During arguments in court today the prosecution said it had no objection to conditional bail for Ms Jayalalithaa.
J Jayalalithaa, 66, was arrested for corruption late last month after being convicted by a Bangalore trial court.
Her trial was moved in 2001 to neighbouring Karnataka from Tamil Nadu to ensure it would be free of political influence.
Ms Jayalalithaa has appealed against her conviction and asked for bail. She is being represented by famous lawyer Ram Jethmalani, who quoted precedent in past cases and even Oscar Wilde today as he argued for bail.
Outside court, a huge number of supporters are waiting for an update on their leader. In Chennai, special prayers were organized by members of Ms Jayalalithaa's party, the AIADMK. Her arrest had triggered massive protests.
Ms Jayalalithaa says she has wrongly been convicted of misusing her first term as chief minister from 1991 to 1996 to collect assets worth nearly Rs. 50 crore, which were incommensurate with her declared income.
Her conviction meant that as per last year's landmark Supreme Court order, she was immediately disqualified from office.
She was sentenced to four years in prison and penalized Rs. 100 crore; three of her aides, including live-in friend Sasikala Natarajan were also found guilty.
She has been replaced as Chief Minister by loyalist O Panneerselvam.
Since her arrest, many top leaders from her party, the AIADMK, have lined up to meet her in jail; she has refused to see most.
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