The finance ministry has rejected ICICI Bank's proposal to raise $300 million through an overseas bond issue.

Ministry officials confirmed the rejection. They said corporates looking at external commercial borrowings of over $100 million were being discouraged.

The finance ministry is, however, open to allowing corporates to raise ECBs of over $100 million for retiring loans of domestic institutions that have turned sick. Approvals will be given on a case-to-case basis.

The ministry's move could create problems for corporates exploring the overseas bond market to raise similar quantums, since the alternative to raising foreign resources through loans had become relatively costly in the past few weeks.

ICICI Bank was looking at floating a five-year, fixed-rate bond to raise $300 million and was awaiting approval of the finance ministry. An ICICI Bank spokesperson refused comment on the issue.

Corporates require finance ministry approval to raise funds over $100 million from the overseas market, while raising money below the $100 million cut-off point takes the automatic route.

If the issue had gone through, it would have been the first dollar-denominated debt issue in about six years. Merrill Lynch and Deutsche Bank had been given a verbal mandate for the issue.

The high-level committee on capital markets is expected to meet soon to deliberate on the ECB policy. However, it was not certain if the panel would favour an increase in the ECB limit, the officials said.

Corporates have been looking at overseas bond markets to diversify investor base. Rates in the ECB loan market had hardened for larger tranches, and bond issues were preferred to ECB loan issues, even as the rates in bond issues were slightly higher. There is a shortage of investors in the market, and this has propped up the cost.

"Banks from the Gulf and South-East regions are looking at higher yields, which in turn has increased the cost of the loan issues. Indian banks, which used to pick up more than 25 per cent of the loans, are now more keen on offering loans to the smaller players, wherein they can charge higher interest rates.