Of $7 billion worth of convertible bonds issued in Asia so far this year, Indian companies account for $2.7 billion, according to market data and sources.

MUMBAI: Encouraged by easier access to foreign convertible bond markets, Indian companies are turning away more demanding private-equity investors as they look to fund their expansion projects.

A booming Indian stock market that has jumped 30% this year — Asia’s top performing major bourse, after South Korea — has helped firms raise their profile among foreign investors and boost valuations to around 15 times’ expected earnings.

Of $7 billion worth of convertible bonds issued in Asia so far this year, Indian companies account for $2.7 billion, or 38%, according to market data and local bank sources.

“They (convertible bonds) are a lot easier than private equity deals which come with strings attached. like board representation,” said K Balakrishnan, managing director and chief executive at Lazard India.

Singapore investment agency Temasek Holdings last week scrapped a plan to put money into Indian budget airline SpiceJet Ltd due to a disagreement over terms. The carrier has said it would make up the shortfall through a planned foreign convertible bond issue.

Dishman Pharmaceuticals and Chemicals Ltd and Genus Overseas Electronics Ltd, both considered private equity funding, but switched to convertible bonds. “Private equity investors are at a disadvantage when it comes to investing in listed entities because of the bonds option,” said N Subramaniam, partner at Baring Private Equity Partners Ltd.

Founders of Indian companies tend to avoid private equity investors because of the strict conditions they impose on the management.

“Their term sheets are long,” said K E C Rajakumar, chief executive at UTI Venture Funds. “They demand too many rights which Indian founders are unwilling to give these days.”

C Jayaram, executive director at Kotak Mahindra Capital Co, the Indian associate of Goldman Sachs Inc, said: “You won’t be free to run the company the way you want, if you have private equity investors, and many founders aren’t used to questioning.”

On the flip side, Aluri Srinivasa Rao, investment director at ICICI Venture Funds Management, said private equity investors prefer to stay away from companies that opt for convertible issues, rather than compromise their management standards.

Not only are private equity deals getting difficult, they are also getting smaller. There were 100 deals worth $1.22 billion in January-September, against 67 deals worth $1.6 billion in all of 2004, according to Venture Intelligence Ltd, a private equity and venture capital tracking firm.

“It’s a mixed bag,” said Kotak’s Jayaram. “When there’s euphoria, there are companies which raise funds without good reason.”

India has recently tightened the rules for issuing bonds overseas to slow a rash of offerings, and has asked companies to list their stocks locally before launching issues. The government has said the conversion price must be linked to the market price at the time of the offering.

Earlier, there was no such restriction. Under the new rule, bond subscribers would stand to lose if the share price fell by the time of conversion. The change is likely to restrict unlisted firms from raising funds overseas and give some relief to private equity investors.

“One can’t say it has created a totally level playing field, but private equity investors may not lose deals on pricing,” said Baring’s Subramaniam.