The government said earlier this week that global issues of most types of preference capital will be considered as debt, and will be subject to the ceiling on external commercial borrowings (ECBs). Both the finance ministry and the Reserve Bank of India are trying to work out ways to reduce the waves of global capital flooding the economy. An option: tighter controls on ECBs.
This newspaper has been saying that restrictions on ECBs will not work. Why? Capital will come in through other routes. So, what will change is not the amount of capital coming in, but the financing structure of Indian companies.
This is precisely what has happened. Many firms have issued preference shares, thus pretending that they are raising foreign equity rather than debt. These new rules may not work either. As long as borrowing abroad is cheaper, firms and their investment bankers will find ways to waltz around such regulatory walls.