Shock MSCI move triggers Indonesian market chaos

Late on 27 January, 2026 global index provider, Morgan Stanley Capital International (MSCI), announced, without warning, the results of a recent consultation on free float issues surrounding Indonesian securities. The consultation focused on concerns raised by international investors as to the reliability of data provided by PT Kustodian Sentral Efek Indonesia (KSEI), Indonesia’s central custodian used for Indonesian stock exchange transactions.

MSCI noted that “significant concerns” had been expressed by some investors over the reliability of KSEI data provided in its Monthly Holding Composition Report and in particular its categorization of shareholders. Investors pointed to “fundamental investability issues” arising from opaque shareholding structures and “concerns about possible coordinated trading behaviour that undermines proper price formation,” the MSCI announcement read.

That’s a polite way of suggesting that Indonesian stocks are vulnerable to price manipulation by undisclosed insiders. MSCI noted that it needed “more granular and reliable” data on shareholding structures to address investors’ concerns, including the possibility of monitoring of securities with a high shareholding concentration.

What really shocked the market, however, was what came next. MSCI announced an immediate halt to any anticipated changes to index construction that would have allowed for further foreign participation (by freezing Foreign Inclusion Factors and the number of shares accessible to foreign investors) as well as halting any planned index additions to its MSCI Investable Market Indices. The freeze would allow time for the relevant market authorities, namely Otoritas Jasa Keuangan (OJK), the Indonesian financial services authority, and Indonesia Stock Exchange (IDX) to “deliver meaningful transparency improvements”.

MSCI also stated that following a forthcoming review in May, it will reassess Indonesia’s market accessibility status, which could result in a weighting reduction in MSCI Emerging Markets Indices or even a downgrade from emerging to frontier market status.

That last threat, however unrealistic, spooked investors. When trading opened on January 28, the Jakarta Composite Index (JCI) dropped 8.8% in intraday trading before closing 7.35% and falling further on January 29 to record the worst two-day decline in the JCI in some 30 years. Such was the chaos that trading was halted temporarily on both days. The notion that Indonesia's allocation could be reduced or even yanked from the MSCI Emerging Market Indices caused investors to dump securities.

Were Indonesia indeed to be downgraded to frontier market status, it would be rubbing shoulders with markets like Pakistan, Bangladesh and Sri Lanka, an unthinkable outcome for ASEAN’s largest economy. Such a move would dramatically reshape the composition and characteristics of the indices, causing chaos among index investors in Asia forced to reposition aggressively. Goldman Sachs estimates that Indonesia could face passive outflows of between $2.2 billion (best case) and $7.8 billion (worst case) if the MSCI downgrade materializes. But how likely is it to happen in reality?

MSCI has taken drastic downgrade action in respect of equity markets before – Pakistan (2008/9); Greece and Morocco (2013) and Argentina (2021). But those downgrades were made in the face of significant market dislocation and economic disruption and were well trailed. The Indonesia situation is very different. The measures were announced without warning, they entail an immediate freeze on positive changes prior to any further consultation, and include the threat of further action (including the possible downgrade to frontier market status) as soon as May this year. Yet Indonesia isn’t the only market in Asia Pacific with low public float levels and market manipulation problems: ACGA’s CG Watch research and engagement has long advocated Indonesian and certain other ASEAN markets to raise free float levels and increase ultimate beneficial owner (UBO) transparency. So why has MSCI seemingly singled Indonesia out for such treatment? Are the infractions so egregious or is something else going on?

As the dust settled, suspicions arose over the motives behind the move. Local businessmen in Jakarta ACGA spoke with speculated that powerful government-related interests had engineered the drop in order to reap profits as the market rebounded. Another source familiar with US government thinking told ACGA that the MSCI move was likely linked to the Agreement on Reciprocal Trade due to be signed imminently between Indonesia and the USA, with pressure being applied by the US administration on the Indonesian government via the trade deal to increase domestic market access for US and international investors.

Whatever the reasons, local stakeholders were quick to apply a brave face to the event. In remarks made at an investor conference in Jakarta attended by ACGA, Pandu Sjahrir, Chief Investment Officer of Danantara, Indonesia’s newest sovereign wealth fund, was keen to assuage concerns among the international investment community, stating that the issues were well known and the event was a “wake-up call, a good reminder against complacency”. He reiterated Indonesia’s desire and necessity to become a global market and assured the international audience of a prompt and responsible response.

Sjahrir clearly knew what was coming. The same day as his remarks, January 29, the OJK announced immediate steps to increase the minimum free float requirement for listed companies to 15% and to improve UBO data, including the publication of share ownership data for corporate and other investor categories holding less than the existing 5% disclosure threshold. Such material regulatory changes would normally take months, if not years, to emerge from Indonesia’s sticky regulatory bureaucracies.

Bloomberg data estimates that the new hike in free float from 7.5% to 15% will affect more than 200 listed companies. The OJK says that the new free float rules will be finalised by end February 2026, along with deadlines for compliance. Companies that fail to comply will face a structured delisting process, yet to be detailed.

While the new measures will save Indonesia the ignominy of reclassification by MSCI as a frontier market (likely a hollow threat in ACGA’s view) they were not enough to save senior capital market officials. On the morning of January 30, citing a “commitment to accountability towards recent market condition” (sic), IDX CEO, Iman Rachman, resigned. He was joined later in the afternoon by OJK chairman Mahendra Siregar, chief executive for capital markets supervision, Inarno Djajadi, and deputy commissioner I. B. Aditya Jayaantara. Mahendra said that the decision to resign by the OJK executives was taken as a “form of moral responsibility”.

The extraordinary nature of MSCI’s intervention in Indonesian markets, the speed with which Indonesian regulators responded to MSCI demands and the sacrificial blood-letting at the top of OJK and IDX are indeed suggestive of a coordinated political scheme to wrest control over the capital markets from insiders. Whether that came with the involvement of the US administration or was concocted by senior figures within the Prabowo government is moot. The impact on the Indonesian capital markets will be profound, perhaps pivotal.