The finance ministry has turned down Reliance Industries' proposal to raise $500 million through external commercial borrowings.

Government officials said big ECB proposals had been deferred, pending a decision by Finance Minister Jaswant Singh on whether to rule out ECBs above $50 million, to spur credit offtake in the domestic market.

ICICI Bank's proposal to raise $300 million abroad for financing a restructuring package for the steel industry has also been rejected.

The Reliance proposal was meant for general corporate objectives.

The ministry feels that with buoyant foreign exchange reserves, companies should raise loans in the domestic market.

Based on Singh's advice, a high-level committee comprising officials from the ministry and the Reserve Bank of India will take a decision.

However, officials said the companies could ask for a reconsideration of the proposals later.

The foreign exchange reserves rose to a record $87.85 billion on September 12, as per data released by the Reserve Bank of India.

Earlier this month, the government had approved Reliance's plan to raise $750 million overseas.

Officials said the proposal had been cleared in January 2002, but since the company had asked for changes in the tenure of the loan from five years to 10 years, the proposal had to be vetted by the finance ministry again.

Domestic firms have raised $1.1 billion so far this year through ECBs, against $1.6 billion in 2002, spurted by cheaper foreign loans and a rising rupee.

However, foreign investors are now demanding higher returns at a time when domestic rates are falling.