The Indonesia Stock Exchange has announced it will remove a large number of companies with highly concentrated share ownership from its flagship index, a move aimed at preventing MSCI from downgrading or even ejecting the market from its emerging market index. The reform comes as Indonesia's stock market faces severe pressure from billions of dollars in capital outflows.
According to the Financial Times, the Indonesia Stock Exchange announced the decision on Monday, shortly after MSCI warned it might reclassify Indonesia as a "standalone market" — a category typically applied to markets such as Argentina, Lebanon and Zimbabwe, signaling serious deterioration in market accessibility or liquidity.
Indonesia Stock Exchange CEO Jeffrey Hendrik said:
We will remove all stocks with high ownership concentration from the composite price index. They can still trade normally, but their price movements will no longer affect the Jakarta Composite Index (JCI).
Hit by MSCI's warning last Friday, the Jakarta Composite Index plunged 11.6% on Friday and fell a further 3.6% on Monday. The combined market capitalization weight of the expelled companies accounts for roughly 18% of the JCI.
Analysts warn that the reform measures may not be enough to fully address MSCI's concerns, while Indonesia's stock market has fallen more than 40% year-to-date, with net foreign outflows approaching US$5 billion.
MSCI Turns Up the Pressure, Downgrade Threat Targets Market Accessibility
MSCI's concerns about the Indonesian market are long-standing, but this warning marks a significant escalation. In January, MSCI warned it might downgrade Indonesia from emerging market to frontier market status, citing insufficient market transparency, highly concentrated ownership structures and insider trading issues. The latest threat to classify Indonesia as a "standalone market" means it could be excluded entirely from major indices. MSCI indices are widely tracked by global emerging market investors, and a downgrade to standalone market status could trigger billions of dollars in capital outflows, dealing a further blow to Indonesia's already strained capital markets.
Exchange Rolls Out Dense Reform Measures, Analysts Remain Skeptical
To address MSCI's concerns, the Jakarta exchange had previously introduced a series of reform measures: lowering the minimum stock trading price from 50 rupiah (about US$0.003) to 1 rupiah to boost market liquidity; and raising the minimum free float ratio from about 7.5% to 15%. After MSCI issued its warning last Friday, the exchange announced further measures aimed at improving transparency and the quality of market data, and on Monday, following a virtual meeting with MSCI officials, formally announced the decision to remove highly concentrated holdings companies. However, analysts remain reserved about whether these measures can truly resolve MSCI's concerns. Yanuar Rizky, senior economist at think tank Bright Institute, said:
In my view, removing these stocks from the composite index does not necessarily solve the root problem. The exchange should focus on the reform itself... to make information truly transparent.
He noted that structural transparency issues are at the core of MSCI's concerns.
Affected Companies Hit with Regulatory Penalties, Root Causes Draw Attention
Among the companies classified by the exchange as having highly concentrated ownership are Dian Swastatika Sentosa and Barito Renewables Energy, both of which rank among the top of the index by market capitalization. Indonesia's regulator said last week it had fined dealers, underwriters, securities firms and beneficial owners of both companies for "proven violations of capital market regulations" during their initial public offerings. The exchange has not yet disclosed the specific effective date of the removal measures. Given that the expelled companies account for nearly one-fifth of the JCI's overall weighting, their eventual exit from the index is bound to cause notable disruption to the market benchmark, and whether the reforms can meet the market access standards set by MSCI remains to be seen.
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