Capital market reform amid persistent structural challenges

The interim freeze by MSCI on Indonesia’s February market status review has shaken the country’s capital market and triggered a wave of reform initiatives. Authorities quickly responded with measures including investigations into past fraudulent trading cases, new disclosure rules and plans to demutualize the Indonesia Stock Exchange (IDX). While these steps signal a stronger reform commitment, fundamental problems remain unresolved, undermining the role of Indonesia’s equity market as a source of long-term financing for economic growth.

Indonesia’s capital market has long been marked by structural weaknesses such limited transparency, weak law enforcement and high ownership concentration dominated by conglomerate-controlled companies. Such concentration creates opportunities for controlling shareholders to extract private benefits while offering limited protection for retail investors. Weak investor protection discourages participation and constrains the development of a deeper capital market.

Calls for reform had long gone unheeded. Only after MSCI imposed the interim freeze did regulators move quickly. In response, the Financial Services Authority (OJK) introduced eight reform initiatives aimed at improving transparency, strengthening governance, increasing liquidity and deepening the market.

One key reform raises the minimum free float requirement for listed companies from 7.5 percent to 15 percent. Previously, Indonesia’s requirement was significantly lower than those of neighboring markets. For comparison, Malaysia requires 25 percent, Thailand 15 percent and Singapore 10 percent.

The higher threshold aims to increase the proportion of publicly tradable shares and improve market liquidity. Greater free float could also benefit retail investors by limiting the dominance of controlling shareholders and institutional investors, thereby reducing opportunities for rent extraction and price manipulation.

Another reform targets shareholder transparency. Investors holding 1 percent or more of a listed company must now disclose their ownership, compared with the previous threshold of 5 percent. Lowering the threshold is intended to enhance transparency and provide investors with clearer insight into ownership structures.

The OJK has also stepped-up enforcement against past fraudulent practices, including cases involving initial public offerings (IPOs) and insider trading. For instance, Shinhan Sekuritas Indonesia is under investigation after the director of Multi Makmur Lemindo (PIPA), which it underwrote, was suspected of manipulating the company’s stock price. Authorities believe investors were encouraged to purchase shares despite valuations that did not justify the price.

Another case involves insider trading through pseudo-transactions between 2020 and 2022 linked to Mirae Asset Sekuritas Indonesia. These trades reportedly drove the share price of PT Berkah Beton Sadaya (BEBS) up by as much as 7,150 percent. Authorities estimate the insider trading scheme was worth around Rp 14.5 trillion (US$879 million at current rate) and involved seven companies, 58 individuals and six operators.

Investigations have also targeted Narada Asset Management and Minna Padi Asset Management. In the Narada case, mutual funds allegedly invested in stocks controlled internally through affiliated networks and nominee accounts. Meanwhile, Minna Padi Asset Management is suspected of buying shares from affiliated entities at low prices before selling them to mutual funds under its management at significantly higher prices.

Beyond institutional misconduct, the OJK has also sanctioned social media influencer Belvin Tannadi for participating in a pump-and-dump scheme between 2021 and 2022. The scheme allegedly involved coordinated trading through multiple securities accounts to inflate stock prices, with trades influenced by reactions from his social media followers.

For many observers, these enforcement actions came only after the MSCI freeze, reinforcing perceptions that regulators had long overlooked questionable market practices. Whether authorities will sustain such enforcement remains uncertain. Indonesia’s regulatory framework still lacks clarity in addressing market manipulation, including insider trading.

Indonesia’s capital market law, Law No. 8 of 1995, contains significant limitations in defining insider trading. Corporate insiders are narrowly defined as directors, employees, lawyers and consultants. Yet many other parties, including family members, affiliated companies and technology vendors, may also access sensitive corporate information. The absence of clear regulations covering these actors creates loopholes for insider trading.

Insider information obtained through “legitimate” channels can also still be used for trading without immediate public disclosure. Closed meetings with analysts or institutional investors, for example, may involve material information without simultaneous disclosure to the public. In contrast, the United States requires simultaneous public disclosure under Regulation Fair Disclosure (Reg FD), which seeks to prevent selective information sharing. Such regulatory gaps risk distorting stock prices and undermining market efficiency.

Governance reform is also expected through the planned demutualization of the IDX. Historically, the exchange has been owned by member brokerage firms, creating potential conflicts of interest between regulatory oversight and business interests. Many global exchanges, including the London Stock Exchange, Singapore Exchange and Australian Securities Exchange, have already undergone demutualization to strengthen governance and transparency.

Opening IDX ownership to public investors could improve governance and operational efficiency. However, concerns have emerged about the possible involvement of Indonesia’s state asset fund Danantara. If Danantara simultaneously holds stakes in both state-owned companies and the stock exchange, conflicts of interest could arise. Favoritism toward state-owned or government-linked entities could undermine the goals of demutualization and weaken market trust.

Ultimately, strengthening Indonesia’s capital market requires more than reactive reforms. Market distortions not only discourage investment but also hinder efforts to deepen the country’s financial system. Without stronger surveillance and consistent enforcement against misconduct such as insider trading and price manipulation, investor confidence will remain fragile.