Shares in Diageo rose almost 2% to 1754p after it revealed it had started discussions about buying a stake in Vijay Mallya's Bangalore-based United Spirits.
Glasgow's Whyte & Mackay, which also includes single malt brands such as Dalmore and Jura, was acquired by Mr Mallya for £595 million in 2007.
Diageo and United Spirits released a joint statement yesterday confirming initial discussions had taken place but cautioned there was no certainty a deal would go ahead.
Talks between the two businesses previously collapsed in 2009 after they failed to agree a price.
However, Mr Mallya is known to be keen to raise cash to reduce the debt pile of companies in his portfolio, including United Breweries and Kingfisher Airlines.
The chance to increase its presence in India plus take control of several more brands is thought to appeal to Diageo.
Whisky industry analyst Alan Gray, of Sutherlands in Edinburgh, said: "The prospects in India are quite exciting.
"There is a growing middle class and they are aspiring to western items such as Scotch whisky.
"It has looked for some time as if United Spirits might be up for sale and one of the most obvious candidates would be Diageo."
Mike van Dulken, head of research at Accendo Markets, said: "An acquisition of a stake would certainly provide Diageo with an improved in-road into India, where an ever-growing and lucrative middle class is seen providing enhanced demand for high-end and aspirational consumer items, but where import duty on alcohol is very high and internal regulations provide major hurdles to outsiders."
Some analysts believe Diageo plans to take more than half of Mr Mallya's 28% stake in United Spirits plus snap up shares from smaller investors to build up a 25% holding.
That would mean it has to launch an open offer for at least 26% more of the shares to give it a controlling stake.
Mr Gray said: "There is no way in my view Diageo would want to end up being a minority shareholder."
If that happens it would also remove Mr Mallya's place as the largest shareholder in United Spirits.
It finished the day 9% ahead on the Bombay Stock Exchange at 1147 rupees.
Banking sources said Diageo may offer between 1200 and 1300 rupees per share to make the deal happen.
Analysts at Kepler Capital Markets estimated that United Spirits could raise up to £500m by selling a 25% stake to Diageo.
Mr Mallya, who also owns the Force India F1 racing team which Scottish driver Paul di Resta races for, faced investors at an annual general meeting for United Spirits yesterday but he made no comment regarding any potential deal with Diageo.
The entrepreneur has further AGMs at United Breweries and Kingfisher Airlines this week.
It is not yet clear whether competition watchdogs may step in and ask Diageo to offload Whyte & Mackay as a condition for a deal going through.
Mr Gray added: "It is possible the authorities could look at it as it a few more malt distilleries being taken over but Diageo have about 28 just now and in the past had more than 40.
"I don't see competition worries scuppering the deal."
A spokesman for Whyte & Mackay said: "We have no comment to make. This is a discussion between our parent company United Spirits and Diageo.
"Meanwhile it is business as usual at Whyte & Mackay."
Whyte & Mackay made a pre-tax profit of £12.4m in its most recent accounts, down from £31.7m in the preceding year, after turnover dipped 20% from £211m to £169m.