IDX revamps index to limit fallout from MSCI warning

JAKARTA: The Indonesia Stock Exchange (IDX) has introduced new initiatives, including a plan to exclude stocks with high shareholder concentration (HSC) from its benchmark index, in an effort to address transparency concerns raised by global index provider MSCI.

IDX president director Jeffrey Hendrik unveiled the move following a meeting with MSCI on Monday, saying that it was aimed at creating “a more credible price index with higher integrity”.

The exchange currently has 80 stocks listed under the HSC category. These stocks account for roughly 18% of the IDX Composite index total weighting.

“All of these stocks with high shareholding concentration will be excluded from the IDX Composite index calculation.

“Although the stocks are tradable, their price movement will no longer affect the index,” Jeffrey said, adding that such a measure would provide a “fairer reflection” of the benchmark index’s movement, given the “potential risks” carried by shares with concentrated ownership.

Jeffrey called it a “best practice”, citing that Hong Kong’s stock exchange also implemented a similar measure for the Hang Seng index.

Additionally, he announced that the bourse’s plan to publish the names of investors holding at least a 1% stake in a company’s shares would include descriptions of their affiliation with the company.

Jeffrey said that the implementation dates for these initiatives would be announced soon.

The IDX Composite climbed more than 5% on Tuesday, rebounding from a nearly 15% drop over last Friday and Monday amid mounting fears over a possible downgrade from MSCI.

The index provider proposed last week to reclassify Indonesian equities in its global indices from “emerging market” to “standalone market” status, as it remains unconvinced about the effectiveness of the country’s capital market reforms.

The ongoing reform includes enhanced disclosure of shareholders holding more than 1% of a company, more granular investor classification disclosure, HSC reporting and a road map toward a minimum free float of 15%.

Analysts said that the initiative to exclude HSC stocks could enhance the quality of the benchmark index, which has suffered from mounting downward pressures and has become one of the world’s worst-performing markets.

Founder of Stocknow.id Hendra Wardana stated in an analysis on Monday that omitting such stocks could help the benchmark index better reflect the performance of stocks with broader ownership distribution and healthier liquidity.

However, given that these stocks account for 18% of the index’s weighting, their removal could significantly alter the movement of the IDX Composite.

“If these stocks are a source of selling pressure, removing them from the calculation can reduce downward pressure on the IDX Composite index. Conversely, if these stocks rise, their positive contribution will no longer be reflected in the index.”

However, Hendra also noted that sustained improvement would highly depend on market reform, transparency, investability and credible law enforcement.

He pointed out that the plan to publish indications of shareholder affiliation should be verified with accurate ownership data to ensure credibility of Indonesia’s capital market reform plan.

Harry Su, managing director of research at Samuel Sekuritas told The Jakarta Post that stocks with concentrated ownership experienced the most severe drops, dragging down the IDX Composite index.

Therefore, excluding these stocks could actually help lift the key index. Samuel Sekuritas projected that the exclusion of HSC stocks could push the benchmark index up to 5,925 points, an 18.6% increase from its multi-year low of 4,997 points recorded at Monday’s close.

The rout in Indonesia’s stock market has triggered massive foreign selling, with cumulative foreign outflows surging to a record Rp 89.91 trillion as of Monday.

The figure surpassed the worst levels seen during the Covid-19 pandemic in 2020 and the 2008 global financial crisis, which stood at 53.84 trillion rupiah and 50.17 trillion rupiah for the full calendar year, respectively.

George Xu, a director in Fitch Ratings’ Sovereigns team, told the Jakarta Post that the latest concerns and substantial market sell-off reinforced the risks that had been identified by the rating agency relating to “policy credibility, fiscal discipline and capital market governance amid growing centralisation of policymaking authority”.

Fitch revised the outlook of Indonesia’s BBB sovereign rating to “negative” from “stable” in March. However, the firm said it did not anticipate the consultation announcement itself to have material immediate credit implications.

“We expect the authorities to introduce further measures to improve market governance and functioning in the coming weeks, although these measures alone are unlikely to eliminate investor caution,” George stated. — The Jakarta Post/ANN