Coal India and telecoms firm BSNL are the prime candidates to list on Indian bourses under the government's new rules for selling stakes in state firms, but valuations will have to be tempered to attract investors.

The government said last week unlisted state firms making profits in the past three consecutive years should list, as Asia's third-largest economy looks to fuel growth without further widening a large fiscal deficit.

The IPO windfall could raise more than USD 10 billion and prompt significant inflows of foreign investment.

Coal India, the country's biggest coal miner, and Bharat Sanchar Nigam, India's fourth-largest mobile operator and No 2 telecoms firm including fixed-line subscribers, are among firms meeting the new rules.

Coal India Chairman Partha Bhattacharyya told Reuters his company has been advised by the government to appoint an independent financial adviser for a potential IPO.

"We expect to make the appointment by December," he said.

BSNL Chairman Kuldeep Goyal said the government has to decide the timing for any potential IPO of his company.

This follows recent strongly subscribed IPOs of state-run firms NHPC and Oil India, which together raised USD 1.8 billion for the government.

Oil India also made a strong market debut, with analysts widely agreeing its valuations were attractive.

But NHPC, and private sector firms Adani Power and Indiabulls Power, made muted debuts in recent months, with analysts blaming high IPO prices.

"The valuations offered by the government have to be reasonable," said Phani Sekhar, fund manager at Angel Mutual Fund.

The government would also do well to time any potential offerings when the stock market is on an uptrend, he said.

"If the government does not want to compromise on valuations, as in the case of NHPC, then it has to choose its timing very carefully."

Listed state firms jump

The government also said all profitable, listed state firms must have at least 10% of their shares in public hands.

The government should raise about USD 5.5 billion by selling stakes in profitable listed state firms in which it holds more than 90%, according to Standard Chartered estimates.

Such firms include MMTC, Hindustan Copper, Rashtriya Chemicals, Neyveli Lignite, National Fertilizers, State Trading Corp, NMDC and Andrew Yule.

Shares in most of these firms have jumped by at least a fifth since the new stake sale rules were announced on Thursday, with Rashtriya Chemicals climbing 25%.

Coal mining and power generation firm Neyveli Lignite has risen 8%, while leading iron ore miner NMDC and heavy engineering firm Andrew Yule gained 15% and 13%, respectively.

"Some steps need to be taken to give a fillip to the economy," said A.N. Sridhar, a fund manager at Sahara Mutual Fund. "The proposed stake sales are definitely aimed at reviving the economy and closing the fiscal gap. If the government does it, that'll be really positive."

Other candidates

Officials have said Railways subsidiary RITES, Cochin Shipyard, Telecommunications Consultants India and Manganese Ore India will also be on the government's radar for potential IPOs.

The government gave no timeline for potential IPOs of state firms when it released the new rules.

RITES, Cochin Shipyard and Manganese Ore India have been profitable for the past three years, but past financials for Telecommunications Consultants were not immediately available.

An official at Cochin Shipyard said the company had not received any direct communication from the government related to an IPO. The other firms could not be immediately reached.

Standard Chartered analysts Samiran Chakraborty and Anubhuti Sahay said it was difficult to estimate the proceeds from potential IPOs of state firms.

"In any case, the proceeds will be substantial, and we envision a heavy influx of foreign flows to capture this opportunity," they said in a note to clients.

The government last year proposed selling a 10% stake in BSNL, looking to raise around USD 10 billion, but the sale was headed off by political and labour opposition.