India took a step towards setting up a regulator for its coal industry on Wednesday, a move it hopes will improve supplies and weed out corruption in a sector that is the main source of energy for Asia's third-largest economy.

India boasts of the world's fifth-largest reserves of coal and the world's biggest coal miner, in state-run Coal India Ltd, but still suffers massive power cuts due to supply bottlenecks and poor quality of coal delivered to power plants.

Law Minister Ashwani Kumar was forced to resign this month over the so-called Coalgate scandal over mining rights, which has become one of the biggest headaches for Prime Minister Manmohan Singh.

"A coal regulator is good as this sector will be opened up sooner or later for private participation and an independent regulator can provide a level playing field," said Rakesh Arora, managing director and country head of research at Macquarie Capital Securities (India) Private Ltd.

A group of ministers approved the draft bill on Wednesday to set up the regulator, Coal Minister Sriprakash Jaiswal said, but gave no further details. The bill must next be approved by cabinet and parliament.

"We've tried to put together a very cogent, balanced bill which takes into account the interests of all stakeholders," Power Minister Jyotiraditya Scindia told reporters.

Reform flurry

The group also agreed on a pricing mechanism known as "pass-through" which allows power producers to pass on the higher cost of imported coal to consumers.

The two proposals would be readied within 10 days and sent to the cabinet, Scindia said.

The moves are part of a flurry of reform measures that the Congress-led coalition government wants to push through to kick start sputtering growth ahead of elections that must be held by May 2014.

The Coalgate scandal involved alleged irregularities in the awarding of mining rights potentially worth billions of dollars to private companies.

Opposition demands for the law minister's resignation, and that of another minister in a separate corruption probe, brought parliamentary work to a standstill and raised the prospect of the government calling an early election.

The regulator would have the power to decide in disputes over quality and also have some jurisdiction over pricing, Scindia told reporters.

State-run power producer NTPC has long complained it is forced to accept coal that is heavily adulterated with rocks and stones, crimping its output and leading to blackouts which hurt economic growth and keep the country reliant on costly imports.

"Pricing, grading, quality, testing," Scindia said, when asked what would be the remit of the coal regulator. "But, pricing (authority) only in very, very specific and certain cases."

Macquarie's Arora said the regulator might have limited impact initially because of Coal India's dominance. "But it should evolve over time with opening up of the sector," he said.

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