South Korea's financial regulator is set to partially lift its ban on short selling of listed stocks this week, about 14 months after it imposed it to cope with a stock market rout triggered by the COVID-19 pandemic.

Starting Monday, the ban on 200 large-cap firms listed on the main KOSPI and 150 firms listed on the secondary KOSDAQ will be lifted, the Financial Services Commission (FSC) said.

A total of 917 stocks are listed on the KOSPI, and 1,470 stocks are listed on the KOSDAQ.

A ban on short selling on the remaining 717 stocks on the KOSPI and the remaining 1,320 stocks on the KOSDAQ will continue to be in place, the FSC said.

Stock 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 prices fall, they can buy back the stocks at lower prices, pocket the profit and return the shares to the original owner. Increased short selling typically indicates that many investors anticipate a slump in stock prices.

Since early last month, South Korea has toughened punishments against naked short selling, a short selling practice without the securing of underlying assets.

Helped by aggressive purchases of shares by retail investors, South Korea's benchmark stock index jumped about 30 percent last year.

Retail investors have criticized short selling for fueling price declines when stock markets fall, but foreign investors are unable to hedge their exposure to the local market under the ban.

Although retail investors have urged financial authorities to prohibit the hedging practice, some experts said the partial resumption of short selling is unlikely to have a major impact on the stock market, given excess liquidity in the market and an earnings boost.

However, some stocks may be vulnerable to short selling if they have relatively higher valuations than their earnings, they said. (Yonhap)