The Delhi High Court has granted bail to Avnish Bajaj, the head of Baazee.com, eBay's Indian subsidiary.

Delhi police arrested Bajaj on Friday in connection with the sale of a pornographic video CD on Baazee.com's online auction portal. He appeared before a magistrate in Delhi on Saturday and was remanded to seven days in jail at the request of police investigating the case.

In granting bail to Bajaj, a US citizen of Indian origin, the judge of the Delhi High Court asked him to surrender his passport and provide two collateral payments of 100,000 rupees (£1,180).

Bajaj's arrest has been criticised by legal experts and industry groups since he was apparently unaware that the video had been put on sale and had been co-operating with police. He was arrested under Section 67 of India's Information Technology Act, which relates to the transmission of obscene material through electronic media.

Baazee.com has argued through its lawyers that it was unaware of the content of the clip and that it removed it as soon as it was found to be pornographic. The MMS clip of two Delhi schoolchildren engaged in oral sex was allegedly recorded on a mobile phone by one of the participants in the act and forwarded to his friends. A student of the Indian Institute of Technology (IIT) in Kharagpur put it up for auction on Baazee.com.

EBay applauded the Indian court for its quick decision to release Bajaj on bail. The case raises issues that are important for the Internet's growth in India and eBay hopes to work with the Indian government to clarify the responsibilities of online service providers, it said in a statement.