Even as the merchant bankers declined comment on the issue, and the VSNL GDR came under intense arbitrage pressure in domestic and foreign markets, market sources said the issue is headed for substantial undersubscription abroad, and a virtual zero-response in the domestic market. VSNL sources refused to comment, but those familiar with the issue blamed the government and Mahanagar Telephone Nigam Ltd (MTNL) for the disaster, saying that the latter's announcement of an internet service could not have come at a worse time for the GDR offer.

The arbitrage pressure was evident from the fact that while the GDR was hammered on Tuesday to a low of $9.63 (down from Monday's close at $10.63), the underlying stock recovered by 1.43 per cent to close at Rs710 on the local bourses. The VSNL GDR is quoted at a premium of 15.12 per cent to its underlying stock price. (Two GDRs = One Equity Share). It may be recalled that since the first day of the road show (January 27) the market value of the GDR has been steadily declining.

One of the lead managers to the VSNL issue said that the uniform book building exercise for the domestic and the GDR issue adopted for the issue is discouraging investors to go in for the issue. "The domestic investors are not interested to subscribe to the issue as they are looking for a higher discounted price," he said.

According to sources, institutions like ICICI, IDBI, LIC, GIC, UTI are not showing any interest in subscribing to the issue. "It seems, this time the pressure tactics of the centre is not having any impact on the institutions as they are not interested to take any further losses into their books," said a source closely tracking the issue.

Shanti Ekambaram, executive director, Kotak Mahindra Capital Company refusedto comment on the issue. She said: "I would not like to make any comment on the ongoing issue at this point of time."

The entry of Mahanagar Telephone Nigam Ltd (MTNL) in the Internet business has hit the prospects of the share offering of the other state-owned telecom carrier, Videsh Sanchar Nigam Ltd (VSNL), feel sources closely associated with the issue process.

MTNL's Internet services just when the roadshows had commenced."People were not too wary of the private Internet Service Providers expected to jump into the fray shortly as these are much smaller players. MTNL on the other hand is a public sector telecom giant and would thus definitely be a big competition to VSNL," said a source.

"To top it all, MTNL announced its service at a discount to the one offered by VSNL and that too right in the midst of the roadshows which hit us hard", the source added. In fact, MTNL was initially planning to discount its service even further but reportedly backed out following an intervention by the government atthe last moment and decided to discount it only to the extent of 15 per cent to the service offered by VSNL.

But market watchers said that the Internet business is still expected to be a major revenue earner for VSNL in the coming years and the company itself has pegged more than 15 per cent of its revenue coming from the Internet and other value-added services business.

The company has, however, decided to relaunch its Internet service but this is yet to take place and hence could not save the day.

"The other reason for the dismal performance of the offering has been the clutch of confusing signals that have been sent out by the government. There have been several statements and then the discussion paper. Although the new policy has not been formulated, there are enough reasons to doubt whether VSNL would continue to have its monopoly status till 2004, as promised by the government," said a source.