Editorial: Why the stock market crash is a self-inflicted governance failure
The MSCI warning did not cause the meltdown. It exposes a problem ignored for too long.
You may wonder: why is The Reformist writing about the stock market? Isn’t this a platform to talk about governance reforms?
The short answer is that because the failure is not in the market but in governance. Read through the end to understand why.
It would, of course, be easier to blame Morgan Stanley Capital International (MSCI) for what happened. Early estimates suggest that the MSCI warning had already pushed at least US$80 billion out of the country. Imagine the scale of catastrophe that would ensue if that warning escalates into decisive action.
Following the mass resignation of high-ranking officials within the Financial Services Authority (OJK) and Indonesia Stock Exchange (BEI) last week, many may assume that this was their fault. But we think that assumption is lazy at worst and politically convenient at best.
An 80-billion dollar reality check
Before MSCI issued its warning on 27 January 2026, it had already engaged the market regulators in a series of consultations. We won’t go into the minute details of what happened, but at the core of it are two words: free float—the shares of a publicly traded company that are actually available to public buyers in the secondary market, such as BEI.
Up until recently, Indonesia allowed companies to be traded on the stock market as long as they maintained a 7.5-percent free float rate. In other words, that means 92.5 percent of shares could remain concentrated in the hands of the controlling few: founders, owners, conglomerates, and other affiliated entities. Many have pointed out that this was already a low bar to begin with. In Asia, Singapore and the Philippines set the rate at 10 percent, Thailand at 15 percent, and leading markets such as Japan, Malaysia, and Hong Kong at 25 percent.
But here’s the deal: while the rate was set at 7.5 percent, the available shares to public buyers are often even smaller than that. When the public cannot participate in the secondary market, it reduces liquidity and amplifies volatility.
The result? Vulnerable price formation, coordinated trading, pump and dump—so many different names, but everyone knows it by the colloquial term of saham gorengan (‘fried stock’). And unfortunately for Indonesia, MSCI decided it was time for a reality check—one that comes with a US$80 billion price tag.
This is where the governance failure becomes impossible to ignore. Three words: beneficial ownership transparency—or lack thereof.
Publicly traded, privately controlled
MSCI is one of the largest global index providers. As of June 2025, it boasts a massive US$18.3 trillion in assets under management (AUM). That is roughly Rp 307 quadrillion, or at least 80 thousand times Indonesia’s 2026 state budget. And that tells you all you need to know why we can’t afford the potential downgrade from an emerging to a frontier market.
We’re not going to break down the technical details, but we can conclude that MSCI is not in the business of ‘cosmetics’. They do not fool around with that much money at stake.
MSCI’s analyses suggest that the freely tradable portion of stocks in the Indonesian stock exchange market is structurally constrained. Inaction was not an option because they’ll essentially be putting themselves at risk. And that’s why, in a grossly oversimplified manner, they took a firmer stance this time by issuing a warning–for now.
Indonesia’s low free float problem is exacerbated by a cluster of what is ultimately a regulatory and enforcement discrepancy. Specifically, we want to focus on the problem of opaque ownership. Many of the companies traded on BEI look alright to the unassuming eyes, but further inspection shows that many are prone to inexplicable, frequent, and sharp price swings. To put it simply, Indonesia is increasingly seen as a liability to MSCI.
In 2018, then-President Joko Widodo issued a Presidential Regulation on Beneficial Ownership. However, this was constructed mainly with the intention of combating money laundering and terrorism financing. Any lawyers you seek advice from would tell you that beneficial ownership is a key compliance issue.
Here, we begin to see the pattern: there is a rule in place, but its enforcement remains a big question mark.
Shining light on the shadows
As is the case with many things in Indonesia, compliance with beneficial ownership disclosure is more declaratory than disciplinary. The Ministry of Law’s General Law Administration Directorate General requires companies to disclose their beneficial owners, but there is barely any verification being done. This creates an accountability failure: companies may report their beneficial ownership information, but we can’t be sure if that information is reliable or not.
Think of it this way: a company seeking to operate in Indonesia is owned by an entity (X), but in reality, X is nothing more than an empty vessel or ‘nominee’ who acts on behalf of another entity (Y). In this case, X is the legal owner of the company, but Y is the beneficial owner, i.e., the ultimate entity that benefits from the company’s activities.
In the stock market, this problem persists. Or rather, worsens. Nominee accounts hold a portion of the free float shares on behalf of a separate controlling interest that remains in the shadows. This gives one entity far too much control, which allows them to potentially manipulate the stock price.
For a retail investor, this opacity is risky. For a global index provider managing trillions of dollars in passive capital, it is plain and simple a liability. And if you’ve followed us so far, the root cause of this fiasco boils down to what we talk about here at The Reformist every week: governance.
Having established that the market crash is a signal of governance failure, that brings us to the final question…
How do we reform the stock market?
Most importantly, we have to start with a disclaimer first: we don’t know the answers either. But we do have a few ideas where OJK, BEI, and all the relevant parties can start.
The resignation of OJK and BEI officials offered little to no resolution. If anything, it’s a temporary patch to signal that a change is coming. If that change never arrives, we’re just waiting for the figurative shit to hit the fan. And when it does, it will come with a price tag so exorbitant that the US$80-billion loss last week would feel like pocket change.
Across the many online investor forums we scrolled through while writing this piece, one single advice resonates: stop buying saham gorengan and look at the fundamentals. In governance terms, our advice to the government is principally the same: stop going for cosmetic solutions and thoroughly address the accountability failures.
Transparency, compliance, and accountability are not just abstract concepts that pose no consequences when ignored. We may not think of them as such, but these are the real variables that index providers like MSCI think of when determining who’s worth investing in and who to stay away from.
This could mean so many different things. Parliament may need to fast-track a law to give regulators stronger enforcement power to make companies comply. The Law Ministry may need to review the thousands of company registration deeds they have in their registry and begin verifying the truthfulness of their beneficial ownership disclosure. The Finance Ministry may need to consider redefining its authorities when it comes to the stock market, in favor of giving OJK and BEI more independence. Law enforcement agencies may need to get more serious with their institutional reform agendas if Indonesia were to rout the entities who pull the string from the shadows—often with ‘protection’ from within their own ranks.
Meanwhile, for those who do not trade in the stock market, it would be gravely wrong to dismiss this turmoil as a problem relevant only to the richest of the rich. Like it or not, we are all intertwined in the system one way or another. No buts.
The next time the market crashes and burns, it may not be those gambling in the stock market that bear the biggest brunt.
Your parents may lose their pension funds overnight, the food vendors in your community may be forced to close down, your Rp 10 million savings may not amount to much if the rupiah tanks, and so many different consequences that we will have to share, whether we participate in the game or not.
This is not far-fetched at all: the US$1.15-trillion Jiwasraya megascandal was largely caused by a pump-and-dump saham gorengan scheme that went wrong in every way imaginable, with 13 investment management companies and an OJK official tried for financial crimes. The ripple effect couldn’t have been more severe: over 2.6 million people lost their insurance—mostly of lower-middle income profile—and at least 7,000 unemployed.
This saga is far from over and we’ll be keeping a close eye on it. But if you did start reading thinking why this is a topic for The Reformist, now you know why.
What are your takes on beneficial ownership and its transparency (or the lack thereof) in Indonesia? Discuss below!