The arrests centre on a deal made between AWB and the Indian state trading corporation in 1998 over the sale of two million tonnes of Australian wheat.

As part of the deal, AWB paid $2.5 million into an offshore bank account.

It is this transaction that Indian officials are investigating.

Indian authorities claim the price paid for the wheat was above the going rate at the time.

And they claim India did not need wheat supplies at the time of the deal.

Allegedly, other bidders for the wheat tender were rejected on spurious grounds in order to allow AWB to get the contract.

The arrests mark the culmination of a long push by India's Bureau of Investigation to look into the incident.

Its attempts to look into the matter in 2001, 2004 and 2006 were foiled by the former Australian Coalition government and its lack of support.

But the Federal Labor Government has instructed the Australian Federal Police and the Attorney General's office to cooperate fully with the Indian investigators under mutual assistance legislation.

The Indian affair marks another major bribing scandal for AWB, whose payments to the Saddam Hussein regime in Iraq led to an overhaul of Australia's export wheat arrangement.

AWB has said it is co-operating fully with the AFP to provide all the documents necessary for the inquiry – saying it handed over 120 documents related to the 1998 contract earlier this year.

The deal was done before AWB was privatised, when it was still a state trading enterprise, being run as the Australian Wheat Board.

The two Indian men arrested were the head of the Indian state trading corporation and a middleman.