Telenor’s Indian unit, Uninor, is reportedly in discussions to acquire a majority stake in smaller rival Videocon Telecom for as much as INR100 billion ($1.56 billion).

Uninor currently has less than a 5 per cent share of the market with about 45 million mobile connections, while Videocon has just seven million connections, according to GSMA Intelligence.

The Economic Times, citing a source familiar with the talks, said a major obstacle to a deal is the INR5 billion Videocon owes the Department of Telecom (DoT).

Videocon was one of nine mobile operators, including Uninor, that the DoT demanded pay a one-time spectrum charge for providing services between February 2012 and February 2013, even after India’s high court cancelled their permits in February 2012. All nine operators are fighting to avoid having to pay. That liability needs to be resolved before any deal can move forward.

The person told the Times that Videocon is looking to exit telecoms while Uninor aims to expand through acquisition. Both parties are said to be negotiating a valuation, but a large gap remains.

Videocon chief executive Arvind Bali confirmed that the company is in talks with “international companies”, the Times reported.

Uninor CEO Vivek Sood previously told the Times that Videocon Telecom was “a viable option” for a buy. “There is an obvious compatibility since both of us have liberalised spectrum.”

Uninor obtained 1.8GHz spectrum in a previous auction, which means it wouldn’t need to pay the government more if it acquires bandwidth in the same band. The country’s M&A rules require a buyer to pay market-linked price for spectrum that it gains through an acquisition if the target’s spectrum is allocated outside of auctions. The has been a major stumbling block in past M&As.

Uninor and Videocon have overlapping spectrum in four regions. But since both are small, a combined company wouldn’t have close to the 50 per cent market share restriction.

Videocon’s Bali acknowledged that entering into new a region, or circle, is becoming unviable for a new player at current spectrum prices, the Times said.