Indonesia to Hike Free-Float in Stages to 25%, Citing Liquidity Needs

Indonesia's financial regulator has announced plans to gradually raise the minimum free-float requirement for publicly listed companies from the current 7.5% to 25%. The move aims to enhance market liquidity and attract a broader base of investors, according to the Financial Services Authority (OJK). Inarno Djajadi, head of capital market supervision at OJK, emphasized that the adjustment would be implemented in stages, starting with an increase to 10%, followed by a step-up to 15%, and eventually reaching 25%. This initiative comes after years of debate over the liquidity challenges in Indonesia's stock market, which has the highest share of low free-float companies in Southeast Asia.

The free-float refers to the number of shares available for public trading and is a key indicator of a stock's liquidity.

A higher free-float typically makes a stock more attractive to institutional investors, as it reduces the risk of price manipulation and increases market depth. Currently, Indonesia's free-float is below the regional average, which has prompted calls for reform. The OJK's proposed change aligns with broader efforts to modernize the country's capital markets and improve investor confidence.

Southeast Asia's largest economy has been considering this adjustment for years. As early as 2015, the OJK explored increasing the free-float requirement to a range of 10% to 20%. However, implementation has been delayed due to concerns about the impact on companies with concentrated ownership structures. Now, with renewed urgency driven by market pressures, the regulator is moving forward with a phased approach to minimize disruption and ensure smooth adoption.

Implications for Market Liquidity and Investor Confidence

A higher free-float requirement is expected to deepen market liquidity, making Indonesian stocks more appealing to both local and international investors. By increasing the proportion of shares available for trading, the government aims to reduce volatility and create a more stable environment for capital formation. This, in turn, could lead to increased participation from institutional investors, who often shy away from markets with low liquidity. Inarno Djajadi noted that the change is part of a broader effort to bring Indonesia's market standards in line with regional benchmarks.

The regulator has also proposed calculating free-float levels based on a company's market value rather than its equity position, a suggestion made by Iman Rachman, president director of the Indonesia Stock Exchange. This approach would provide a more accurate reflection of market dynamics and could lead to a more efficient pricing mechanism. Additionally, the regulator is considering easing requirements for rights issues, which could further encourage companies to issue more shares and increase free-float levels.

Risks and Challenges

Despite the potential benefits, the proposed increase in free-float requirements is not without risks. Companies with concentrated ownership structures may struggle to meet the new thresholds, especially if they lack sufficient sources of capital to issue additional shares. Inarno Djajadi acknowledged that the phased implementation is intended to allow firms time to adapt and avoid sudden liquidity shocks according to market analysis. However, some analysts have raised concerns that the transition could lead to short-term volatility as companies restructure their capital bases.

The timing of the announcement is particularly sensitive, as it comes amid broader concerns about Indonesia's market structure. Last month, MSCI sought feedback on its calculation of public float, a move that has raised fears of potential outflows if the methodology changes. This has added to the pressure on the OJK to act decisively while ensuring that the reforms do not inadvertently destabilize the market. The regulator will need to strike a balance between promoting liquidity and maintaining financial stability.

What This Means for Investors

For investors, the gradual increase in free-float requirements presents both opportunities and challenges. On the one hand, it could lead to a more liquid and transparent market, which may attract more institutional capital. On the other, companies that fail to meet the new requirements may face delisting or reduced market access, which could create short-term uncertainties. Investors will need to monitor how individual companies respond to the new rules and assess the broader implications for market performance.

The OJK has not yet provided a specific timeline for the implementation of the new rules, but Inarno Djajadi indicated that the process is expected to begin in the near future according to market reports. In the meantime, the Indonesia Stock Exchange has proposed additional measures to support the transition, including easing requirements for rights issues and adjusting how free-float levels are calculated. These measures could help smooth the path toward the 25% target and reduce the burden on listed companies.