India's new government faces a crucial test of its support for big business over plans to let a British-registered energy company cut down a tract of forest to make way for an open cast coalmine.

Essar Energy – owner of the UK's Stanlow oil refinery – and its partner, the Hindalco company, were granted permission to mine in the Mahan forest of Madhya Pradesh after a lobbying campaign which reached right to the top of the previous government.

In letters to senior figures, including the prime minister and finance minister, they argued that the coal was needed to fuel a power station and aluminium smelting unit that were crucial for the country's economic development.

But the plans have placed them on a collision course with the thousands of people who rely on the forest for their livelihoods and with environmental campaigners, including Greenpeace, who are determined to stop the mine.

Among those directly affected are more than 5,000 members of tribal communities with legal rights to use the forest. Greenpeace claims that the mine would mean the felling of more than five million trees, affecting the livelihoods of as many as 50,000 people, with at least two villages being razed. It has also raised concerns about the effect on wildlife, which includes leopards and sloth bears. Tigers and elephants are reported to be occasional visitors.

The deal is also one of several allocations of mining rights which are the subject of a criminal investigation into corruption. An official audit found many had been significantly undervalued and the political row over what became known in India as the "coal scam" further dented trust in the Congress-led government and helped consign it to defeat in this year's general election.

A similar standoff between the UK's Vedanta and villagers in Orissa over plans to mine bauxite in the Niyamgiri Hills ended in defeat for the company.

But the Bharatiya Janata party (BJP) came to power promising to make it easier to do business in India and the billionaire owners of the two firms will expect it to make good on that pledge.

The decision to allow mining to go ahead in Mahan was granted despite staunch opposition from former environment minister Jairam Ramesh.

A final decision is expected shortly but a report to new prime minister Narendra Modi this month from India's powerful Intelligence Bureau, labelling Greenpeace as "a threat to national economic security", suggests the environmentalists face a struggle.

The coal block was allocated by a Congress-led government in 2006 to provide coal for Essar's planned power station and to fuel an aluminium smelter owned by Hindalco. But environmental clearances proved hard to secure and by 2010 the companies were frustrated.

Essar chairman Shashi Ruia decided to lobby prime minister Manmohan Singh personally. On 5 March 2010 he wrote to Singh to "earnestly request" clearance, pointing out that 65% of the work on the power station had been completed and complaining that three years after being allotted the coal block, the company was still waiting on permission from the environment ministry.

The delay, Ruia argued, would result in "avoidable huge loss to us as well as the country". Singh copied the letter to the environment and forest minister, Ramesh, with a note asking him to deal with it "expeditiously".

Six days later, Ramesh met Ruia. In a note of the meeting sent to the prime minister's permanent secretary, he pointed out that "the Mahan coal block should never have been allowed in the first place" and that giving permission for mining would "open up a Pandora's box which we should avoid at all costs".

Undeterred, Ruia tried again. On 16 August 2010 he wrote to Singh to update him on progress with construction of the power station and to ask again for clearance. "I would be very much grateful if necessary instructions are given to the Hon Minister of Environment and Forests to expedite necessary forest clearances at the earliest."

Ramesh refused to bend. In a letter dated 8 July 2011, he wrote that he was unable to agree to clearance for the project and was particularly concerned that the coal block lay in the catchment area of the Rihand reservoir. Instead, he suggested that the power plants be supplied by the Sohagpur coalfield.

In the letter, Ramesh said that he had taken into consideration that the companies had already invested about £360m in the power plants and that the chief minister of Madhya Pradesh had appealed to him twice to permit it on the grounds that it would boost economic activity in the state. But he complained that the investment had taken place without clearance and that "fait accompli has become far too common in forest and environmental clearances".

Shortly afterwards, he was switched to the ministry of rural development. A year later, his decision was reversed and in-principle approval was granted. In February this year, the project was given the green light. Even then, the decision came with conditions, among them the need for a resolution from the representatives of those living in the area – the gram sabha – supporting the project.

But the resolution, passed on 6 March 2013, is hotly contested. It contains the signatures of 1,125 people, although local campaigners say there were only 184 people present at the meeting. Greenpeace claims nine of the "signatories" are dead and has produced death certificates for two of those named. Several people have come forward to insist their signatures were forged. Among them is Kripanath Yadav, 36, of Amelia village. .

"Mahan forest is my provider, protector and God," he said. "I was born in the forest and I am aware that our constitution bestows on us rights on our forest.

"My signature along with several others including some people who are dead were forged during a gram sabha which was held to take people's consent on Essar's coalmine. "We don't want the mine, the jobs or the compensation that Essar tries to lure us with." Officials have promised a fresh vote in the next month.

Last month the former coal secretary PC Parakh was questioned for two days by detectives about a number of allocations, including the Mahan block, but no charges have yet been filed.

Priya Pillai, senior campaigner with Greenpeace India, accused the company of wanting to press ahead at any cost. "There's a lot at stake for the company, therefore it seems they want to build their mine even if it means the law of the land is bypassed," said Pillai.

It is not just environmental issues that have dogged Essar of late. The company's decision to delist from the London Stock Exchange and take itself private upset institutional shareholders, which included Standard Life, Scottish Widows and at least two UK local authorities. Many investors were angered by a deal that they argued undervalued the company and left them millions of pounds out of pocket. The company share price stood at 420p when it initially floated in 2010 but the minority shareholders were offered just 70p when it delisted in May.

But Ramakant Tiwari, CEO of Mahan Coal, said the companies had been waiting since 2006 for permission, had invested heavily in the project and had stuck to the letter of the law.

"In such a scenario, it was but natural for both companies to represent their case before the government."