The government is planning to auction mines with proven resources to augment its revenue, discontinuing the current practice of case-to-case allotment. The key criterion in the auction process will be the value addition to be done by the applicants.

Under the current system, companies apply to state governments, which in turn recommend the shortlisted entities to the central government.

In the third stage, the Centre gives its final approval. Industry observers said this system left a lot of room for discretion and gave preference to projects coming up in the same area.

The Group of Ministers (GoM) has taken a decision in this regard and this will be included in the mineral policy which is expected to be placed before Parliament in the next session.

Industry observers said the decision, if approved, will benefit players with deep pockets such as Korean major Posco and the world's largest steel company, Mittal Steel, which are setting up huge manufacturing facilities.

However, mines with probable and possible reserves will be kept out of the purview of the auction process. Sources close to the development said Finance Minister P Chidambaram had come out in support of auctions, with a pre-determined floor price, on the plea that it would be the best tool for price discovery.

The government is also likely to switch over to ad-valorem rates for calculating mineral royalty, which is likely to go up to Rs 3,000 crore per annum from the current Rs 900 crore. A part of the royalty will be earmarked for the development of the mining areas.

Steel industry sources said it would help set a procedure for grant of iron ore mines, which have been allotted in an ad-hoc manner so far. Iron ore is the most important raw material for steel production. Rs 5,00,000 crore of investments are in the pipeline for the steel sector.

The fate of the investment is linked to the availability of iron ore. Industry sources said the auction process could also fast-track the allotment of mines, which had been with the state governments for long.

The Hoda committee, which was entrusted with chalking out the roadmap for the mineral industry, had recommended that production capacities in existence on July 1, 2006, without captive mines should be granted preferential allotment of iron ore mines, fully prospected by public agencies.

However, it is not known whether the existing capacities would be exempt from auctions, or steel companies�Essar Steel, Ispat Industries [Get Quote] and JSW Steel�would also be subject to the auction procedure.

India has approximately 23.59 billion tonnes of iron ore scattered in states like Jharkhand, Orissa, Chhattisgarh, Karnataka and Goa. Out of this, there are proven reserves of 6.311 billion tonne.