Oct. 25 (Bloomberg) -- India's capital markets regulator plans to set up a stock exchange for small and medium-sized enterprises to help channel record investment to more companies.

``We want to have a separate exchange for the small and medium enterprises segment,'' M. Damodaran, chairman of the Securities & Exchange Board of India said in a press conference in Mumbai. ``Interested parties are invited with their proposal.''

The move will help open a cheaper funding route for hundreds of companies in the South Asian nation who otherwise rely on loans from commercial banks, boosting economic expansion in Asia's third biggest economy.

Small companies in India usually pay more than banks' prime lending rate, or the rate charged to the best borrowers. The idea proposed today is similar to the Alternative Investment Market, a sub-market of the London Stock Exchange started in 1995, which allows smaller companies to float shares.

State Bank of India, the nation's biggest, charges 12.75 percent interest rate on loans to its best customers, the most since 1999. Comparable interest rate in neighboring China is 7.5 percent, according to Bloomberg data.

State Bank has raised its lending rate over the past year in line with the policy rates of the central bank, which is fighting inflation in the South Asian economy.

Overseas companies are lapping up stocks in India to profit from an economy that has grown an average 8.6 percent since 2003, the second-fastest among the world's major economies.

Global investors have bought $18.7 billion of stocks and bonds this year, higher than the previous record of $9.46 billion in 2005, when they bought $10.7 billion of shares and sold $1.24 billion of bonds. Overseas investors bought a net $8.9 billion in stocks and bonds last year.

Damodaran also directed stock exchanges to improve supervision by setting up board-level surveillance committees.

To contact the reporter on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net.

Last Updated: October 25, 2007 09:44 EDT