It is a widely acknowledged fact that there is no foolproof hedging mechanism available in domestic capital markets. Traders and investors looking for even simple solutions for managing risk have nowhere to turn to, given the provisions of the Securities Contracts Regulation Act.

The badla mechanism evolved to tackle this problem by allowing open long and short positions to be either matched against cash, or against securities, or against some other "open" position.

The mechanism has an in-built safety net, whereby any excessive selling is offset by a backwardation charge, which prompts the short-seller to reverse his position at the expense of incurring an additional charge. So SEBI's problem with excessive short-selling is usually taken care of by a self-correcting mechanism.

If SEBI feels that foreign markets do not allow naked short-sales, and India should follow the same path, it is because those markets have a separate hedging mechanism different from the cashmarket--futures and options and derivative instruments are available.

Unless the same is true in domestic markets, where there is a physical separation between the cash and forward markets, the present mechanism should at best be left alone.

There is no evidence that the market has ever faced a crisis due to short- selling. All the crises on the exchanges have been caused by excessive buying, and not by excessive selling. SEBI should be concerned with preventing crises, and not be bothered about the level of the Index, which is what seems to be the motivating factor behind tinkering with short- sales.

ISP-Telecom

The government's recent ISP policy has paved the way for private Internet service providers (ISPs) to enter the fray. Even VSNL, which till recently enjoyed a monopoly in this sector, will have to garner a new licence from DoT.

But the policy has specified an eligibility criteria for the ISPs to qualify for a licence. Commensurately, the proposed norms might delay the entry oftelecom majors like Birla-AT&T, Reliance Telecom, BPL Ltd, JT Mobile, Tatas, Modicom, and Koshika-Usha. This is because the norms under consideration stipulate that all licence-fee defaulters to DoT will not qualify for an ISP licence directly. DoT is in the process of formulating a 'conditional licence' for such operators.

These operators have bagged the licence for providing cellular services in the non-metro circles. Owing to the projected subscriber base not being achieved by them, these operators had defaulted on their licence-fee obligations.

Ironically, the government only recently increased the licence fee payment period for the non-metro operators to 15 years from 10 years. In July 1998, DoT had referred the whole issue to Trai, and specified that operators seeking deferment on payment of licence fee should furnish guarantees as security.

Till date, eight of the 13 operators have complied with this condition. The government has also specified that the extension in the licence-fee period is onlyfor non-defaulters, and hence, all operators will have to make sure that they comply with the terms and conditions of the licence agreements.

All this means that initially most of the ISP licences would be bagged by new entrants in the telecom sector, the reason being the ISP policy has stated that to qualify for a licence, an ISP need not have any prior experience in telephony. But the operators will not lose out in the long run as there is no cap on the number of ISP licences.

Disinvestment

At the Ficci meet on Thursday, the finance minister Yashwant Sinha said that the government may disinvest in more than the four companies so far slated for disinvestment. Considering the amount which the government is set to garner from disinvestment, there seems to be hardly any choice in the matter.

According to Sinha, the Concor issue will garner about Rs 250 crore at a price of Rs 240-Rs 250. This will leave around Rs 4,750 crore to be garnered from disinvestment of IOC, VSNL, and Gail, which seemstough, given the price Concor is set to garner.

At a 30 per cent discount for Gail and IOC, the yield would be about Rs 1,600 crore to the government. VSNL should easily fetch $20-$24 (based on current GDR prices, which are again quite low), and Rs 1,100 crore. Given these calculations, the total would fall short of the target by Rs 2,000 crore.

However, there is also a chance that the government can achieve the target, provided it plays its hand carefully. Merchant bankers, who had handled the previous Gail disinvestment, say that although the government could not get the target price of Rs 120 per share, there were huge buy orders at Rs 85-90 per share.

Considering that the present price is approximately Rs 70, there is little chance for the government to get a premium on the present price. But a price of Rs 65-72 can easily be got for the Gail issue. For IOC, the merchant bankers should be able to sell the issue at the prevailing market price. This would mean additional revenues of Rs 700crore.

Secondly, IOC and Gail could go in for buyback of their shares from the centre. This will reduce the share capital and increase the sort of premiums one can expect on disinvestment.

Even if IOC and Gail buy back 5 per cent of the share capital, the government is sure to achieve its disinvestment target. Hence, though it may seem difficult for the centre to achieve the target, the options available should see the issues sail through.

With contributions from Aaron Chaze, AG Krishnan and Manish Saxena