Vodafone India is the second biggest provider of mobile services in India after Bharti Airtel, while Idea Cellular is third.
The UK-based operator confirmed it was eyeing a merger after reports emerged over the weekend claiming Idea-parent Aditya Birla Group and Vodafone had been locked in talks about a deal.
Vodafone said in a statement: “Vodafone confirms that it is in discussions with the Aditya Birla Group about an all share merger of Vodafone India (excluding Vodafone's 42% stake in Indus Towers) and Idea. Any merger would be effected through the issue of new shares in Idea to Vodafone and would result in Vodafone deconsolidating Vodafone India.
“There is no certainty that any transaction will be agreed, nor as to the terms or timing of any transaction.”
The deal would not include Indus Towers, the infrastructure firm that Vodafone has a 42% stake in. The rest of Indus is owned by Airtel (also with a 42% shareholding) and Idea, which holds a 16% stake.
Vodafone has faced difficulties in the Indian market, and was forced to write down the value of its Indian unit by £4.3 billion in November.
The Indian market has been thrown into a price war following the launch of Reliance Jio last year. Jio is offering some mobile services for free and has signed up more than 72.4 million subscribers in just four months.
Jio has had an immediate impact on the profits of its Indian rivals, with Bharti Airtel reporting its lowest profit for four years in the final three months of 2016.
The launch of the service, which is backed by India’s richest man Mukesh Ambani, has also caused a number of legal disputes which regulator TRAI is currently trying to resolve.
Idea last week asked a court to intervene over a penalty Trai has recommended the Department of Telecommunications impose on the mobile operator. Trai asked the DoT to fine Idea 9.5 billion rupees ($137 million) for allegedly not providing interconnections to Jio.
Similar accusations and potential penalties have been launched against both Vodafone and Airtel, with Jio blaming its rivals for a high number of dropped calls involving its network. Vodafone and Airtel have both denied any wrongdoing.
