NEW DELHI (Reuters) - The Supreme Court on Monday declared as illegal government allocations of coal blocks since 1993, jeopardising projects built around the blocks and threatening to exacerbate a shortage of the fuel.
The government's awards of more than 200 coal blocks to steel, cement and power companies has been at the centre of a scandal Indian media has dubbed "Coalgate", with an auditor report in 2012 saying the underpriced sales had cost the exchequer as much as $33 billion.
The ruling sent the shares of Jindal Steel and Power Ltd (JNSP.NS), Hindalco Industries Ltd (HALC.NS) and Sesa Sterlite Ltd SESA.NS down by more than 10 percent. The firms have spent billions of dollars on steel and power plants based around the coal blocks.
The court said it will hold a further hearing on Sept. 1, after which it will decide whether to cancel the allocations or impose some sort of penalty.
Power and Coal Minister Piyush Goyal said a final decision from the court would be in the interest of the country.
"I would look forward to finality in the matter of coal block allocations which have for several years now kept the sector in limbo and with the finality that one can expect very soon, I hope the sector can start progressing," Goyal told reporters.
The uncertainty surrounding the allocations has made it difficult for firms to develop the coal. Dipesh Dipu, partner with Jenissi Management Consultants, said only 30 of the around 200 blocks are operational with annual capacity of about 40 million tonnes.
Accusations of crony capitalism in allocating India's resources from coal to mobile telephone bandwidth had dogged the former government of Manmohan Singh. His Congress party suffered its worst defeat in polls concluded about three months ago.
The court has taken similar action against illegal iron ore mining over the past three years that have crippled the sector.
Any mass cancellation of the coal blocks will add to a shortage of coal for power plants. More than two-thirds of India's electricity is generated by the fuel.
India produced 565 million tonnes of coal in the fiscal year to March 31.
P.C. Parakh, a former top bureaucrat in the Coal Ministry, said the blocks cannot be cancelled wholesale.
"A coal mine takes in our country anywhere between eight to 10 years to start operating. We are already in serious shortage of coal in the country," Parakh told CNBC TV18 channel.
India is the world's third largest importer of coal as state monopoly Coal India Ltd (COAL.NS) has struggled to raise output fast enough to meet rising demand.
"If these coal blocks are cancelled we will be at least five years behind in terms of production of coal, which can have serious implications for our power sector," Parakh said.
Earlier in the day, the Central Bureau of Investigation said that it was likely to close a coal scam case against billionaire Kumar Mangalam Birla and Parakh that surfaced after the 2012 auditor's report.
The CBI is likely to file a closure report on the case against Birla and Parakh very soon, CBI spokeswoman Kanchan Prasad told Reuters.
"Obviously if a closure report is being filed there's no criminality (on the part of Birla and Parakh)," she said.
The CBI filed the case against Birla and Parakh late last year in relation to a block allocated in 2005 to Hindalco, part of the $40 billion Aditya Birla Group. Kumar Mangalam Birla is the chairman of the group.
The case had sparked widespread condemnation from industry leaders and politicians alike given Birla's stature as a leading Indian entrepreneur.
Hindalco had denied any wrongdoing and even the then Prime Minister Manmohan Singh, who was in charge of the coal ministry when the allocation took place, defended the decision to award the block to Hindalco.
Hindalco shares closed down about 10 percent while Jindal shares ended down 14 percent in a wider Mumbai market that was up slightly.
Editing by Himani Sarkar and Michael Urquhart