The Attorney General proposed to the Supreme Court on Monday that about 40 of the 218 coal mines it declared illegal should not be taken back from the companies that operate them as they were either producing or were close to producing.

The suggestion by Attorney General Mukul Rohatgi sent shares of some of the big companies that hold coal blocks sharply higher on speculation this could lead to the court avoiding a wholesale cancellation of blocks as feared earlier.

Rohatgi also told a Supreme Court hearing that the government was open to re-auctioning the coal blocks if their allocations are revoked.

India's highest court ruled last week that the country's decades-old method of granting coal mining concessions was illegal and arbitrary, putting investments worth billions of dollars at risk.

A further hearing was being held on Monday.

The award of more than 200 coal blocks to steel, cement and power companies has been at the centre of the so-called "Coalgate" scandal, estimated in a 2012 audit report to have cost the exchequer as much as $33 billion.

Jindal Steel and Power Ltd , Hindalco Industries Ltd and Sesa Sterlite Ltd are some of the firms that have already spent heavily on steel and power plants based around the coal blocks.