The proportion of circulating shares is the lowest in the Asia-Pacific! MSCI will review the Indonesian stock market, which may lead to a $2 billion outflow from the "largest stock market in Southeast Asia."

MSCI is considering tightening the definition of publicly traded shares, and this adjustment in index compilation methods could trigger over $2 billion in capital outflows from the Indonesian stock market. The index compiler will decide by the end of January whether to implement the new rules, and any approved changes will take effect during the May review, having a profound impact on this Southeast Asian market with a market capitalization of $971 billion.

According to a report by Bloomberg on the 20th, the Indonesian stock market has faced the lowest average proportion of publicly traded shares in the Asia-Pacific region. If MSCI finds that the actual number of tradable shares of Indonesian companies is lower than reported data, passive investors will be forced to sell their existing positions. This decision will become one of the most significant events for the Indonesian stock market in years, directly affecting capital flows and investor confidence.

The hardest hit will be the leading companies in the country and the region, including PT Petrindo Jaya Kreasi, in which billionaire Prajogo Pangestu holds an 84% stake, and PT Barito Pacific, in which he holds a 71% stake. Gary Tan, a portfolio manager at Allspring Global Investments, stated that this review is a critical test of Indonesia's capital market reform agenda, highlighting the need for improvements in corporate governance to attract more international funds.

The low proportion of publicly traded shares has become a pain point for the Indonesian market. Many weighted stocks in the Jakarta Composite Index are controlled by a few wealthy individuals, resulting in thin trading. Last year, this index soared over 22% to a record high, while the MSCI Indonesia Index fell 3%, marking the largest divergence in history between the two.

Tightening of Publicly Traded Share Definition Will Accelerate Capital Outflows

The proposed new rules by MSCI will calculate publicly traded shares based on lower values from public documents or new datasets. It is predicted that this will reduce the market capitalization of 15 constituent stocks, leading to capital outflows. Several brokerages, including PT Samuel Sekuritas Indonesia, expect that if the new rules are implemented, the outflow from foreign passive funds will reach approximately $2 billion.

More than 200 stocks in the Indonesian benchmark index have a publicly traded share ratio of less than 15%. According to Bloomberg data, the average proportion of publicly traded shares in the Indonesian benchmark index is the lowest among major indices in the Asia-Pacific region. Aletheia Capital analyst Nirgunan Tiruchelvam referred to low publicly traded stocks as "museum pieces: you can look but can't buy enough."

In a consultation document in September, MSCI pointed out that Indonesia's opaque and complex business relationships make it difficult to identify strategic shareholders. Currently, the Indonesian Stock Exchange only requires companies to disclose shareholders with more than 5% ownership, while new data providers can identify types of shareholders with less than 5% ownership in electronically traded stocks, thereby presenting a clearer picture of the actual publicly traded shares.

Regulatory Reforms Face Structural Barriers

Regulators are attempting to alleviate concerns by raising the minimum publicly traded share requirement, planning to increase the threshold from the current 7.5% to 10%-15%, with a long-term goal of 25%, but no timeline has been set. In contrast, the requirements in Hong Kong and India are 25%, and in Thailand, it is 15% Reform faces numerous obstacles. Indonesia's tax regulations allow individuals and companies to be exempt from income tax on dividends reinvested for at least three years, which encourages more companies to hold shares—precisely the type that MSCI hopes to exclude from the free float calculation, as it obscures the actual number of shares in public hands.

Christopher Andre Benas, head of research at PT BCA Sekuritas, pointed out that even if companies increase the number of tradable shares, the market still needs more liquidity to absorb the new stocks, but this liquidity may ultimately not materialize, as institutional investors will remain selective, while retail investors lack sufficient funds to absorb the remainder.

Investors Weigh Reform Pressures Against Growth Potential

Despite facing outflow pressures, some investors believe that the long-term growth potential of the Indonesian market remains attractive. Dimas Yusuf, Chief Investment Officer at PT Sucorinvest Asset Management, stated, "Given the long-term upside potential of Indonesian stocks, they are too attractive for index providers to continue reducing their weights."

The index differentiation caused by an excessively low free float ratio has already cost fund managers. Due to the thin trading of many constituents in the Jakarta Composite Index, fund managers indicated that the benchmark is effectively untrackable, prompting them to shift to the more stringent MSCI Indonesia Index. Investors expect that the downward adjustment of free float data and the reduction of Indonesian companies' weights will only accelerate rather than narrow this differentiation.

Financial regulators are also preparing stricter rules for small companies going public. MSCI stated in an email that potential changes provide "additional transparency" that helps address the "information gap" issue. This decision will test whether Indonesia can unlock greater international investment potential through improvements in corporate governance