The 66-year-old Rashtriya Janata Dal leader was arrested in September after being found guilty of embezzling government funds while he was Bihar Chief Minister. He was sent to jail for five years.
The fact that he can leave prison will gladden his party, which ran the risk of being perceived as leaderless just months away from the national election. Lalu's wife, Rabri Devi, had taken charge of the RJD. In 1997, when he was first arrested in the case, she took over as chief minister.
"His release will have a huge impact in Bihar," said his party colleague Raghuvansh Prasad Singh.
Mr Prasad can't contest the election. After he was convicted, Mr Prasad was disqualified as a parliamentarian and banned from contesting elections for the next six years, both rules set by a recent Supreme Court verdict which calls for barring MPs convicted in corruption cases.
While granting him bail today, a bench headed by Chief Justice P Sathasivam said, "Similar accused have already been granted bail and Lalu Prasad was in jail for a year out of his five-year sentence."
The CBI had told the Chief Justice that Mr Prasad "should not run away."
Senior lawyer Ram Jethmalani had argued that barring Lalu Prasad, no other convict in the case has been refused bail. 44 people were convicted in the case, he said, of whom 37 have already been granted bail.
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