The Supreme Court has held as illegal all coal blocks allocated by the government to various firms between 1993 and 2009, adding that a final decision on the fate of the blocks would be taken next week.
About 200 coal blocks were awarded over the period to sprivate steel, cement and power companies for their own consumption.
The court's decision pushed down sharply shares of Jindal Steel and Power and Hindalco Industries - two of the firms that won blocks during the time.
"There was no transparency by the companies as well as the central government," Chief Justice of India R.M. Lodha said in his observations. "On many occasions guidelines had been breached, the approach casual and at times illegal."
Amit Anand Tiwari, a lawyer for the Central Bureau of Investigation (CBI) that is also investigating illegalities in coal mine allocations, said wrongful grant of blocks had cost the public exchequer Rs 290 billion ($4.8 billion).
Earlier in the day, the CBI had said it was likely to close a coal scam case against billionaire Kumar Mangalam Birla and former coal secretary PC Parakh that surfaced in 2012 after a report by Comptroller and Auditor General (CAG).
The government auditor had alleged that the government's under-priced sale of coal blocks may have cost the exchequer revenues of $33 billion, although industry watchers and the previous government had cast doubts on the figure.
"The CBI is likely to file a closure report on the case against Birla and former coal secretary PC 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 investigation agency 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 were down more than 10 per cent while Jindal shares were down 15 per cent, trailing a wider market that was up slightly.
Accusations of crony capitalism in allocating resources from coal to mobile telephone bandwidth had dogged the former government of Manmohan Singh. The Congress party suffered its worst defeat in polls concluded about three months ago.
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