This article first appeared in The Edge Malaysia Weekly on February 2, 2026 - February 8, 2026
MSCI Inc’s threat to downgrade Indonesian stocks hinges on the market’s investability, not merely on a numeric threshold — in this case, the minimum required free float of listed companies.
For stocks listed on the Indonesia Stock Exchange (IDX), the minimum free float is 7.5%, but regulators will now raise it to 15% in the “near term”, following MSCI’s warning last Wednesday of a potential downgrade to frontier-market status. The warning came after the index provider’s global consultation on free-float assessments for Indonesian stocks.
At issue is the reliability of shareholder information of Jakarta-listed stocks, resulting in a lack of transparency on actual free float data and the ultimate ownership structure of these companies.
“Free float is a key consideration to a fund because it is related to liquidity and price discovery. Liquidity allows ease of entry and exit. Buying or selling the shares with ease allows us to [open] or close positions whenever [needed],” says Ng Zhu Hann, founder and CEO of Tradeview Capital, a boutique fund management company.
“Price discovery means the market forces determining the actual value of the listed company. With low free float, there will not be efficient price discovery due to the ‘managed share price’ of the company. If a company’s share price is ‘managed’ — whether the market is good or bad, fundamentals change or otherwise — the share price will never reflect the true value in an efficient price discovery situation.”
MSCI’s warning on Wednesday caused the Jakarta Composite Index to plunge 8.8% in a single day — its steepest fall since April 2025 — triggering circuit breakers. According to Bloomberg, the rout erased about US$80 billion in market value over two days.
Aside from doubling the minimum free float, other measures — such as plans to demutualise the IDX and getting pension funds and insurance companies to increase their exposure to the capital market — were bandied about.
The news halted the decline and, on Thursday, the Jakarta Composite Index rebounded although it still ended in the red.
On Friday, IDX CEO Iman Rachman resigned, saying: “As a form of accountability for the events of the past two days, I hereby declare my resignation.”
Market watchers in Malaysia say his resignation highlights the impact of the MSCI threat and question the free float exemptions granted to new listings on Bursa Malaysia. Note that the free float requirement on the local bourse is 25%.
According to Practice Note 19 of the Main Market Listing Requirements, a free float below 25% is permitted if the company has a market capitalisation of at least RM1 billion (see accompanying story “What Bursa says …”).
A recent case in point is Sunway Healthcare Holdings Bhd. On Jan 23, the healthcare arm of Sunway Bhd (KL:SUNWAY) secured approval from the Securities Commission Malaysia and Bursa Malaysia to list on the Main Market with a reduced public float of 18%. Such approvals are uncommon, but they have been increasingly granted for “mega-listings” — including those of MR DIY Group (M) Bhd (KL:MRDIY), 99 Speed Mart Holdings Bhd (KL:99SMART) and Eco-Shop Marketing Bhd (KL:ECOSHOP) — when liquidity is deemed adequate.
In a press conference last Thursday, Bursa Malaysia Bhd (KL:BURSA) CEO Datuk Fad’l Mohamed emphasised that concerns expressed by market participants about recent MSCI actions were specific to Indonesia and not indicative of broader regional issues. Furthermore, he said approvals for large initial public offerings (IPOs) with a free float level below the standard 25% are governed by clear regulatory parameters and have not raised systemic concerns with MSCI.
Tradeview’s Ng counters: “Exemptions should be given on a case-by-case basis, but it shouldn’t become a norm. If the size of the offering is big enough and there are insufficient takers or institutional investors to meet the IPO float, then sizing down is the only way forward. But, ideally, the free float for a Main Market IPO shouldn’t be lower than 15%.”
According to a seasoned investor who requested anonymity, a small free float like Indonesia’s 7.5% creates an environment in which share prices can be easily manipulated upward, giving controlling shareholders an illusion of wealth. “Does the market reflect the true position or is it manipulated?” he asks.
On exemptions for new listings, he says transparent guidelines should be provided on how a company qualifies for a lower free float. “At the moment, it’s not transparent (lack of quantitative measures) and unfair to those with a 25% free float,” he adds, noting that exempted companies should be required to comply within a set timeframe.
Aside from controlling shareholders seeking to maintain control, a high valuation is said to be another reason for a free float below the standard 25%.
With a dark cloud hanging over the Jakarta market, could Malaysian stocks benefit from some of the capital outflow moving to the local market? Ng says the impact depends on whether foreign fund flows can be sustained. “They have moved up quite a bit in the past month. Logically, if funds are flowing out of Indonesia, they should flow into our markets. But over the past two days, foreign funds were net sellers, after being the main buyers pushing up the index in recent weeks.”
For the first three weeks of the year to Jan 23, foreign inflows totalled RM1.04 billion, pushing the FBM KLCI to 1,771.25 points last Tuesday — the highest since October 2018.
What Bursa says …
Malaysia’s regulatory framework requires a minimum public shareholding spread of 25%, which is one of the highest thresholds in the region. Disclosure standards and transparency levels in our market remain robust, and there has been no indication of any review or change to the way MSCI assesses free float for Malaysian securities. Overall, this development does not impact Malaysia’s market structure, transparency or free float practices.
Bursa Malaysia’s Main Market and ACE Market Listing Requirements prescribe clear requirements on the public shareholding spread to ensure a fair, transparent and orderly marketplace. These include:
i. At the point of listing, companies must have at least 25% of the total number of shares held by the public, with a minimum of 1,000 public shareholders for Main Market and 200 public shareholders for ACE Market, each holding at least 100 shares.
ii. On a continuing basis, listed issuers must also maintain a minimum public shareholding spread of 25%.
These requirements are fundamental to safeguarding market integrity. Maintaining an appropriate level of public shareholding spread helps to minimise the risk of trading irregularities, so that the listed issuers’ securities are less susceptible to market manipulation.
At the same time, Bursa Malaysia recognises that there are circumstances which may warrant a lower public shareholding spread. In view of this, Bursa Malaysia may accept a lower public shareholding spread under the listing requirements, provided that such lower percentage is sufficient for a liquid market in line with the key objective of the public shareholding spread requirement, without compromising on the maintenance of an orderly and fair market.
In exercising the discretion to grant a lower public shareholding spread, Bursa Malaysia is guided by the criteria spelt out in Practice Note 19/Guidance Note 13 of the listing requirements. In essence, Bursa Malaysia may accept a lower public shareholding spread only if the objective and subjective criteria are satisfied:
a. The objective criteria are predicated on the fulfilment of market capitalisation requirements as follows:
b. The subjective criteria take into account sufficient liquidity, orderly trading of securities, and good corporate governance and compliance records of the applicant/listed issuer.
Our focus is to ensure a fair and orderly market. Other markets such as those in Hong Kong and the UK have similar frameworks in accommodating lower public shareholding spreads.
While Bursa Malaysia may grant flexibility to have a lower public shareholding spread requirement to a listed issuer, issuers are advised to use their best endeavour to increase the public shareholding spread to 25% or more to create more trading liquidity.
Likewise, if there is any evidence of trading activities that lead to irregularities in trading which is susceptible to market manipulation, Bursa Malaysia reserves the right to revoke the flexibility of having a lower public shareholding spread.
MSCI assesses the investability of a company using a broad set of criteria, with free float being one of several considerations.
Other key factors include:
- Liquidity and trading turnover,
- Free float–adjusted market capitalisation,
- Market accessibility and ease of execution, and
- The ability for institutional and passive investors to replicate the index efficiently.
Bursa Malaysia maintains regular engagement with index providers to stay current with their methodologies, governance standards and transparency requirements.
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