Author: Roby Rushandie (Researcher The PRAKARSA)
January is typically a month of stock market optimism. Investors anticipate the January Effect, a phenomenon where stock prices tend to rally. This appears to have come true, with the Indonesian stock exchange hitting an all-time high in mid-January, with the Jakarta Composite Index (JCI) breaking through the psychological level of 9.000.
However, the January Effect seemed to quickly pass and morph into a January Shock, with the stock market plummeting and halting trading for two consecutive days before the month's close. Market capitalization evaporated by US$80 billion in a matter of days, and this market shock was even followed by the resignation of the President Director of the Indonesia Stock Exchange (IDX) and the head of the Financial Services Authority (OJK).
The market turmoil began with a stern warning from Morgan Stanley Capital International (MSCI) regarding the transparency of share ownership data and indications of coordinated trading. MSCI's warning emphasized that Indonesia's stock market fundamentals remain vulnerable to being manipulated by a single group.
The resignations of the IDX and OJK leaders, on the one hand, represent a moral responsibility to restore trust. However, on the other hand, these collective resignations raise questions about whether responding to MSCI's warning is a complex and highly risky matter.
Fried Stocks as a Tool for Institutional Fraud
MSCI's findings are not simply technical issues with data presentation, but rather a wake-up call for market integrity. What MSCI calls coordinated trading behavior has long been under scrutiny. The conditions MSCI identifies are fertile ground for stock manipulation practices.
It's no secret that "fried stocks" are often used as a tool for institutional fraud. Warnings regarding fried stocks signal a lack of robust market governance.
The most extreme example of the use of "fried stocks" as a fraudulent activity is the Jiwasraya scandal, which involved the JS Saving Plan product. The Jiwasraya mega-scandal employed a method similar to what MSCI calls coordinated trading, where fund managers purchase illiquid stocks at artificially high prices.
Jiwasraya failed to pay claims on its JS Saving Plan product to over 17 customers. The restructuring option, which involved transferring funds to IFG Life, forced customers to accept a reduced value.
It's important to remember that the capital market isn't just a place for the elite or traders. It also includes vulnerable groups such as retirees, the elderly, and housewives, as well as the general public, who are retail investors who hope to secure prosperity in their old age through investments in pension funds, insurance, and mutual funds.
In the Jiwasraya case, according to the Jiwasraya CEO at the time, the number of policyholders reached 2,63 million. Over 90% of these customers were pension plan policyholders, and 9 of them were from the Guru Foundation. Therefore, vulnerable groups were the most affected by fraudulent stock market practices.
Momentum for Capital Market Improvement
This market turmoil has prompted the urgency of demutualization of the IDX, as mandated by the P2SK Law. Demutualization is believed to be key to breaking the chain of conflicts of interest that have hampered law enforcement in the capital market.
Historically, stock exchanges around the world, including those in developing countries, have operated as mutual, not-for-profit organizations. In this model, the exchange is owned, managed, and regulated by its members, most of whom are stockbrokers. This structure often creates a closed-club environment where the interests of members tend to take precedence over market integrity.
Mutual exchanges often lack the incentive to invest in technological infrastructure or enforce strict disciplinary rules against their own owners (brokers). As a result, the market is often vulnerable to price manipulation by a small number of market players.
Demutualization is the process of changing the Exchange's legal status from a member-owned organization to a shareholder-owned company. This process involves the separation of three previously unified primary functions: ownership, management, and trading rights. As a profit-oriented entity, the Exchange is driven to maximize shareholder value through operational efficiency, product innovation, and market expansion.
Demutualization is not new; Singapore, Malaysia, and India have already implemented it. The driving forces behind demutualization are generally to address similar challenges: the need to attract capital, increase domestic retail investor participation, and clean up the market.
IOSCO stated that one of the rationales for demutualization is the Exchange's ability to raise funds for investment in adequate infrastructure to prevent share price manipulation practices.
Of course, demutualization is not without risks. A study by Kary (2002) in the Hastings Law Journal warned that demutualization is also seen as bringing new risks of conflicts of interest related to the balance between commercial objectives and regulatory roles. A study by Huang et al. (2020) also stated that without strong regulatory oversight, demutualization risks compromising the quality of oversight because the exchange is too focused on profit-making.
However, the Singapore Exchange's practice of establishing SGX RegCo as a dedicated regulatory entity demonstrates that the risk of these new conflicts of interest can be mitigated with proper governance. Therefore, the exchange's demutualization needs to be accompanied by governance reforms and a strengthening of the OJK's role in overseeing the capital market.
Demutualization Is Not Just a Change of Ownership
Ultimately, the demutualization agenda should not simply be about changing the legal status and ownership of the exchange. Demutualization should be a turning point for a more inclusive, secure, and integrated Indonesia Stock Exchange. However, demutualization must be accompanied by...
Demutualization must also be on the agenda, with a role in strengthening market supervision. The Financial Services Authority (OJK) needs to prepare a robust regulatory framework to oversee profit-oriented exchanges, ensuring transaction costs remain efficient and that oversight functions are not reduced for the sake of cost efficiency. The OJK's supervisory approach must also be more holistic, eliminating procedural barriers between banking, capital markets, and non-bank financial institutions (IKNB).
An inclusive agenda and protection for retail investors, especially vulnerable groups, must be a high priority. The Jiwasraya scandal, for example, has revealed that vulnerable groups such as retirees and the elderly are the hardest hit by stock price manipulation practices. Risk hedges for pension funds and insurance companies need to be enforced through limiting exposure to issuers with special designations/low liquidity, stricter due diligence requirements, and rapid remediation mechanisms for victims.
If demutualization succeeds in creating a market with integrity and inclusiveness, the stock exchange will no longer be an exclusive arena for large investors and traders, but rather a safe space for retirees, the elderly, and even housewives to place their hopes for prosperity.
This article has appeared on Katadata.co.id with the title "Demutualization of the Indonesian Stock Exchange"
This article has appeared on Katadata.co.id With the title "Roby Rushandie: Demutualization of the Indonesian Stock Exchange and the Hope of a More Inclusive Capital Market," read the full article here: Katadata.co.id