Justice Narayanaswamy deferred their release to September 16 after a Special Investigation Team argued against granting bail to them prior to filing of the charge sheet.
Apart from Riaz, three other accused who were granted bail are television journalist M B Srinivasa Gowda, Shankare Gowda and Ashok Kumar.
Counsel for Riaz submitted that the arrest of his client was in violation of Sections 41 (when police may arrest without warrant) and 41(A) (notice of appearance before police officer) of Criminal Prodecure Code.
He also submitted that since the imprisonment punishment was for less than three-year period, the charges against Riaz was not that serious.
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SIT, in its counter, submitted that the accused should be granted bail only after a charge sheet had been filed against all the four accused and sought time till September 16 to do so.
Justice Narayanaswamy then directed SIT to file charge sheet against the four on or before that date.
Bhaskar Rao, a former High Court Chief Justice, had rejected the charges that his son was involved in the racket and said he would resign if the charge was proved correct.
Ashwin Rao, Lokayukta's son, was in July arrested by SIT. The issue had raised a storm both inside and outside the state legislature and there was growing pressure from opposition parties and various organisations for removal of Rao.