"Sanjay will play the lead role. It is through him that we will see the valley and what is happening there," told Dholakia, who plans to steer clear of the troubled region's politics or militancy and focus on its people instead.
"It is film that would project how people are living in Kashmir and how people are living with multiple identities. It is a thriller for sure and I don't intend to use the popular song and dance sequences in the movie, which will have a serious theme."
The insurgency in Kashmir has killed more than 40,000 people since it began in 1989, affected tourism and has led to the region becoming one of the most heavily militarised in the world.
Dholakia however did not reveal the title of the film or its release date.
Sanjay, 47, has starred in another film based in the region, "Mission Kashmir", in which he played a police officer.
The actor, who has been found guilty of buying and possessing arms in connection with the 1993 Mumbai bombings that killed more than 250 people, is yet to be sentenced.