The highly acclaimed film had Om Puri, Amrish Puri, Smita Patil, Naseeruddin Shah, and Sadashiv Amrapurkar in the lead.
The movie followed the story of a policeman, played by Om Puri, struggling with the evils around him and with his own frailties.
"We are working on the sequel of 'Ardh Satya'. Producer Manmohan Shetty has been really keen to make a sequel. We were toying with this idea since long time. Finally we have decided to go ahead with it," Nihalani told PTI.
"The story will move ahead as the original story ended with cop (Om Puri) behind the bars. So we explore what happens when he comes out of jail as an old man after serving his sentence for killing the goon Rama Shetty," he said.
"Ardh Satya" considered to be one of the best cop films made in India, had won many awards and it went on to become a landmark project in the history of cinema.
"We thought of it to call 'Ardh Satya 2'. We are still working on the script and hopefully by the end of this year or early next year we will go on floors," the 71-year-old said.
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At a time when cop dramas like "Dabangg", "Singham" are doing well at the box office, this seems to be the right time for the sequel.
Ask the filmmaker about the same and he says, "We are not cashing in on anything. The idea of a sequel was thought of long back. Its just that things have finalized now. The sequel will be very much different from the kind of cop dramas that we have seen recently."
"'Ardh Satya 2' will be a contemporary cop film not a remake of any South movie. Ours is a fresh story," Nihalani said.
The makers have not yet finalised the star cast for the sequel, but they hope to retain veteran actor Om Puri.
"We would love to have Om Puri in the film. His character in the sequel will be of an older man. Apart from this, we have not thought of the main star cast yet," Nihalani said.