MSCI executive tells investors Indonesia needs stronger enforcement to avert downgrade
Indonesia must demonstrate effective stock market oversight, not just change its rules, MSCI Managing Director Raman Aylur Subramanian told investors questioning the index provider's proposal to move the country from Emerging Market to Standalone Market status.
Investors press MSCI on its proposal
Subramanian addressed more than 100 investors at a UBS Group meeting on Tuesday, October 20, according to Bloomberg. He said the concerns behind the proposed downgrade centered on conditions in Indonesia's equity market rather than its stock indexes: the market had not yet met participants' expectations.
The proposal would place Indonesia in the same classification as Zimbabwe and Argentina. Subramanian said reforms were needed to remove "bad actors" undermining market governance, and that authorities had to persuade MSCI and global investors they could supervise trading effectively. Regulatory changes without consistent enforcement would not be enough.
Stephen Wu, managing partner at Carthage Capital, made a similar distinction in the Bloomberg report. He identified widespread market manipulation and weak enforcement of capital market rules, rather than a shortage of regulations, as Indonesia's central problem.
"Fixing this in time may still be possible, but it is difficult. Indonesia cannot resolve this problem simply by introducing regulations; it must demonstrate tangible change," Wu said. He also said enforcement needed to reach conglomerates with close political ties to the Indonesian government.
Transparency reforms face an enforcement test
MSCI has acknowledged reforms announced by Indonesian authorities. These include fuller disclosure of shareholders owning more than 1%, more detailed investor classifications, a High Shareholding Concentration reporting framework, and a roadmap toward a 15% minimum free float requirement.
The Indonesia Stock Exchange also plans to remove about 80 companies with highly concentrated ownership from the Jakarta Composite Index. According to QuotedData, those stocks account for approximately 18% of the index. Their removal would not prevent investors from trading them.
The concerns extend beyond disclosure rules. Since early 2026, MSCI has sought action against manipulation through coordinated trading. Its warning early in the year cited global investors' lack of confidence in ownership transparency, limited free float—the shares available for public trading—and inadequate market information.
In its 2026 Global Market Accessibility Review, MSCI marked Indonesia's "Information Flow" as deteriorating, citing opaque shareholding structures and coordinated trading that interfered with proper price formation.
Restrictions and a shrinking index presence
MSCI has already restricted certain index changes involving Indonesian securities. A freeze introduced in January 2026 blocks increases in Foreign Inclusion Factors (FIF) and Number of Shares (NOS), new additions to the MSCI Indonesia Investable Market Index (IMI), and moves into larger size-segment indexes. MSCI says the restrictions remain in effect until further notice.
Its June 2026 Market Classification Review retained Indonesia's Emerging Market designation but warned that insufficient progress by the November 2026 Index Review could prompt a reclassification consultation. The October proposal followed that warning.
MSCI's consultation figures show Indonesia's share of the MSCI Emerging Markets Index at 0.43% on September 30, 2026, down from 1.16% at the end of 2025. During that period, the MSCI Indonesia Index's free-float-adjusted market capitalization declined about 55%, from US$119.1 billion to US$53.4 billion, while its constituent count dropped from 18 to nine.
The remaining index was also heavily concentrated by sector: financials represented 71.71% of its weight as of September 30.
Market losses and potential withdrawals
Following MSCI's October 15, 2026, announcement, Indonesian equities lost 14.8% across Friday and Monday, QuotedData reported. Stocks then recovered 5.3% on Tuesday after the exchange intervened. The outlet put the market's decline for 2026 at around 40%.
A downgrade to Standalone Market status would remove all Indonesia Stock Exchange-listed shares from MSCI's index coverage and is expected to prompt billions of US dollars in withdrawals.
Estimates differ in scope and severity. QuotedData cited UBS's estimate of about US$4 billion in passive outflows. Other October 2026 estimates reported by Metrobank Wealth Insights put passive withdrawals at US$4 billion to US$6 billion, with MSCI-benchmarked active funds holding another US$8 billion or more. A more severe scenario put total outflows at US$12 billion to US$16 billion.
An April deadline for improvements
Indonesia has until the end of April 2027 to show improvements before the reclassification consultation closes. MSCI said in an announcement last week that it would publish the outcome of its consultation with market participants in June 2027.