Cabinet has approved a Bill calling for mining firms to share either profits or amounts equivalent to royalties, a move that could boost political support for the government and free up lucrative projects but also raise business costs.
The bill, which must now win parliamentary approval, calls on coal miners to share a maximum 26% of their profits with local communities and for other miners an amount equivalent to royalties, government ministers said on Friday.
The initial proposal suggested all miners give 26% of profits to local communities.
"All coal mining companies have to share 26% of their profits," coal minister Sriprakash Jaiswal told reporters after a cabinet meeting.
The draft law proposes the profit sharing formula in a bid to smooth land acquisition, a touchy issue in the countryside, where many oppose natural resources being carted away by outsiders.
A part of government moves to expand social programmes for the poor, the bill seeks to simultaneously please the core support base, block flows of new recruits to a Maoist insurgency and balance modern lifestyles against traditional ways.
While industry bodies are reconciled to sharing some profits, they have baulked at 26%, saying that will raise business costs too much and deter investors.
Shares of Coal India , the world's biggest coal miner, fell 3.4% after the cabinet approved the bill.
The mining ministry says that profit-sharing should make it easier for mining projects to win local approval and accelerate the pace of developments.
Years of protests, sometimes violent, have delayed many industrial projects, including South Korean steel maker POSCO's plant in Orissa state, the biggest foreign direct investment in India at $12 billion.
India's mining sector has only opened up fully to private investors in recent years and state-run companies have lacked the funds and expertise to probe deeper than the top 50 metres or so where its iron ore and coal reserves are found.
The bill is likely to be presented in the session of parliament in December and approved, though the opposition could seek changes.