Indonesia Toughens Stock Manipulation Rules After MSCI Warning Sparks Selloff

Indonesian financial authorities have announced new measures to combat stock market manipulation, including adding independent members to an oversight committee and launching more proactive investigations. The move follows a severe downgrade warning from index provider MSCI that sparked a record market selloff earlier this month over concerns about opaque trading practices.

Regulators Bolster Market Oversight

The Indonesia Stock Exchange (IDX) will expand a committee responsible for identifying stocks with high shareholder concentration to include independent parties, IDX chief Jeffrey Hendrik announced Monday. The committee, previously composed only of capital market officials, will now include academics and F. Chapman Taylor, a former partner at Capital Group and an adviser to Indonesia's sovereign wealth fund, as a representative for foreign investors.

Starting in November, the IDX will also gain powers to proactively launch investigations and freeze suspicious investor accounts upon detecting potential coordinated trading. This marks a shift from its previous policy of issuing public warnings about unusual market activity and requesting explanations from companies.

"We encourage the IDX to strengthen the mechanism and methodology of trading supervision, including its capacity to identify patterns of irregular transactions, detect coordinated trading and strengthen the mechanism to respond to such events," said Hasan Fawzi, the financial regulator’s capital market supervisor.

Market Turmoil Prompts Action

The reforms were prompted by an announcement from MSCI earlier in October that it could demote Indonesia from its current "emerging" market classification to "standalone" market status. The warning, which cited a lack of progress in addressing coordinated trading, was more severe than a January warning of a potential downgrade to "frontier" status.

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MSCI's announcement triggered Indonesia’s deepest-ever two-day stock selloff on October 16 and 19, which sent the main index to its lowest point since 2020. The market has since rebounded, though the rupiah weakened to its lowest point since July on Monday.

Broader Reforms and Context

In addition to the new oversight and investigation powers, regulators outlined other key actions:

• Stocks with high shareholding concentrations will be excluded from the main Jakarta index starting November 2.
• A policy allowing companies to conduct share buybacks without a general shareholder meeting has been extended until June 2027.

Indonesian authorities have been in communication with MSCI and other index providers like FTSE Russell to reiterate their commitment to reforms, Fawzi said. The response from officials has varied, with President Prabowo Subianto telling his cabinet last week that MSCI was trying to "intimidate" the country.