The move had been anticipated ever since Tech Mahindra stepped in to rescue scandal-hit Satyam and bought a stake of about 43 per cent back in April 2009.
Hyderabad-based Satyam was then close to collapse after its founder, Ramalinga Raju, had admitted to overstating profits and falsifying assets in India’s biggest case of accounting fraud.
The latest deal gives shareholders one Tech Mahindra stock for every 8.5 shares of Satyam, the companies said in a statement this week.
The transaction will be formally closed in six to nine months and the combined company will have over 75,000 staff globally.
Tech Mahindra's vice-chairman, Vineet Nayyar, said: “Satyam has reached normalcy. We saw this as the right time to merge.”
Tech Mahindra's founder, the Mahindra Group, held a stake of 48 per cent in Satyam and Britain's BT Group Plc owned 23 per cent at the end of December 2011.
Tech Mahindra, which provides IT services and solutions to telecom companies, said the parent company would own 26.3 per cent in the merged entity, while BT would hold 12.8 per cent.
The combined entity expects to be better positioned to compete with rivals such as sector leader Tata Consultancy Services (TCS) and India's second largest IT exporter Infosys for large outsourcing contracts from global corporations.
The merger comes as India's software industry is forecast to enter a period of slower growth, given the tough business conditions faced by clients in the United States and Europe.