(Feb 5): Indonesia’s stock market needed just two days of chaos to highlight what investors have long lamented: parts of the market aren’t trading freely.
Last week’s worst tumble in nearly three decades drew attention to a major problem at the heart of Southeast Asia’s biggest equity market: a handful of billionaires own so much of their listed companies that barely any of those companies’ shares are left to trade.
At least three billionaires directly control 85% or more of three listed companies, according to data compiled by the Bloomberg Billionaires Index based on recent filings. Southeast Asia’s richest person has a more than two-thirds indirect stake in PT Barito Renewables Energy, Indonesia’s largest listed firm. And about seven billionaires own more than 50% of shares in at least 13 companies, the data show.
That concentration is now colliding with regulatory reform. Indonesia’s market watchdog said newly listing firms will be required to double their minimum free float — the number of shares available for public trading — to 15%. Companies already trading will have to follow eventually, too. The regulator is responding to index compiler MSCI Inc’s concerns about the investability of Indonesia’s US$870 billion ($1.11 trillion) market.
The recent MSCI statement gave the market “a bloody nose”, said Hasnain Malik, head of emerging-markets equity and geopolitics strategy at Tellimer in Dubai. The announcement “highlighted investor concerns on low free float, opaque shareholding structures, and scope for share price manipulation by related parties”.
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Investors have for years complained that the nation’s biggest companies are thinly traded and controlled by a handful of wealthy individuals. Prajogo Pangestu, the country’s richest person with a net worth of about US$35.2 billion, presides over 84% of shares in mining firm PT Petrindo Jaya Kreasi, and has a 68% direct and indirect stake in Barito Renewables, according to calculations by Bloomberg News.
Others also have huge holdings. Billionaire Sri Prakash Lohia, whose business empire stretches across Southeast Asia from fertilisers to medical gloves, owns 92.3% of PT Indo-Rama Synthetics. Tahir, another tycoon who goes by a single name, controls roughly 86% of PT Maha Properti Indonesia, a thinly traded property developer whose shares soared about 443% over the past year.
Their holdings are compounding a broader problem in Indonesia. About a quarter of firms listed on Jakarta’s stock exchange have a free float of 15% or less, according to data compiled by Bloomberg, making ownership in the bourse among the most concentrated in Asia Pacific. That compares with about 6.9% of companies in Malaysia, 3.3% for Thailand, and 12% in the Philippines, the data show.
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Critics argue that this level of concentration leaves Indonesia’s market unusually vulnerable to distortion. Last year, the benchmark Jakarta Composite Index surged 22%. Over the same period, the MSCI Indonesia Index, which applies stricter investability rules, fell 3.6%.
That gap “can clearly tell you that the JCI was distorted by some of these tightly held, concentrated ownership kind of companies”, said Chih Kai Soh, who manages an Asean portfolio at Lion Global Investors in Singapore.
Last week, MSCI went further, warning that persistent ownership opacity may eventually cost Indonesia its emerging-market status — a designation that acts as a magnet for foreign capital. In a statement, the index provider cited “fundamental investability issues”, including complex shareholding structures and the risk of coordinated behaviour influencing prices. It asked for greater transparency by May, or risk a downgrade to frontier-market status.
“We think that this is an inflection point for Indonesia’s capital markets,” said Thea Jamison, the New York-based managing director of Change Global Investment, which specialises in developing markets. “The MSCI announcement is ushering a wave of reform, which we believe will improve the outlook in the long-run.”
Opaque structures are hardly unusual in Indonesia, where wealthy families often control listed firms through layers of cross-holdings that are themselves publicly traded. MSCI said it needed more granular and reliable information to properly assess what is truly available to investors.
“Some of these points are valid,” Homin Lee, a senior macro strategist at Lombard Odier, said at a briefing on Jan 29 in Singapore. “For the time being, we are a bit cautious.”
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For larger conglomerates, meeting the higher free-float threshold may come with some pain. It will require substantial divestment which would “inevitably create selling pressure”, said Herditya Wicaksana, an analyst at MNC Sekuritas in Jakarta.
A spokesperson for Barito said the company is closely monitoring regulatory developments and will await further guidance. Indo-Rama Synthetics, Maha Properti Indonesia and Petrindo didn’t respond to questions from Bloomberg News about their ownership stakes or how they plan to meet the new free-float rules.
Regulators insist change is coming, if gradually. Friderica Widyasari Dewi, the acting chair of the Financial Services Authority (FSA), said on Feb 1 that the higher free-float requirement would initially apply to new listings, with existing companies given a transition period. The FSA aims to implement a higher free float requirement by March at the latest.
“Raising free-float requirements can help create a healthier tradable base,” said Ke Yan, the head of research at DZT Research in Singapore. “But ownership transparency is just as important. Investors need clear disclosure of beneficial owners and affiliates so they can assess the true free float.”
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