Key facts
- Barito Renewables Energy denied inflating its share volume and price to gain MSCI index inclusion.
- MSCI warned in October that Indonesia could be downgraded by two notches from emerging-market status.
- Indonesia's Financial Services Authority fined parties linked to Barito, Dian Swastatika Sentosa and Petrindo Jaya Kreasi $116 million combined.
- Barito Renewables surged about 1,000% within weeks of listing, and the exchange later confirmed 97% of shares were held by a small group.
- MSCI's deadline for a decision on Indonesia's classification is the end of June.
PT Barito Renewables Energy, one of Indonesia's biggest companies by value, denied taking steps to inflate the volume and price of its shares to gain entry into MSCI Inc. indexes, according to a report that did not date the event.
MSCI warned in October that Indonesia's efforts to improve its market were insufficient and that the country could be downgraded by two notches from emerging-market status, Bloomberg reported. A downgrade would drop Indonesia into a category that includes Zimbabwe and Lebanon. In January, MSCI had issued an initial warning, saying it had identified fundamental investability issues and that matched trades were distorting market prices. MSCI's deadline for a decision is the end of June.
MSCI flagged a possible downgrade because of a practice known in Indonesian financial circles as the "MSCI trade," a method of manufacturing the market capitalization and trading volume required for index inclusion. A controlling shareholder hires a brokerage, which opens nominee accounts in the names of household staff and cross-trades between them to drive up volume and price, according to the report. Meilani Natalie Prisscilla, a partner at AGPR Law Firm, said nominee accounts are banned in Indonesia but still occur.
Immediately after MSCI's second warning in October, the Financial Services Authority levied a combined $116 million in fines on companies and individuals linked to Barito Renewables Energy, Dian Swastatika Sentosa and Petrindo Jaya Kreasi. The three companies count Indonesian tycoons Prajogo Pangestu and Franky Widjaja among their major shareholders. Barito Renewables surged about 1,000% within weeks of its listing, and the exchange later confirmed that Pangestu and a small group of investors held 97% of the company's shares.