By Jihoon Lee and Ju-min Park

SEOUL (Reuters) -South Korea announced on Monday a reform plan for listed companies to boost shareholder returns in an effort to reduce the “Korea discount” on stock prices, but the eagerly-awaited proposals fell short of market expectations.

South Korea is using Japan’s playbook to boost the value of its companies, analysts say, as its neighbour’s stock market surged to a record high last week thanks to years of corporate governance reforms and other steps to encourage share buybacks, lower cross-holdings and increased dividends.

Under the “Corporate Value-up Programme”, the South Korean government will encourage and support companies’ voluntary efforts to return more capital to shareholders and improve governance, the Financial Services Commission (FSC) said.

Companies will be able to refer to a detailed guideline set for release by the government in the first half of this year for their reporting plans, the FSC said.

“We expect it could help resolve the problem of ‘Korea discount'”, the regulator said in a statement.

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.

Some analysts said the proposals didn’t go far enough.

“The market was already expecting some ‘sell-on-the-news’ but profit-taking pressure turned out to be even heavier as the announced proposal was just too disappointing,” said Huh Jae-hwan, an analyst at Eugene Investment Securities.

“It was just too plain, with few measures seen as incentives. Neither compulsory requirements nor tax benefits were in there, which were steps the market had been anticipating,” he said.

The benchmark KOSPI index fell as much as 1.42% in morning trade, with losses led by automakers and banks which are often considered undervalued. These sectors had rallied hard recently ahead of the government’s reform proposal.

To encourage voluntary reforms, the FSC is considering preferential treatment in tax policies for companies that enhance their market value and increase shareholder returns.

The regulator will also introduce an index of firms with strong shareholder value.

FSC Vice Chairman Kim So-young said at a press conference that the reforms must be voluntary, not compulsory, adding the proposal “includes more and much stronger incentives than those rolled out in Japan.”

Kim said many companies are striving to improve their market value and more are expected to follow.

Joining the government’s push, South Korea’s stock bourse said earlier this month it would establish a team dedicated to improving corporate governance while the national pension fund decided to invest in companies working to boost their value.

The KOSPI rose 19% last year, underperforming the Nikkei and the U.S. S&P500. In 2022, its performance beat only Russia among the Group of 20 big economies.

About two-thirds of KOSPI-listed companies trade at a price-to-book value ratio (PBR) of less than 1, meaning their market value is less than the value of assets on the balance sheet.

Global tech titan Samsung Electronics was not doing much better, trading at a PBR of 1.2, compared with Taiwan Semiconductor Manufacturing Co’s 5.2, according to LSEG data.

(HReporting by Ju-min Park and Jihoon Lee; Editing by Emelia Sithole-Matarise and Shri Navaratnam)

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