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THE GOVERNMENT HAS effectively shut the door on corporates raising money abroad through external commercial borrowings. It proposes to impose conditions that would make a large segment of the corporate sector ineligible to access the overseas markets, and on those eligible set requirements on borrowing costs that are almost impossible to fulfil. For instance, it says that companies seeking to raise upwards of $50 million can do so only against import of capital equipment. With production capacity already in excess, the corporate sector needs only cheaper working capital. Yet, that is not good enough reason, by the latest Government edict.

The notion that investment in fixed capital has a superior purpose, unlike working capital, turns the canons of corporate finance on their head. Not content with this, the Government wants to set conditions on the cost at which such funds can be raised, effectively ruling out ECB as a source. The all-inclusive borrowing cost is not to exceed 150 basis points over six-month LIBOR (London inter-bank offered rate). While a handful of companies may be able to source funds within such a ceiling, for the large majority of borrowers, the combination of country- and company-specific risk premia on their overseas borrowings could easily push the cost above this limit. Throw in the element of forward premium for hedging future payables, the cost simply cannot be contained within the ceiling proposed, thus effectively shutting for them this source of finance.

It is astonishing that the Government has not gone beyond giving a bland justification that the revision has become necessary in the light of `developments in recent months' considering that these changes virtually amount to a reversal of the earlier policy of liberalisation. All the more so when the Finance Minister himself is on record that the freedom available to foreign investors in India requires a corresponding loosening of controls on local investors to access funds overseas. Clearly, the Government has been under some pressure from exporters to stem the gradual appreciation of the rupee against the dollar consequent to the huge inflows. But damming ECB flows is unlikely to yield much to the Government as the external commercial borrowings in the first quarter of this fiscal were only $639 million.

It is inconceivable that such a minuscule source of foreign exchange inflow could have a bearing on the rupee's external parity when overseas investors and non-resident Indians continue to repose much faith in the near-term prospects for the Indian economy. The official machinery went on an overdrive to sell the story of a resurgent India with the `India Shining' campaign. Evidently, the Government is a victim of its own marketing success in a manner that it might never have expected at the start of the media and outdoor campaign. Corporate India has to now bail the Government out by denying itself access to cheap overseas funds.

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