Indonesia tightens stock market rules to address MSCI concerns

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Indonesia moves to overhaul stock index

Highlights

Indonesia plans to exclude tightly held stocks.
Affected shares represent 18% of index weighting.
MSCI downgrade concerns drive market reforms.

Indonesia Stock Exchange Chief Executive Jeffrey Hendrik announced the plan Monday after meeting representatives of MSCI, the global index provider. Companies with highly concentrated ownership currently represent about 18% of the Jakarta Composite Index's total weighting, Bloomberg reports.

Jakarta exchange changes index composition

Under the proposal, shares held by a small group of controlling investors would no longer be included in the Jakarta Composite Index. The affected stocks would remain available for trading, but their price movements would stop influencing the benchmark. The exchange has not yet announced when the changes will take effect or which companies will be excluded.

The decision is intended to make the index more representative of shares available to ordinary investors. Stocks with concentrated ownership can experience sharp price movements when relatively few shares are actively traded. Those movements may distort a benchmark even when they do not reflect broader market conditions.

Hendrik pointed to Hong Kong's Hang Seng Index as an example of a benchmark that excludes stocks with concentrated ownership. The Indonesian exchange plans to announce an implementation timetable after completing the necessary preparations.

New disclosures target ownership transparency

The exchange will also publish the names of investors holding at least 1% of a listed company's shares. It will identify whether those shareholders have affiliations with the company, providing additional information about relationships that may affect trading activity. The measure is designed to address concerns that existing disclosures do not fully reveal who controls certain listed businesses.

MSCI raised those concerns last week, citing persistent coordinated trading practices and limited ownership transparency. The index provider warned that Indonesia could face a two-level downgrade from emerging-market to standalone-market status. Indonesian officials are now seeking to demonstrate that the exchange can address those weaknesses.

MSCI decision raises stakes for investors

A downgrade would have consequences for Indonesia's access to international investment. Global funds that track MSCI benchmarks use the provider's market classifications when determining where to allocate capital. Moving Indonesia into the standalone category could reduce its exposure to funds focused on emerging markets.

The proposed index exclusions are significant because tightly held stocks account for approximately 18% of the Jakarta benchmark's weighting. Removing them would change how the index reflects movements in the country's equity market. However, the impact on individual companies and investors will depend on the final exclusion criteria and implementation schedule.

Indonesia's response also highlights the importance of market transparency in attracting foreign capital. The exchange has outlined two changes, but MSCI has not confirmed that they will resolve its concerns. Investors will be watching for implementation details and the index provider's subsequent assessment.

We also reported Bank Indonesia has seen holding rates steady as market turmoil tests rupiah.

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