Telenor, which won rights to operate in six Indian zones in an auction this month after its earlier permits were ordered to be revoked, is looking to take a majority stake in the merged entity, the source said.
The deal will see India's Tata Group cutting its stake in unlisted Tata Teleservices, the country's No. 6 mobile phone carrier, said the source, declining to be named due to the sensitivity of the matter.
The merged entity will be ranked No. 5 by customers.
Japan's NTT DoCoMo, which owns a 26 per cent stake in the company, will retain its holding in the combined entity, the source said.
Telenor and Tata Teleservices declined comment. NTT DoCoMo could not immediately be reached for comment in Tokyo outside their business hours.
With more than 900 million mobile phone customers, India's mobile phone market is second only to China.
The crowded market, which boasted 15 players until the first half of this year, is ripe for consolidation, analysts have said, as competition and rising debt levels eat into profit margins.
However, there have been few deals, mainly due to regulatory uncertainty and strict government rules on ownership and airwave holdings.
A cabinet decision this month determined that companies buying a carrier that paid a low state-set price for airwaves must match a far higher price determined in a recent auction and pay the difference to the government.
Singapore state investor Temasek owns about 7 per cent of Tata Teleservices, while Indian businessman C. Sivasankaran holds about 8 per cent. It was not immediately clear if their holdings would change if the deal goes through.
Telenor, which earlier operated in 13 Indian telecom zones, will now be reduced to six zones with 34 million customers, while Tata Teleservices has permits for all of India's 22 zones.
Copyright @ Thomson Reuters 2012