Indonesia yesterday introduced a host of additional measures to address stock market manipulation, in order to stave off a potential downgrade of the country’s investment status by the global index provider MSCI.
On October 16, MSCI announced that it had launched “a consultation on a proposal to reclassify the MSCI Indonesia Indexes from Emerging Market to Standalone Market status” due to its lack of action to increase the transparency of its stock market. The announcement led to an immediate plunge in the Indonesian stock market, which shed 15 percent of its value over two days of trading.
Amid a defiant response from President Prabowo Subianto, who last week accused MSCI of trying to “intimidate” Indonesia, Indonesian officials have promised action to address the index provider’s concerns. Last week, the Indonesia Stock Exchange (IDX) said that it would exclude stocks with high shareholding concentrations from its main Jakarta index starting on November 2.
At a press conference yesterday, IDX chief Jeffrey Hendrik said it plans to expand the membership of a committee that will come up with a list of stocks with high shareholder concentration to include independent parties, Reuters reported. These could include a number of Indonesian academics as well as F. Taylor Chapman, an American businessman currently serving on the board of the new Indonesian state investment fund Danantara, who will act as a representative of foreign investors.
Hendrik said that the IDX also plans to launch investigations when it detects possible coordinated trading aimed at manipulating share prices. It will also freeze suspicious investor accounts.
“We encourage the IDX to strengthen the mechanism and methodology of trading supervision, including its capacity to identify patterns of irregular transactions, detect coordinated trading and strengthen the mechanism to respond to such events,” said Hasan Fawzi, the financial regulator’s capital market supervisor, according to Reuters.
The Indonesian announcements reflect the seriousness of MSCI’s threat to recategorize Indonesia as a “standalone” market. Given its status as the primary benchmark for institutional investors, such a downgrade could potentially trigger billions of dollars in capital outflows.
MSCI initially threatened to downgrade Indonesia in January, but only to “frontier market” status, which is a rung above the “standalone market” category. At the time, it expressed concerns with a host of issues, including coordinated share purchases, the high concentration of ownership in certain companies, and the limited “free float” of shares – i.e., those openly available for public trading.
Whether these measures are enough to stave off a downgrade when MSCI makes its determination next June remains to be seen. After MSCI’s January announcement, Indonesia announced a long list of reforms to address MSCI’s concerns, including a doubling of the minimum free float for listed companies to 15 percent. Top executives of the exchange and regulatory body also stepped down.
However, in its October 16 announcement, MSCI said that despite these promised reforms, “significant concerns remain around market dysfunction, including continued suspected coordinated trading behavior and lack of evidence of meaningful enforcement.” For this reason, it said, “a reclassification to Frontier Markets would not properly recognize the depth of the market problems.”
As Larry Luckey wrote in these pages last week, Jakarta’s proposed reforms are all sensible, “but announcing new regulations and actually enforcing them are two different things.”
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