Trading Halt: What triggered a stoppage at the Jakarta Composite on Wednesday

Indonesian equities came under heavy pressure after MSCI flagged concerns over the market's accessibility, raising the risk of a possible downgrade from emerging-market to frontier status.

The Jakarta Composite Index slumped 7.4% on Wednesday, marking its steepest single-day fall in more than nine months.

Losses deepened to as much as 8.8% during intraday trade, forcing a 30-minute trading halt.

The sharp selloff followed MSCI's decision to temporarily suspend certain index adjustments, including new inclusions, until regulatory authorities address issues linked to concentrated ownership structures among listed companies.

At the heart of MSCI's concern is Indonesia's limited free float, or the proportion of shares readily available for trading.

Over recent years, global investors have repeatedly flagged that several of the country's largest companies remain tightly held by a small group of controlling shareholders, resulting in thin trading volumes.

MSCI said its move was driven by "fundamental investability challenges" and mounting investor unease around potential price distortions caused by coordinated market behaviour.

"MSCI's action should be seen as a cautionary signal rather than a final decision," said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore told Bloomberg. "Markets have already begun factoring in the possibility of an adverse outcome, which explains the selling pressure on stocks with heavy index exposure."

Indonesia's stock exchange sought to reassure investors, saying it remains committed to improving transparency and aligning with MSCI's expectations.

The exchange will work closely with the index provider to find common ground and plans to engage market participants on appropriate free-float thresholds, according to I Gede Nyoman Yetna, director of listing at the Indonesia Stock Exchange.

MSCI has indicated it will review Indonesia's market accessibility again in May if sufficient progress is not made. A negative assessment could lead to reduced weightings for Indonesian stocks in the MSCI Emerging Markets Index and potentially trigger a downgrade to frontier-market classification.

Foreign investors have already begun pulling money out. Net equity outflows reached $192 million in the week ended January 23, the first weekly withdrawal in 16 weeks.

Selling pressure intensified this week, with the exchange reporting net outflows of 3 trillion rupiah, or about $180 million, by Wednesday morning. Stocks widely tipped for inclusion in MSCI indices bore the brunt of the rout, with PT Bumi Resources, PT Petrosea and PT Pantai Indah Kapuk Dua each falling by the daily 15% limit.

The latest decision follows months of discussions after MSCI proposed tightening its definition of free float for Indonesian securities.

The index provider is also evaluating the use of data from the Indonesia Central Securities Depository, known as KSEI, to better assess the true level of shares available for trading. If actual tradable shares are found to be lower than previously disclosed, passive funds could be forced to pare their holdings.

The exchange said it will collaborate with KSEI to provide a clearer breakdown of shareholder categories, including institutional investors such as sovereign wealth funds and hedge funds.

Regulators have already taken steps to address liquidity concerns, including plans to raise minimum free-float requirements to 10%-15% from the current 7.5%. The longer-term target is 25%, though no timeline has been specified. By comparison, markets such as India and Hong Kong mandate a 25% minimum float, while Thailand requires 15%.

Concerns about price inefficiencies were evident last year, when the Jakarta Composite Index outperformed the MSCI Indonesia Index. With many JCI constituents thinly traded, passive investors have increasingly viewed the benchmark as difficult to replicate, prompting a preference for MSCI’s stricter methodology.

Even before Wednesday's selloff, Indonesian equities had lagged regional peers this year, with the benchmark rising 2.7% compared with a 5.3% gain in the MSCI Asean Index.