Mallya was arrested at a central London police station by officers from the Metropolitan Police's Extradition Unit Tuesday morning "on behalf of the Indian authorities in relation to accusations of fraud", according a police statement.
Mallya, 61, secretly fled India in March past year, owing more than US$1 billion (S$1.4 billion) after defaulting on loan payments to state-owned banks and allegedly misusing the funds.
Scotland Yard said Mallya, who fled to the United Kingdom from India to avoid arrest in relation to £1bn of unpaid debts, was arrested on an extradition warrant on Tuesday.
In February, the Indian government handed over to British authorities a formal request for Mallya's extradition, saying it had a legitimate case against him on charges of financial irregularities and loan default.
Finance Minister Arun Jaitley today said investigative agencies are doing their best to ensure extradition of controversial businessman Vijay Mallya, who was arrested in London yesterday and later released on bail.
Mallya appeared before Westminster magistrates court and was bailed to return for an extradition hearing at a later date. But sources close to Mr. Mallya asserted that it was a voluntary arrest and he was let off on bail within three hours.
India had submitted an extradition request to Britain in early February. The development was an outcome of the extradition request by India pursuant to orders from a Mumbai court in two different cases against the liquor baron and founder of the now-defunct Kingfisher Airlines.
Mallya, who has thrown lavish parties attended by fashion models and Bollywood stars - and was once hailed as India's Sir Richard Branson - co-owns the Sahara Force India Formula One team. And lastly, the magistrate made a decision to grant him bail instead of remanding him in custody on a bond of £650,000.
Mallya, 61, appeared to downplay the charges in a Twitter post on Tuesday. The ED also will file its first chargesheet against Vijay Mallya and others in the IDBI bank loan default case. In reply to a tweet, Mallya said the case has to be decided on merits and evidence.
Since Mallya left the country, the government has been looking at steps to bring him back, he said.