A group of analysts has estimated that the pair would command a combined revenue market share of 43 per cent.
British mobile phone giant Vodafone will merge its Indian unit with Idea Cellular to create the country's largest telecoms operator, the firms said on Monday.
"Vodafone Group Plc and Idea Cellular today announced that they have reached an agreement to combine their operations in India," they said in a statement to the Bombay Stock Exchange (BSE).
"The combined company would become the leading communications provider in India with almost 400 million customers, 35 per cent customer market share and 41 per cent revenue market share," the statement added.
Aditya Birla Group chairman Kumar Mangalam Birla will become the chairman of the new entity, it was also announced.
The confirmation ended months of speculation that the two operators were ready to sign a deal to help fend off Reliance Jio, whose recent arrival has shaken up India's ultra-competitive mobile network market.
Reliance Jio, which began operations last year, is owned by India's richest man Mukesh Ambani.
The 4G Jio network launched in September with an audacious free service for the rest of 2016, followed by vastly cheaper data plans and free voice calls for life.
It forced rivals to dramatically slash their tariffs and left them scrambling to match the deep pockets of Jio, which is backed by India's hugely wealthy energy-to-chemicals conglomerate Reliance Industries.
Shares in Idea rose almost four per cent in Mumbai following announcement of the Vodafone deal.