On Friday, October 16, Indonesia’s stock market suffered its worst one-day decline since the 1998 Asian financial crisis. The Jakarta Composite Index plunged 11.6 percent following the global index provider MSCI’s announcement that it was considering removing Indonesia from its Emerging Market classification and placing it directly into its Standalone Market category. The selling continued when markets opened on Monday, with the index falling another 3.9 percent, bringing the combined decline over the two trading days to approximately 15 percent.
For Southeast Asia’s largest economy, this is a serious development. However, the most important issue is not the decline in share prices or even the possibility of losing Emerging Market status. It is what this crisis reveals about the credibility of Indonesia’s capital markets and the effectiveness of the institutions responsible for regulating them.
MSCI’s concerns about concentrated share ownership, questionable free-float calculations, coordinated trading, and the reliability of market prices are not new. In January, MSCI restricted certain increases in Indonesian securities’ index representation, and announced that it was considering downgrading Indonesia from Emerging Market to Frontier Market status. By June, it had acknowledged reforms introduced by the authorities but emphasized the need for sustained implementation. However, MSCI was still concerned enough this month to propose removing Indonesia from both its Emerging and Frontier Market classifications.
Market Manipulation and Inflated Valuations
One of the main concerns is coordinated trading, where groups of investors work together to influence share prices rather than allowing them to be determined by genuine buying and selling. Such activities can involve transactions through multiple brokerage accounts, including accounts held by related parties or nominees, creating the appearance of greater trading activity and investor demand than actually exists.
The problem is especially serious when a company’s shares are concentrated among a small number of shareholders. With only a limited number genuinely available for trading, relatively modest transactions can have a disproportionate impact on the market price. If prices are pushed higher through coordinated buying, the resulting increase in market capitalization can give investors a misleading impression of the company’s value. Investors, including foreign institutions and index funds, may subsequently purchase shares at prices that do not reflect genuine independent demand.
For example, on October 16, Indonesia’s Financial Services Authority (OJK) announced that its investigation into trading in Dian Swastatika Sentosa (DSSA), a company associated with the Sinar Mas Group, had uncovered planned and structured market manipulation involving individual and institutional investors operating through several brokerage firms.
According to OJK, the investigation examined transactions between 2024 and 2026 and identified coordinated activities that significantly increased DSSA’s share price. The regulator questioned brokerage directors, individuals, and foreign legal entities, suspended certain individual licenses and announced penalties totaling Rp1.5 trillion (around $83 million) in connection with the case.
The regulator has not publicly established that the company’s controlling shareholders directed these activities, and it would be wrong to assume their involvement without evidence. However, the case demonstrates that trading on a regulated stock exchange can produce prices that do not reflect genuine independent demand.
There is also a broader concern about how inflated valuations affect the financial system. Higher share prices increase the apparent wealth of major shareholders and, where shares are accepted as collateral, may influence the financing available against those holdings. They can also affect index weightings and investment decisions by institutions relying on reported market prices and liquidity.
The obvious question is how such activities could continue over several years without being stopped earlier. Modern stock exchanges have surveillance systems designed to identify unusual trading patterns, concentrated ownership, and potentially coordinated transactions. Were these warning signs missed, were investigations delayed, or did the authorities lack the resources or willingness to intervene?
The Indonesia Stock Exchange (IDX), OJK, and Central Securities Depository have taken steps to address these concerns. In response to MSCI’s first downgrade threat in January, the authorities have introduced measures to improve transparency, including reducing the shareholding disclosure threshold from 5 percent to 1 percent, expanding investor classifications from nine to 39 categories, and establishing a roadmap to increase the minimum free-float requirement from 7.5 percent to 15 percent. They have also introduced measures to identify companies with highly concentrated shareholdings, improve beneficial ownership disclosures, strengthen scrutiny of IPO allocations, and enhance market surveillance and enforcement.
These are all sensible reforms, but announcing new regulations and actually enforcing them are two different things. For instance, increasing the minimum free float means very little if shares supposedly held by independent investors are actually controlled through nominee arrangements, affiliated companies, or other parties connected with principal shareholders.
Indonesia’s listed companies have historically been dominated by family-controlled business groups, with various studies estimating that 60–70 percent of companies listed on the IDX are controlled by families. Many of these groups have played an important role in Indonesia’s economic development. While there is nothing inherently wrong with concentrated family ownership, the problem arises when complex ownership structures make it difficult to determine who actually controls publicly traded shares, whether transactions are conducted at arm’s length, and whether market prices reflect genuine trading between independent investors.
An example of this is Barito Renewables Energy. Following its 2023 IPO, the company’s market capitalization rose dramatically, at one point exceeding that of Bank Central Asia, one of Indonesia’s largest banks. The valuation attracted considerable attention, particularly given the company’s relatively limited earnings relative to its market capitalization.
In 2024, FTSE Russell excluded Barito Renewables from its global indices over concerns about concentrated share ownership. This should have been another warning that international investors were questioning whether the reported public shareholdings represented shares genuinely available for trading.
More recently, OJK announced penalties of Rp500 billion ($27.9 million) and Rp100 billion ($ 5.5 million), involving irregularities connected with the IPOs of Barito Renewables and Petrindo Jaya Kreasi, respectively, both associated with businessman Prajogo Pangestu. According to the regulator, shares intended for public investors had been allocated to parties associated with controlling shareholders, including through arrangements that obscured the identities of the ultimate beneficiaries. The penalties were directed at parties involved in the violations rather than the listed companies themselves.
Another example is the transaction involving Bayan Resources, in which founder Low Tuck Kwong and his daughter Elaine Low sold a combined 30.25 percent stake to PT Jhonlin Baratama, associated with businessman Haji Isam. According to regulatory filings, the shares were sold at Rp2,588 each, approximately 80 percent below the prevailing market price of Rp13,000–14,000.
There may be legitimate commercial reasons for selling such a large block of shares at a substantial discount. While this does not establish market manipulation, the difference between the negotiated price and the market price raises questions about whether the quoted share price accurately reflects its value.
Whither Regulatory Independence?
The involvement of some of Indonesia’s most influential business families raises questions about whether financial regulators are sufficiently independent and willing to take action against powerful business interests.
Indonesia’s large conglomerates often have longstanding relationships with political figures, government institutions, and other influential groups. Such relationships are hardly unique to Indonesia and do not, by themselves, imply wrongdoing. However, they create concerns about whether regulators can operate without political or commercial pressure, particularly when enforcement actions could affect prominent shareholders or companies with political connections.
OJK deserves credit for pursuing the recent investigations and announcing substantial penalties, particularly given the prominence of the corporate groups involved. Although OJK maintains that its investigations were underway before MSCI’s announcement, it should explain why these problems persisted for so long and what steps it has taken to prevent them from happening again.
Investors should also be entitled to know who was responsible for the violations, what penalties have actually been collected, whether further proceedings are being pursued and whether those involved remain permitted to operate in the market.
Restoring Investor Confidence
Indonesia has considerable economic advantages, including its large domestic market, natural resources, and opportunities in infrastructure, energy, and manufacturing. However, international investors also value the reliability of financial information, minority shareholder protection, regulatory independence, and the predictability of government policies.
When confidence in these areas weakens, investors may demand higher returns or simply invest elsewhere. For Indonesian companies, this can mean lower valuations, a higher cost of capital, and greater difficulty raising funds for expansion.
The proposed MSCI reclassification could compound these problems. Funds required to track Emerging Market benchmarks may have to reduce their Indonesian holdings if the downgrade proceeds, while other investors may reassess their exposure because of concerns about governance and market integrity.
The government’s response should therefore concentrate on restoring confidence rather than simply supporting share prices. Danantara’s reported plans to invest $5 billion in domestic businesses may provide support during a period of market weakness. However, using public investment funds to support the market cannot resolve concerns about ownership transparency, coordinated trading, or regulatory enforcement. Such investments should be based on commercial considerations, with transparent investment criteria and proper accountability.
The IDX and OJK should concentrate on enforcing existing regulations rather than continuing to announce additional reforms. Beneficial ownership must be reliably identified, free-float requirements must reflect shares genuinely available to independent investors, and suspicious trading must be investigated promptly. The authorities should also publish regular reports identifying companies that remain in breach of the regulations, the corrective measures required and the outcomes of enforcement proceedings. Investors should not have to rely on general assurances that improvements are being made.
Indonesia has until April 30, 2027, to respond to MSCI’s consultation, with a final decision expected by June 30. However, the government’s objective should be more than simply retaining its Emerging Market classification. The underlying problem is that Indonesia has allowed legitimate concerns about the integrity of its capital markets to remain unresolved for too long. IDX and OJK must demonstrate that they, not Indonesia’s powerful business groups or politically connected shareholders, are responsible for overseeing Indonesia’s capital markets. The rules must apply equally to everyone, regardless of their wealth, influence, or political connections. Unless the authorities are prepared to assert their independence and hold those responsible accountable, restoring international investor confidence will remain difficult, no matter how many new regulations are announced.
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