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What's going on in Indonesia re MSCI? The simple summary is this: Locals cornered and wash traded a bunch of stocks up, artificially boosting market cap & liquidity with the goal of achieving index inclusion & unloading into passive buying. In other words, they tried to game MSCI. This went on for years and was succeeding, but it eventually reached utterly egregious levels where almost half the market cap was "saham gorengan" (deep fried shares), and some of the said stocks were trading at P/E ratios of 500x. Retail investors also jumped in, as did local institutions who feared underperforming the local market cap weighted index (JCI). The market distortions eventually became so blatantly obvious that even blundering MSCI eventually realized they were being gamed, but their blunt processes were not equipped to differentiate between "real" and "fake" prices (pro tip MSCI, real stocks trade at 5-10x PEs and fake ones >100x). MSCI decided if their systems can't differentiate between the two, the easiest and most bureaucratic option was to just boot Indonesia out of the indices. The lack of appropriate domestic market supervision & safeguards against market manipulation can be criticized. However, OJK (the local regulator) has already been taking action. The prices of many saham gorengan have already fallen 80% since MSCI announced earlier this year it was freezing new inclusions and considering downgrading Indonesia to FM (frontier). However, manipulation is not always that easy to clamp down on, some of the activity has moved to offshore vehicles, Indo retail and local benchmark hugging institutions also participated, and, it must be said, some of the players are politically connected, putting OJK in a difficult position. But they have been moving in the right direction & progress has been made. That is what makes MSCI's most recent escalation of threatening to kick Indonesia not just out of EM into FM, but excluding it from FM as well, a little puzzling and draconian. MSCI's behaviour is in a way not that surprising though, as like rating agencies, it is bureaucratic and usually behind the curve. They kicked Nigeria out of the frontier index for instance after years of currency convertibility problems (during which it should have been excluded), but they did so right at the point when a new government had been elected and had just floated the currency. My take is that while Indonesian conduct bears a meaningful portion of the blame, so does MSCI/passive. With passive growing to become such a large force in financial markets, it was only a matter of time before it was gamed, and what we are also seeing here is some of the stuctural problems/limitations of passive investing. Passive works best when its a small part of the market that can free ride reasonably efficient markets driven by active investors. However, when passive grows to become sufficiently large it can become distortionary, and capable of driving major market inefficiency and being gamed/arbbed. Recent developments potentially provide a substantial buying opportunity for long term benchmark unaware investors, though it will require a long term focus and volatility tolerance to benefit from. Exclusion from major indices will structurally raise the Indonesian cost of equity and result in a potentially durable valuation discount. Long term investors can benefit from that in the form of higher returns priced into stocks, but that doesn't mean a fast (or even any) recovery in valuations will necessarily occur (though it could). There is still 8mths until MSCI's final decision so the market may be oversold short term (active might not dump until its actually excluded from indices), but there could also be a wall of forced selling coming mid next year. Indonesia has other problems to be sure (governance under Prabowo), but that is not the proximate cause of the recent sell-off - it is purely fears of downgrade triggering passive and offshore active outflows (if Indonesia is small, off benchmark, and not a good news story, many active instos won't bother with it), and investors are thus front running those anticipated outflows. I for one am a buyer.

The Premier League has spoken as Manchester City have been found guilty. Now I want to explain what that actually means, because a lot of what you will read on this app today is wrong. On Tuesday, the Premier League confirmed that an independent Commission found City guilty of every charge relating to serious breaches of its financial rules between the 2009/10 and 2017/18 seasons. They were also found guilty of most of the charges about failing to co-operate with the League's investigation. The charges were first brought in February 2023, and it took a four-year investigation and a 42-day hearing to get here. In plain English, the Commission found three things. City arranged "sham" contracts with some of its commercial partners, meaning the paper said one thing while the real agreement was something else. Those deals made the club's revenue look bigger and its costs look smaller than they really were. Because of that, the accounts City filed were misstated, and the true state of the club's finances was hidden from its auditors and from football's regulators. And City were significantly over both the Premier League's and UEFA's spending limits. But guilty is not the same as punished, and this is the part people are skipping. The sanctions will be decided separately at another private hearing. The possible outcomes range from a heavy fine to a points deduction, and even relegation. City also have until Friday, 2 October, to appeal. So as of today, nobody has been relegated and not a single point has been deducted. Now, this is where it gets interesting for lawyers. In 2020, the Court of Arbitration for Sport overturned UEFA's two-year Champions League ban on City, largely because many of the allegations were too old to be pursued under UEFA's time limits, and the fine was cut to €10 million. This case is different. It sits under the Premier League's own rules, and an appeal goes to a Premier League Appeal Board, not to CAS. The route that saved City in 2020 is not the same route this time. The co-operation finding matters more than people think. In almost any disciplinary process, a party found to have obstructed the investigation does not usually get much sympathy when the punishment is being decided. Three of the four alleged breaches of the duty to co-operate were upheld. And City may not be the only ones heading to court. Other clubs have already reserved the right to seek compensation. Think about the clubs that were relegated, missed out on Europe or lost prize money in those nine seasons while City were operating outside the rules. I would not be surprised if their lawyers are already reading this decision line by line. In September 2024, Pep Guardiola said the independent panel would decide and City would accept the sentence. The club's first reaction today was that it is "disappointed and surprised." On Friday, we will find out whether the club agrees with its manager. My name is Ajoje. I am a FIFA Licensed Agent and International Sports Lawyer. I write on the Law and Business of Football, a lot. Repost and Follow if you want to read more posts like this.

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