The Supreme Court of India has cancelled 214 of the 218 coal mining licences awarded by the government between 1993 and 2010.
According to the verdict, out of the 214 blocks, 172 have been cancelled immediately, while the remaining 42 blocks will be cancelled by March next year after they complete their operations.
In addition, the court also ordered firms, which were allocated coal blocks but did not operate them, to pay compensation to the government for the loss of exchequer and ordered affected companies to pay INR295 ($4.83) a tonne for all the coal mined since 1993.
In its 2012 report, the Comptroller and Auditor General (CAG) claimed that the country is estimated to have lost approximately $33bn because of illegal coal block allocation.
Last month, the Indian Government identified 328 coal blocks allocated during the period and found that 218 of them were allocated illegally to both private and government firms without performing competitive bids.
Only four out of the 218 have been saved. These include two allocated to Reliance Power and a block each given to NTPC and the Steel Authority of India.
The apex court has now given the central government six months to improve the coal allocation policy.
The cancellation could affect India's power sector, as a majority of the affected blocks account for a tenth of the annual coal output in the country.
Meanwhile, Greenpeace has welcomed the Supreme Court's decision, describing it as a victory for the environment and the people of India.
A Greenpeace India climate and energy campaigner said: "Today's landmark ruling is a strong message from the highest court in the country to the government and industry that the laws of the land cannot be circumvented and disregarded.
"And while coal is set to become more expensive, wind and solar energy are dropping rapidly in price. The government has a stark choice, whether to develop a pro-people, pro-green economic model, or stick with increasingly expensive, corrupt, dirty energy."