In a major set back to Anil Ambani-led Reliance Infratel, a subsidiary of RCOM, its proposed deal to merge the telecom tower business of with GTL, India’s largest independent tower company has been called off. This was informed by GTL to stock exchanges on Monday.

RCOM is passing through financial crunch. This deal would have reduced RCOM’s debt by about 50%-60%. Now, the company will have to look for ways to reduce its debt.

“The Non-Binding Term Sheet signed by both parties dated June 27, 2010, expired on August 31, 2010,” the company said in a filing to the Bombay Stock Exchange.

“Despite efforts, both parties have neither extended the Term Sheet nor entered into any definitive transaction agreements as envisaged therein. Consequently, the process of merger as originally contemplated would not take place,” the filing added.

“Following the expiry of the non-binding Term Sheet with GTL Infrastructure Ltd., Reliance Communications Ltd. is now engaged in discussions with certain other strategic and financial investors, to pursue a similar transaction aimed at significant reduction in the Company's debt and unlocking of value for RCOM shareholders from the passive infrastructure and related assets in its 95% owned subsidiary, Reliance Infratel Ltd.,” said RCOM in a press statement.

“An appropriate further announcement will be made in due course. Owing to the provisions of mutual confidentiality agreements, RCOM cannot provide any comment on the reasons for the inability to conclude a transaction with GTL Infrastructure Ltd,” said RCOM.

On June 27, the boards of GTL, RCom and its subsidiary Reliance Infratel Ltd had given in—principle approvals to the Rs 50,000-crore ($11 billion) merger deal to create the world’s largest independent telecom infrastructure company, neither owned nor controlled by any telecom operator.

Though the two companies have not officially given any reason, sources say that one of the main concerns of GTL was maintaining neutrality of the new entity.

Reliance Infratel currently has 50,000 towers. Another 8,000 to 10,000 towers are under various stages of installation. Hence, within one year, Reliance Infratel will have about 60,000 towers. In three years, the company plans to have 75,000 towers.