For the staid and often predictable world of stock-market indexing, it was a bombshell moment.

After months of urging Indonesian officials in private and public to address investor concerns about market manipulation and poor disclosure, MSCI Inc. signaled on Thursday that its patience had run out. In an announcement that sent local stocks tumbling by the most since the Asian Financial Crisis in 1998, MSCI said it expects to remove Indonesia from its global indexes barring major improvements in market governance.

The move would strip Indonesia of its emerging market status and relegate it to a category below even frontier markets like Bangladesh — the first double downgrade since Russia was cut in 2022 after launching a war with Ukraine. That would force passive funds with billions of dollars in Indonesian stocks to dump their holdings.

While MSCI’s announcement stunned some investors who had held out hope it would retain its EM status, or at worst be downgraded to frontier, the index compiler had been privately signaling to Indonesian officials in recent weeks that the market’s problems hadn’t been fixed, according to people familiar with the matter who asked not to be identified discussing private information.

The question now hanging over the $565 billion market is whether this week’s rout focuses minds in Jakarta enough to allay MSCI’s concerns in time for its final decision in June.

In what appeared to be an early attempt to address those concerns, the country’s market regulator on Friday imposed hefty fines on groups linked to two of Indonesia’s most prominent listed companies for alleged market manipulation. President Prabowo Subianto was due Friday to discuss MSCI with top officials, including key ministers and the management of Danantara, the investment vehicle overseeing the government’s holdings in state-owned enterprises, according to a person familiar with the situation. The atmosphere among officials was jittery, with a sense the fallout could reach senior ranks, the person said.

Yet it’s far from clear whether the government can move quickly enough to change MSCI’s mind. In a series of increasingly fraught conversations with Indonesian officials over the past two months, the index compiler repeatedly warned that “bad actors” could return to bigger stocks and questioned whether recent efforts to clean up the market went far enough, according to people familiar with the discussions.

Representatives from New York-based MSCI also gathered feedback from asset managers and brokerages and met with Danantara executives.

During one discussion, an MSCI executive told Danantara that while some disclosures had improved, investors still harbored deep doubts over whether recent market transparency reforms went far enough, the people familiar said. The executive also said investors wondered if bad market actors are sitting on the sidelines — and might resurface once scrutiny subsides, they added.

While MSCI didn’t delve into the specifics of these bad actors, it indicated they were behind activities such as front-running and coordinated trading. The executive said Indonesia’s regulators must have proper tools to surveil the market and a strong means of deterrence, such as fines or debarments for those who flout laws and regulations, according to the people.

MSCI’s action brought forward a review that wasn’t expected until next month, threatening to strip the country from the emerging status that it’s held since 1989.

If it becomes a standalone market, Indonesia would join just five prior instances over the past 25 years when countries have been cut two notches from emerging directly to standalone status: Russia in 2022, Argentina in 2021, Pakistan in 2008, Venezuela in 2006 and Sri Lanka in 2001.

The review brings renewed scrutiny to governance under Prabowo, who has been working to restore confidence and lure investors back to the region’s biggest economy after a bruising year. His government is already contending with concerns about central bank independence and unease over growing state control over key industries.

MSCI said a decision will be made by June 30 and that it may provide an update in coming months during the consultation period. A spokesperson declined to comment further on Friday.

When asked for comment on Friday, Indonesia’s Government Communication Agency referred to a statement from the country’s financial services regulator, the Financial Services Authority. The FSA said it is carefully reviewing MSCI’s assessment regarding areas that need further refinement. Representatives for Danantara didn’t respond to a request for comment.

Indonesian officials had been trying their best to convince MSCI not to downgrade the market and provide reassurances they will follow through on commitments to improve transparency, trading liquidity and high shareholder concentrations.

The deliberations in recent weeks saw conversations between top-level decision makers. In late September, while on a trip in New York, Danantara Chief Investment Officer Pandu Sjahrir met with MSCI Chief Executive Officer Henry Fernandez, the people familiar said.

International funds pulled almost $5 billion from the country’s equities from January through mid-October, on pace to hit an annual record and helping to make Indonesia the world’s worst performer for 2026. An MSCI reclassification to a standalone market could extend these outflows. The benchmark index sank 12% on Friday.

“It matters disproportionately to Indonesia if it gets downgraded because they historically have been so dependent on foreign portfolio flows,” said Veronique Erb, emerging markets portfolio manager at RBC Global Asset Management in London. “Foreign investors are in no rush to get back into Indonesia,” she said, adding that it already has a low weighting and therefore “you don’t have to be in Indonesia.”

MSCI has an influential role in Indonesia’s stock market, which is heavily dependent on inflows from foreign investors. The firm’s decisions to include individual Indonesian securities have often been accompanied by sharp moves in their prices — as investors bet inclusion will draw more funds into the stocks.

International investors have had difficulty trading some Indonesian stocks that MSCI added to its benchmarks because the shares were tightly held.

In the second half of 2025, MSCI added two large-cap stocks to its Indonesia index, setting off a string of events that led to its market downgrade warning. Complaints piled up within days of its August decision to include Dian Swastatika, which at the time had a market capitalization of about $30 billion following a run-up in its shares.

Traders at UBS Group AG tried to buy the company’s shares, but found hardly any available, according to people familiar with the matter. Other global investors including JPMorgan Asset Management encountered the same problem, one of the people said. In the weeks after MSCI said Dian Swastatika would be in its index, the company’s market capitalization soared to as high as $53 billion, roughly 100 times its annual profit in the prior year.

Traders found they could only buy the shares in small quantities at higher prices, and the financial institutions took their grievances to the index compiler, said the people, who asked not to be identified sharing private information.

After hearing from investors, MSCI lowered Dian Swastatika’s weighting in its benchmarks by changing a calculation of its free float, or shares available for trading.

Investors also expressed concerns to MSCI about liquidity in another large-cap stock, Barito Renewables, which MSCI added to its index last year. It was the country’s most-valuable listed company with a market capitalization of roughly $90 billion at the start of 2025, but more than 97% of its shares were subsequently found to be held by entities linked to its controlling shareholder, findings by the Indonesia Stock Exchange later revealed.

On Friday, the Financial Services Authority fined parties linked to Dian Swastatika 1.5 trillion rupiah ($83 million) following a probe into share price manipulation. Parties linked to Barito Renewables were fined 500 billion rupiah. The FSA said it found evidence of planned and structured manipulation of Dian Swastatika’s shares by several brokers.

Representatives for Dian Swastatika and Barito Renewables didn’t immediately respond to requests for comment. UBS and JPMorgan also didn’t respond to a request for comment.

MSCI representatives held discussions with Indonesia’s financial market regulator and the Finance Ministry in the second half of 2025 about the lack of transparency in the stock market.

During the meetings, MSCI outlined the possibility of a downgrade if the issues persisted. In October 2025, it started a consultation on how to estimate the free float of Indonesian stocks after market feedback and further analysis, and closed it at year-end.

In January, MSCI went public with its downgrade warning after finding that Indonesian authorities had done little to address investors’ concerns.

In the wake of a broad selloff, key officials at Indonesia’s regulators resigned, and authorities raced to implement changes including higher minimum free-float requirements to address the market’s shortcomings. Indonesia also pledged to crack down on stock manipulators.

In April, the exchange named Dian Swastatika and Barito Renewables among a clutch of companies whose ownership is highly concentrated. MSCI dropped both stocks from its indexes the following month, along with several other firms.

Indonesia’s financial services authority said in late August that it’s imposed administrative sanctions, suspended licenses and issued warnings to companies, brokerages and other parties for violating capital markets regulations and reporting requirements. The companies named by the regulator were all smaller-cap stocks.

MSCI said it welcomes feedback from market participants on the reclassification proposal until April 30 and will announce its decision on or before June 30.

The next steps will be crucial for Indonesia’s market. MSCI’s indexes now cover more than 80 countries and about $21 trillion in assets under management is benchmarked to them across the globe.

“MSCI is definitely much more influential than they were a decade ago,” said George Cooper, chief investment officer at Equitile Investments Ltd. in London.