The resignation of the Indonesia Stock Exchange’s chief executive marked the first tangible consequence of MSCI Inc.’s reform demands, as policymakers rushed to roll out measures aimed at averting a downgrade and restoring confidence.
The moves capped a volatile week for Indonesian assets after the index compiler flagged concerns about transparency in Southeast Asia’s biggest market, sending benchmark stocks to their worst two-day rout in nearly three decades before regulators stepped in. The Jakarta Composite Index closed 1.2% higher.
“This should be seen less as blame and more as a reset,” said Mohit Mirpuri, senior partner at SGMC Capital Pte. “Periods of stress often accelerate change, and this opens the door for fresh leadership with a clear mandate to raise standards, improve market structure and reinforce investor confidence.”
At the heart of concerns is the low free float of Indonesian equities, given the country’s biggest companies are thinly traded and controlled by a handful of wealthy individuals—a structure that investors say distorts the index and risks manipulation. The issue has been a point of contention for years, with investors arguing that such low liquidity in certain shares makes large portions of the market uninvestable and untrackable.
Currently, MSCI does not have a minimum free float requirement for a country’s market classification, which depends on factors such as accessibility and the economic development. However, the index compiler does require a free float of 15% over a period of time for a security to be included in its investable emerging-market universe, with some exceptions.
In a statement earlier this week, MSCI raised worries over “opacity in shareholding structures and concerns about possible coordinated trading behavior” in Indonesia. It said it needs more granular and reliable information, including stronger monitoring, to support a better assessment of free float and investability across securities.
Many investors remain on edge for whether regulators will be able to do enough to satisfy the index compiler’s demands. “The reforms outlined are directionally positive, but execution and the appointment of a credible successor will be key to determining whether these concerns fully dissipate,” said Gary Tan, a portfolio manager at Allspring Global Investments.
So far this week, global funds offloaded a net $739 million dollar worth of stocks through Thursday, on track for the largest weekly outflow since mid-April.
