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(Bloomberg) — South Korean stocks surged after regulators reimposed a full ban on short-selling for about eight months, a controversial move that authorities said was needed to stop illegal use of a trading tactic deployed regularly by hedge funds and other investors around the world.

The ban may help appeal to retail investors who have complained about the impact of shorting — the selling of borrowed shares by institutional investors — ahead of elections in April. However, it could deter some foreign investors and hold back MSCI Inc. from upgrading Korean equities to developed market from emerging status.

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The benchmark Kospi jumped as much as 4%, the most since January 2021, leading gains among major regional gauges in Asia on Monday. Stocks that had seen recent jumps in short-selling positions, including LG Energy Solution Ltd. and Posco Future M Co., were among the biggest boosts. The small-cap Kosdaq Index surged as much as 5.9%, the most since June 2020. 

The nation’s Financial Services Commission said on Sunday that new short-selling positions will be prohibited for equities on the Kospi 200 Index and Kosdaq 150 Index from Monday through the end of June 2024. Pandemic-era restrictions on the practice had been lifted for those two gauges only in May 2021, while the ban has remained in place for some 2,000 stocks.

READ: South Korea to Ban Short-Selling of Stocks Until June 2024

The move comes ahead of general elections in April for the National Assembly in South Korea, where public perception of short-selling remains deeply negative. Some ruling party lawmakers urged the government to temporarily end stock short-selling in response to demands by retail investors, who have staged protests against the tactic. Most short-selling in South Korea is conducted by institutional investors.

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“This policy reversal with respect to short selling is unwarranted at the current time,” said Wongmo Kang, an analyst at Exome Asset Management. “Many people view it as a political move aimed at next year’s general election,” he said, adding that the Korean market tend to be “heavily influenced by retail investors”.

The Kospi surged earlier this year on frenzied buying of electric-vehicle battery names and chip stocks related to the artificial intelligence theme. Concerns over geopolitical tensions and high interest rates reversed the rally in recent months, driving the benchmark into a technical correction and nearly erasing its gain for the year.

The latest ban is “unusual” as authorities are comprehensively prohibiting short selling at a time when there is no financial crisis, said Huh Jae-Hwan, an analyst at Eugene Investment & Securities.

The financial regulator said the market had been disrupted due to “massive” naked short-selling by global investment banks. The so-called naked variety of the trade involves shorting shares without borrowing them first. The regulator said it is now seeking to make improvements to create a level playing field for retail investors, with stronger punishments for traders who break the rules.

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READ: Korea to Fine Banks for Naked Shorts; Local Media Name HSBC, BNP

While regulators argue that naked short-selling inhibits fair price formation and hurts confidence, some observers say broad outright bans make the market less transparent and therefore less attractive. Some say the restrictions may keep the market from being upgraded in MSCI indexes.

“It does compromise their status and certainly would hold them back from achieving developed market status,” said Gary Dugan, chief investment officer at Dalma Capital Management Ltd. “Given that there is an immediate ban there will be an initial sharp move higher in stock prices of companies that have had some short selling,” but the impact may be limited given low levels of short positions in the overall market, he said.

“There is a possibility that international investors may lose trust and opportunity in the Korean market,” Exome Asset’s Kang said. “Without the ability for investors to express a view that markets and individual stocks are ‘mispriced’ to the upside, stock markets lose long term credibility on the world stage.”

—With assistance from Abhishek Vishnoi.

(An earlier version of this story was corrected to show the ban was partially lifted in May 2021)

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