Investors Wary of IPO for India's Essar

Essar Energy, an Indian oil and power firm which is looking to raise more than £2.5bn in a London Stock Exchange listing, is facing a backlash from City investors over its likely valuation.

Leading fund managers have baulked at the indicative prices being floated by advisers to Essar, with one institution warning that the listing could collapse if there isn't a re-think.

Ravi and Shashi Ruia, Essar's founders, who have amassed an estimated personal fortune of nearly £14bn, are looking to sell a 20 to 25 per cent stake in the business, making it India's largest ever flotation. It will also be London's biggest listing this year. Essar's advisers, the City investment banks JP Morgan Cazenove (JPM) and Deutsche Bank (DB), have been marketing the float to fund managers in the Square Mile over the past few weeks.

Earlier this month, Naresh Nayyar, Essar's chief executive, said that initial soundings of potential investors had shown an "appetite among London-based institutional shareholders for an opportunity to buy into the Indian growth story."

But his optimism appears to have been unfounded, with one leading fund manager saying: "There are significant issues to take into account with this flotation. The pricing is way off at the moment. It has to be done at a much cheaper price than is being indicated to us."

Another said: "It's just way too pricey. The numbers are wrong and there is a real chance that this could fail if the family doesn't take a reality check. We are talking about a cut of 20 per cent before we get interested."

He added: "There is appetite among investors for listings but there has to be a sense of realism. Just ask some of the private equity-backed firms. There are some real risks in backing this company and that needs to be reflected in the offer price."

Cazenove was reported last week to have warned of a number of concerns about Essar, which is India's second largest power generator, in its pre-market literature. The bank cited concerns over corporate governance as well as a history of delays and over-runs at a number of the company's operations.

Essar is believed to be looking to secure a high-profile City name to sit on its board to address any corporate governance concerns investors may have. However, it has dismissed calls for the appointment of an independent chairman, with Ravi Ruia lined up for the role.

Sources close to Essar sought to play down any suggestion of investor disquiet this weekend saying that there had been considerable interest "at the bottom end of the scale".

An Essar spokesman said: "Any price range will be set by investor feedback."

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