UPDATE 1-SAIL shortlists JPM, 5 others for share sale-sources

* HSBC, SBI Capital among those shortlisted - sources

* Banks will get almost no fees

* Follow-on share seen in Jan; may raise up to $1.7 bln (Adds detail)

By Sumeet Chatterjee

MUMBAI, Sept 2 (Reuters) - State-run Steel Authority of India Ltd (SAIL.BO) has shortlisted Deutsche Bank (DBKGn.DE), JP Morgan (JPM.N) and four others to manage a share issue that may raise up to $1.7 billion, sources with direct knowledge said on Thursday.

Other bankers shortlisted by the largest domestic producer of the alloy are HSBC (HSBA.L), SBI Capital, Enam Securities and Kotak Mahindra Capital, the sources, who could not be named as they were not authorised to speak to the media, said.

Officials at SAIL in New Delhi and the shortlisted banks were not immediately available for comment.

The government plans to sell 5 percent in the company, while SAIL will issue new shares equal to 5 percent of its existing share capital. The government owns about 86 percent in the firm, which can produce 15 million tonnes of steel a year.

The sale is likely to be launched in January, the sources said.

A 10 percent share sale would fetch about $1.7 billion, according to Reuters calculation based on the current market price. In April, India's cabinet approved a 20 percent stake sale in the company in two tranches.

Shares in SAIL, with a market value of $16.5 billion, were trading up 1.8 percent at 191.20 rupees at 11:44 a.m. (0614 GMT), while the main Mumbai index .BSESN was up 0.5 percent.

The stock is down about 21 percent in the year to date against a 5 percent rise in the benchmark.

BANKS GET NOTHING

A large number of foreign and domestic banks in India vie for equity underwritings of state-run firms for league table credits, even as the fees on the government deals are usually very low and in some cases lead managers make a loss. The lowest financial bid for managing the SAIL issue was at about one-hundredth of a rupee, two sources with direct knowledge said. This translates to almost no fees for the banks that will manage the offering.

Earlier this year, state miner NMDC Ltd (NMDC.BO) had raised $2.2 billion in a follow-on share sale that made virtually no money for the banks involved, sources with direct knowledge of the deal had said. [ID:nSGE63S0FS]

Besides gaining league table standing and brand recognition, banks justify doing cheap or loss-making deals in the hope they will lead to flow-based trading business in future and open doors for follow-on deals.

The government plans to raise $8.6 billion through stake sales in the fiscal year that ends next March.

Indian companies have raised more than $14 billion through share sales so far this year, compared with $16 billion raised in 2009, according to Thomson Reuters Data.

Total equity offerings in 2010 are expected to reach $30 billion.

The SAIL sale is part of a government plan to sell stakes in about 60 state-run firms over the next few years, as India moves to cut a stubbornly high fiscal deficit and garner funds to spend on schemes for the poor. [ID:nSGE64R0BK]

State-owned Coal India will launch its initial public offering, which aims to raise as much as $3 billion, on Oct. 18, the chairman of the world's largest coal miner said last month. [ID:nSGE67Q036] (Editing by Ranjit Gangadharan)