Ok so I figured out what the problem was. I was converting the certificate to PEM from PKCS using:
openssl pkcs12 -in cert.p12 -out usercert.pem -nokeys
openssl pkcs12 -in cert.p12 -out userkey.pem -nocerts -nodes
Apparently this only extracts the private key from the certificate file but does not actually convert it to PEM format. For that I had to use the following command:
openssl pkcs12 -in cert.p12 -nocerts -nodes|openssl rsa -out userkey.pem -des3
This outputs the private key in the required format and grid-proxy-init
works fine now.