Sir Richard Branson's year-long effort to sell mobile phones in India, the world's fastest-growing market, faces derailment only days after finally getting under way.

On Sunday Sir Richard's Virgin Group announced a partnership with Tata Indicom, under which the Indian company would market a mobile service under the Virgin brand to young consumers.

However, a powerful industry group, which includes Vodafone, the world's largest mobile operator, has demanded that the Indian Government declare the deal void. The Cellular Operators' Association of India argues that Virgin is entering the market via the back door as an illegal “mobile virtual network operator (MVNO)”, whereby it effectively buys mobile capacity wholesale from Tata and sells it under its own brand, a business model that is not permitted in India.

Sources close to the process confirmed that the Indian Ministry of Communications and Information Technology had asked for details of the deal but that no decision had been made. They said it was possible that the Government would relax the rules on MVNOs in the near future. The ministry said that Virgin could be ejected from the Indian market. “The spectrum was allocated to Tata. It is up to Tata to intimate any transfer of that spectrum to the department,” it said. “We are not aware that they did and it is possible we will not allow them to operate.”

Virgin Mobile India, the company formed to run the service, said: “Our agreement does not involve selling of bulk airtime and so isn't an MVNO.” Virgin Mobile India and Tata insist that they have a legal franchise agrement.

Being denied access to India would be a blow to Sir Richard's ambitions. While Western markets are largely saturated, it is estimated that more than 870 million Indians do not own a mobile phone.

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