Investopedia defines capital rationing as the act of limiting the number of new projects or investments undertaken by a company. This is done to slow down the spending of capital so that older projects can be completed or to insure that new projects or investments offer higher rates of return.
According to Financial Web, the typical method of rationing is to increase the cost of capital by restricting the amounts borrowed. These restrictions make borrowing more expensive for the company, forcing managers to choose projects or investments with more care. Capital rationing can also be used to restrict the raising of capital through stock offerings.