Cuts And Gains

So what are the reasons for the sudden change in fortunes? First, there was the successful listing of its American depositary receipts on the New York Stock Exchange. More importantly, this was followed by the revision in domestic and international long-distance telecom charges.

With the Telecom Regulatory Authority of India (TRAI) slashing international long-distance rates by 16-20 per cent, VSNL obviously stands to gain as the pathetically low traffic from India going abroad can be expected to improve.

As of now, outgoing calls to the US cost about three times the cost of a call made from the US to India. This discrepant ratio will better to about two times from October 1, when the new rates become effective.

But, with the US expected to cut down call rates to India next year, industry experts feel that the traffic imbalance between India and the US won't change drastically.

Nonetheless, the cheaper rates can be expected to boost volumes. And the revenue sharing agreement that VSNL has with DoT ensures that it gets a fixed amount of around Rs 10 per minute. Of this, an amount close to Rs 3.5 is paid back to DoT on account of license fees and the remaining Rs 6.5 is retained by VSNL.

This simply means that VSNL does not get hit as badly as DoT because of the lower rates, or in other words stands to gain more from the expected increase in volumes.

However, what will hit VSNL and others of its ilk that are planning to enter national long-distance (NLD) telephony is the 16-23 per cent cut in STD rates. VSNL, Reliance Telecom and Bharti Telecom are among the major players that are expected to provide these services and they certainly wouldn't have foreseen anything of this nature.

The lower rates will highly suppress their margins, and the long payback period associated with the projects will become only longer.

Sebi's options

Even as the index futures market is looking better by the day, it is still nowhere close to being an efficient market. Not only are the spreads overly high, Indian investors seem to be having problems in valuing these products as well.

Many a times, the index futures contracts are seen to be deviating far away from their fair values, implying at times no cost-of-carry and at times immoderately high ones.

When at this juncture, Sebi decides to introduce index-based options as well, one can not help but be sceptical about this move. Clearly, index options do not enjoy so much liquidity as their futures counterparts.

Also, these products are highly complex, especially so evaluating the fairness of the option premium, and thereby require additional safeguards.

With the current scenario suggesting that market people find the index futures market itself enigmatic, one can't help getting the feeling that the introduction of options would be a little too early in the day.

Nevertheless, a closer peep into the matter gives the feeling that the regulator might have got it right this time around. The idea behind the early introduction of index options according to J R Verma, executive director at Sebi, is for Indian market players to have more derivative products to use.

Besides, since these products are complex and hence require time to be understood, the regulators' view is that an early introduction would only help.

Clearly, options aid market players in not only adopting various hedging positions (that futures don't provide), they also are a speculator's dream tool. This is because options allow him to take highly leveraged positions, even while restricting his downside to the option premium paid by him.

Besides, certain uses of options such as in straddles, strangles etc. allows him to take views on the market that are unthinkable under present circumstances.

Besides, institutional players can use the options market to earn additional income by writing options. Broadly, options open various possibilities for market players that makes the act of investing much more desirable.

Meanwhile, certain related developments point out to a more efficient derivatives market in future. With FIIs having begun trading in the futures market after RBI's clearance to FIIs to use the derivatives market for hedging purposes, volumes can be expected to pick up.

Besides, with BSE and NSE providing facilities to trade in the index itself on the spot market, increased arbitrage will also result in better volumes besides aiding in fairer valuations.

(With contributions from Mobis Philipose)