A revival in infrastructure spending is seen as one of the keys to accelerating growth in Asia’s third-biggest economy, but hopes of increased public spending under the government of Prime Minister Narendra Modi have yet to materialise given the focus on reducing its fiscal deficit.

Modi wants $1 trillion invested in infrastructure over the five years to 2017, with half of that coming from private companies.

The allure of big projects has roused smaller firms into action, with many of them raising cash in a booming stock market and dominating share sales this year.

A number of these companies are in the infrastructure sector such as roads and logistics. Over the last three months, a total of more than $400 million (257 million pounds) has been raised by Ashoka Buildcon (>> Ashoka Buildcon Ltd), Hindustan Construction Company (>> Hindustan Construction Company Ltd) and others.

"We have raised money to take equity in new projects," said Virendra Mhaiskar, managing director at IRB Infrastructure Developers (>> Irb Infrastructure Developers Ltd), which raised $70 million in March. "We have seen a good number of new projects come up."

Banks remain the main source of funding in India, but smaller, less diversified firms are finding it difficult to raise credit partly due rising bad loans and stretched balance sheets.

Stressed assets in the Indian banking system, including bad loans, are estimated at over 6 trillion rupees ($96.7 billion), or more than a tenth of the total loans outstanding.

Add to that, the central bank warned last month that banks are overly exposed to infrastructure, and that the economy needs to find new sources of funding.

Investors appear to be taking the cue.

Ashiana Housing's (>> Ashiana Housing Ltd.) share sale in February, managed by broker Religare, was covered in a matter of a few hours, with buyers including Goldman Sachs and private equity firm Creador, two sources involved in the share sale said.

Indian construction company Ashoka Buildcon's 5 billion rupee ($80 million) share sale a month later was oversubscribed by 1.5 billion rupees, two sources involved in the transaction told Reuters.

"A lot of companies are raising money for growth capital as well as to bid for BOT (build-operate-transfer) projects," said V Jayasankar, senior executive director & head of equity capital markets at Kotak Investment Banking.

(Additional reporting by Tommy Wilkes in NEW DELHI; Editing by Clara Ferreira Marques & Shri Navaratnam)

By Abhishek Vishnoi