The 45-year-old filmmaker was sentenced last year to seven years in prison by a Delhi court which convicted him of raping an American research scholar who was visiting India.
The High Court today said that the woman's complaint seemed to have inaccuracies.
The 35-year-old woman, a scholar from Colombia University, during in-camera proceedings, had alleged that Mr Farooqui raped her at his Sukhdev Vihar home. She returned to the US shortly after the alleged sexual assault in 2015, but came back to report the matter to police.
"Peepli Live", which explores the divide between urban and rural India, was produced by Bollywood superstar Aamir Khan. Mr Farooqui co-directed it with his wife, Anusha Rizvi.