Features | Economy | Southeast Asia

Indonesia’s Stock Market Crisis Is Self-Inflicted

Jakarta has serious questions to answer about the credibility of its capital markets and the effectiveness of the institutions responsible for regulating them.

The skyline of Indonesia’s capital Jakarta at dusk.

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.

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