Vodafone's Indian subsidiary has agreed to merge with Idea Cellular in a deal that will create the country's largest telecom operator.

The two companies announced an all-share tie-up on 20 March, with Vodafone owning 45% of the combined entity and Aditya Birla Group – the conglomerate that owns Idea – holding a 26% stake.

The merger will create the widest mobile network in India and the country's largest telecom company in terms of revenue and subscribers.

It comes amidst the emergence of Reliance Jio Infocomm – backed by billionaire Mukesh Ambani – as a major player in India's telecoms sector.

Jio offered free voice and data when it launched in September last year, forcing competitors such as Bharti Airtel and Vodafone to slash tariffs to remain competitive.

"The combination of Vodafone India and Idea will create a new champion of digital India founded with a long-term commitment and vision to bring world-class 4G networks to villages, towns and cities across India," Vodafone chief executive Vittorio Colao said.

"The combined company will have the scale required to ensure sustainable consumer choice in a competitive market and to expand new technologies – such as mobile money services – that have the potential to transform daily life for every Indian.

"We look forward to working with the Aditya Birla Group to create value for all stakeholders."

John Colley, a professor of practice at Warwick University, said the Vodafone-Idea deal could be first of many mergers in the Indian telecoms sectors as companies vie to stay competitive in the midst of a price war.

"The merger will have 400 million users and around 35% of the market. It will also have the lowest cost per user in a very competitive market with around 10 players," he said.

"This is likely to stimulate a spate of mergers between the other competitors in an attempt to reduce their costs. Vodaphone/Idea, with their cost base, will be able to undercut all the other competitors."

As part of the merger agreement, Aditya Birla Group has the right to acquire more shares from Vodafone under an agreed mechanism and achieve parity in shareholdings over time.

Vodafone will also deconsolidate Vodafone India and if Vodafone and Aditya Birla Group's shareholdings in the combined company are not equal after four years, Vodafone will sell down shares to equalise its shareholding with Aditya Birla over the following five-year period.

Vodafone and Idea intend to sell their standalone tower assets to reduce leverage in the combined company. The merger, which is subject to regulatory approval, is expected to be completed next year. Aditya Birla chairman Kumarmangalam Birla will take over as chairman of the combined company.