Concentrated Ownership Distorts the Indonesian Stock Market: Threat of Withdrawal $2 Billion

The highly centralized ownership structure in Indonesia not only creates market liquidity issues but also distorts how global investors assess the value and growth potential of the country’s largest stocks. When a small number of wealthy individuals control the majority of major companies’ shares, it skews the true picture of how many shares are actually available for trading— a critical metric now under scrutiny by MSCI Inc. in evaluating its index methodology.

Companies like PT Petrindo Jaya Kreasi (owned 84% by billionaire Prajogo Pangestu) and PT Barito Pacific (71% owned by Pangestu) have become symbols of this problem. With extreme ownership levels, trading volume for these stocks remains thin, creating a gap between the total shares outstanding and the shares truly accessible to public investors.

How Ownership Structure Distorts Index Valuation

Free float—the proportion of shares available for public trading—is the foundation for how global index providers calculate stock weights in portfolios. However, calculating free float is not just a simple math problem. Indonesia’s complex ownership structures make identifying strategic shareholders a real challenge, and this is what MSCI is trying to address through methodological changes.

This issue has prompted global institutional investors to consider pulling out. If MSCI enforces a stricter interpretation of free float— a decision planned to be announced early next year and implemented by mid-2026— passive funds tracking this index may be forced to divest. PT Samuel Sekuritas Indonesia estimates that fund withdrawals could reach up to $2 billion if the new rules are applied to the $971 billion stock market.

“This is a pivotal moment for Indonesia’s capital market reform, highlighting the need for stronger corporate governance to attract more global investors and long-term capital,” said Gary Tan, portfolio manager at Allspring Global Investments.

MSCI and the Challenge of Measuring Free Float in Indonesia

More than 200 stocks in Indonesia’s main index have a free float below 15%, the lowest among major Asia-Pacific markets. The Indonesia Stock Exchange currently requires disclosure of shareholders with over 5% ownership, but new data providers can now identify shareholder types for all electronically traded stocks—including smaller holdings—offering a much more accurate picture of free float.

One MSCI proposal is to use the lowest free float figure from public documents or new datasets, an approach that could reduce the free float market capitalization of 15 index constituents and trigger institutional fund outflows. While MSCI asserts that the proposed change will improve transparency and help close information gaps, investors worry this will widen the gap between the Jakarta Composite Index (JCI) and the MSCI Indonesia Index.

This phenomenon was already evident last year. The JCI surged over 22% to an all-time high, while the MSCI Indonesia Index fell 3%. This significant divergence reflects how many stocks are rarely traded on the JCI, prompting many fund managers to prefer the MSCI Indonesia Index, which has stricter liquidity standards.

Tax Incentives: Policies That Reinforce Concentration

Understanding the root of ownership concentration in Indonesia requires attention to fiscal policies. Tax incentives that exempt individuals and companies from income tax if they reinvest dividends for at least three years actually encourage concentrated ownership—precisely the type of ownership MSCI aims to exclude from free float calculations.

This mechanism creates a vicious cycle: the more wealthy individuals reinvest their dividends with tax incentives, the higher the ownership concentration becomes, and the fewer shares are truly circulating in the public market. The result distorts how global investors view market accessibility in Indonesia.

Regulatory Efforts and Implementation Challenges

Regulators are considering raising the minimum free float requirement from 7.5% to between 10% and 15%, with a long-term target of 25%—a standard similar to Hong Kong and India, and higher than Thailand’s 15%. However, progress is slow, and real obstacles are becoming apparent.

When regulators talk about increasing free float, an implicit question arises: where will these shares be sold? The exchange warns that significantly greater market liquidity will be needed to absorb the new shares if companies raise their free float.

Christopher Andre Benas, head of research at PT BCA Sekuritas, warns that this liquidity may not materialize. Global institutional investors are likely to remain selective in allocating their capital, while local retail investors may lack the funds to absorb a sudden surge in share supply. It’s not just about regulation but about fundamental market structure and investor behavior.

“Given Indonesia’s long-term equity growth prospects, they remain too attractive for MSCI to keep reducing their index weight,” said Dimas Yusuf, chief investment officer at PT Sucorinvest Asset Management. However, without genuine reforms addressing ownership concentration, Indonesia’s position in global indices will continue to be tested, and potential fund withdrawals will remain a serious risk threatening market stability.