The move comes against the backdrop of the Supreme Court last month quashing allocation of 214 coal blocks to various companies since 1993.
"The Cabinet has recommended promulgation of an Ordinance to the President in order to resolve the pending issues particularly the situation arising out of the Supreme Court judgement quashing the allocation of the coal blocks," Finance Minister Arun Jaitley said briefing the media after the meeting.
"As far as the private sector is concerned, the actual users of coal in the cement, steel and power sectors who apply for a certain number of coal mines will be put in the pool and there would be an e-auction. A sufficient and adequate number of mines would be put so that actual users go back with the mines," he said.
Jaitley said the auction process would be "transparent" and completed in "three to four months" with proceeds going entirely to the state governments where the mines are located.
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The biggest beneficiaries would be the eastern states like Jharkhand, Odisha, West Bengal and Chhattisgarh. States like Madhya Pradesh, Maharashtra and Andhra Pradesh would also benefit.
"This will financially empower particularly the eastern states (which have most of the coal mines) and lakhs of labourers would get employment while bank capital held up with the allottee companies would be fruitfully utilised," the Finance Minister said.