 billion, according to a report from global consulting firm Towers Watson and investment journal P&I.

Stocks that recently saw the ratio of short-selling to total trading volume exceed 20 percent include Hyundai Heavy Industries, Hotel Shilla and Mirae Asset Securities.  

By Kim Yon-se (kys@heraldcorp.com)