India will raise up to $3.5 billion by selling shares in Coal India after setting what brokers and fund managers said looked an attractive price range for the country's largest-ever initial public offer.

At the top of the range, Coal India would be worth $35 billion, ranking seventh among listed Indian companies and making it a likely index candidate as well as a must-own for funds seeing exposure to the Indian growth story.

The Indian government on Tuesday set a price band of 225 to 245 rupees per share in its sale of 631.6 million shares, or a 10 percent stake, in the world's largest coal miner.

The share sale is part of India's broader effort to divest stakes in roughly 60 companies in the next few years.

"The pricing is much better than what we were expecting (which was) ... 260 rupees at the upper end," said Ambareesh Baliga, vice president of Karvy Stock Broking. "The response from institutional investors is expected to be very good."

Lead managers on the offering lobbied the Indian government to price the issue in the 225 to 245 rupee range, to increase the opportunity for retail investors to see gains once the stock lists and bolster appetite for share offerings by other state-run firms, a banker with knowledge of the deal said.

The IPO opens on Oct. 18 and closes on Oct. 21, with listing in Mumbai set for Nov 4. Retail investors and staff will get a 5 percent discount, Coal Minister Sripraksh Jaiswal said.

INVESTOR INTEREST

A Reuters poll of fund managers had expected the IPO to be priced around 250 Indian rupees a share, with most of those surveyed keen to invest in the Indian miner, given its dominant market position and attractive valuations.

The company reported earnings per share of 15.60 rupees for the fiscal year ended March 2010 and would be valued at 15.7 times trailing earnings if priced at the top end of the band.

China's Shenhua Energy, the Indian miner's closest rival, trades at 16 times earnings, while smaller Indonesian peer Adaro Energy has a ratio of 20 times. U.S. miner Peabody Energy trades at 25 times earnings.

"The pricing has been quite reasonable. This is going to be a large market cap company, so it will be difficult for investors to ignore the offer," said a fund manager at Mumbai's JM Financial Mutual Fund who declined to be identified.

Coal powers 75 percent of India's electricity output and demand is expected to grow 11 percent a year. India faces a peak-hour power deficit of nearly 14 percent and plans to triple its generation capacity over the next decade.

Coal India, based in the eastern city of Kolkata, produced 431 million tons in 2009/10 and accounts for nearly 80 percent of coal output in Asia's third-largest economy.

LARGE DEALS, POOR RETURNS

Given the attractive pricing, the Coal India IPO is expected to revive momentum for the government's plan to raise roughly $8.5 billion from share sales in the current fiscal year.

The offer will be followed by a $1.9 billion share sale in Power Grid Corp in the second week of November and a $750 million offer in Hindustan Copper.

Steel Authority of India, the country's largest domestic steelmaker, also hopes to bring its up to $1.9 billion public offer to market by mid-December.

But banks working on the Coal India offer will earn near-zero fees for what some term a national service. A large number of foreign and domestic banks have vied for equity underwritings of state-run firms, despite fees on government deals being usually very low.

Besides gaining league table standing and brand recognition, banks favor such deals in the hope they will lead to trading business and open doors for follow-on deals.

Morgan Stanley, Citigroup, Kotak Mahindra Capital, Enam Securities, Deutsche Bank and Bank of America-Merrill Lynch are managers on the offer.