By Jihoon Lee

SEOUL (Reuters) -South Korea's market watchdog chief warned that companies could face penalties for failing to boost shareholder returns in the long run, signalling a tougher approach after a reform package to spur voluntary efforts was met with market disappointment.

"Authorities are discussing various measures to deal with firms failing to meet certain criteria regarding shareholder returns," Lee Bok-hyun, governor of the Financial Supervisory Service, told a press conference on Wednesday.

The steps under consideration were not included in the corporate reform package announced on Monday but Lee said they will be incorporated once authorities have finalised details.

Possible penalties include removing non-compliant firms from the stock market, Lee said, adding that it would be problematic for firms to remain listed while making no progress over a prolonged period.

The reform plan for listed companies announced on Monday, dubbed "Corporate Value-up Programme", aims to boost shareholder returns in an effort to reduce the "Korea discount" on stock prices.

The Korea discount refers to a tendency for South Korean companies to have lower valuations than global peers due to factors such as low dividend payouts, and the dominance of opaque conglomerates known as chaebols.

But many analysts said the reform package didn't go far enough, noting the lack of details and the absence of any penalties or tax benefits that would push companies to make changes.

"The FSS governor's comments raise hope that there will be follow-up measures that are compulsory," said Park So-yeon, an analyst at Shinyoung Securities.

"There is considerable concern that it might be a policy just prepared for the legislative election in April, but if it does get carried out under a mid- to long-term roadmap, it will be something we can look forward to," Park said.

In separate comments on Wednesday, after meeting with representatives from foreign investment banks to hear their views about the policy initiative, vice finance minister Kim Byoung-hwan said the programme "will not end up as a one-time, short-term task but is part of continuous, mid- to long-term efforts".

The benchmark KOSPI index rose more than 1% on Wednesday, after falling for two straight days. Shares of automakers and banks, considered undervalued, led the gains.