The revelation that Sistema Shyam TeleServices and Reliance Communications are in talks about a potential merger will fuel hopes that consolidation is at last coming to the Indian mobile market.

Earlier this week, Sistema Shyam TeleServices Ltd. -- which trades under the MTS India brand -- indicated it was in discussions with Reliance Communications Ltd. about merging their Indian telecom businesses through a stock swap. According to sources subsequently cited by India's Business Standard, a deal would leave Sistema shareholders with a 10% stake in Reliance.

A merger would combine India's fourth-biggest mobile operator (RCom) with the country's only player still relying exclusively on CDMA technology to provide services. By reducing competition, it might go some way towards bolstering industry profitability. But it would also raise further concern about the long-term prospects for smaller Indian operators, which have continued to lose market share to the country's biggest service providers.

Indeed, the outlook for smaller players appears to have worsened following a recent spectrum auction that generated $17.5 billion for government coffers and saw Bharti Airtel Ltd. (Mumbai: BHARTIARTL), Vodafone India and Idea Cellular Ltd. -- the country's three biggest mobile operators -- all improve their spectrum positions. (See Idea, Airtel, Vodafone Splash Out on Indian Airwaves and India's Auction to Drive Consolidation.)

Sistema, meanwhile, chose to skip the sale entirely, feeling it could not afford the high base prices, while Reliance failed to renew several of its pre-existing 900MHz licenses, even though it did acquire new spectrum in the 800MHz and 1800MHz bands.

In that respect, a merger would bring together two companies with somewhat complementary frequency holdings and technologies as operators prepare for the launch of 4G services. Reliance is another operator with a CDMA network and its 800MHz and 1800MHz spectrum is ideal for supporting the rollout of 4G technology. Sistema, which also holds frequency licenses for the 800MHz band, appears eager to make the transition to 4G technology as soon as possible. (See MTS India Preps Move to 4G .)

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The need to develop a strong 4G offering has become more urgent now that new entrant Reliance Jio has promised to introduce 4G services in December. Using 2.3GHz spectrum, RJio aims to cover nearly 80% of the population by the end of the year and the entire country by 2018. Besides rolling out mobile infrastructure, RJio is also investing heavily in the deployment of a fiber-optic network. (See RJio to Launch 4G in December.)

Sistema has, of course, pointed out that discussions are "indicative and non-binding in nature" and said "there is no certainty that any transaction will result." But a tie-up could make a great deal of sense for both players given the challenges they will face in India's 4G market in future. And whether or not this particular deal goes ahead, consolidation seems likely to have a major impact on the Indian telecom landscape in the months to come.

— Iain Morris, , News Editor, Light Reading