Recording his statement before a special CBI court here, Rai said he was under "no pressure, threat or coercion" to reveal the facts in the case and was "repentant" about his act.
The development came after Rai, an accused, wrote a two-page letter to the court last week seeking pardon in the case while stating that he wants to reveal the truth.
The judge questioned Rai if he had written the letter from the jail to which he replied in the affirmative.
When the judge asked how Rai knew about the incident, he replied, "I was present at the time of murder and was a participant."
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He also told the court that Sheena was killed by strangulation.
The court later directed CBI to file its reply on May 17 over Rai's plea to turn approver in the case. It also asked Thane Jail Superintendent and Thane Police Commissioner to ensure that Rai is produced in the court on the next hearing.
However, their lawyers said that even if the court accepts Rai's plea and makes him an approver, their case won't be affected.
"Its not CBI's case that Rai ever communicated with Peter during the course of murder and there's no evidence against him," said Peter's lawyer Mihir Gheewala.
Khanna's lawyer advocate Shreyansh Mithare also echoed the same view and said that this new development won't have any impact on their case.
While Indrani's lawyer Mahesh Jethmalani refused to comment on the fresh turn in the case, saying he will first have to go through the statement of Rai.
The killing came to light after Rai was picked up in connection with an arms case and later spilled the beans.
Rai last year had recorded his confessional statement before the magistrate under the provisions of section 164, which unlike the police statement, is admissible in the trial.
Two days ago, the court had castigated Thane jail
officials for failing to produce Rai before it and had warned of contempt proceedings while directing them to bring him today.
The court had also directed CBI to file its written submission on Peter Mukerjea's bail plea on May 13, failing which the court said it will fix the matter for passing the order. Peter's bail application had been rejected in the past.
While Peter (59) and Khanna are lodged in Arthur Road prison, Indrani (43) is in Byculla womens' jail.