Two men have appeared in court in West Bengal over the alleged mis-selling of kits which were used to test people for HIV/Aids and hepatitis.
Govind Sarda and his brother Ghanshyam were denied bail
Police say Monozyme India sold hundreds of thousands of the kits, originally designed to test for pregnancy or other conditions, under false pretences.
Doctors say this led to infected people being given the all-clear, and going on to give blood and infect others.
The company's owners deny charges of malpractice and forgery.
Calcutta-based Govind Sarda and his brother Ghanshyam say the kits were mistakenly distributed after a consignment of what were believed to be HIV/Aids testing kits were delivered to India from China.
The pair were denied bail at their court appearance on Monday.
'Past expiry dates'
Calcutta police detective Gyanwant Singh said nearly 90,000 blood diagnostic and pregnancy testing kits, all in use well beyond their expiry dates, had been seized from various blood banks and hospitals in West Bengal during the past 20 days.
He added that police inquiries had revealed that the faulty kits may have been supplied to at least eight other Indian states.
Blood donations are now reported to be dropping
One official said he knew of at least 117 people who were given the wrong diagnosis as a result of these kits - but added there could be very many more.
The kits were supplied between April - when Monozyme won the government contract to distribute them - and August, when large-scale complaints against them were first reported.
By then, Monozyme is believed by police to have supplied nearly 200,000 kits to hospitals and blood banks in West Bengal alone.
The BBC's Subir Bhaumik in Calcutta says many blood banks across West Bengal are now scared of taking new blood donations. Youth clubs, which have frequently organised blood collections, have stopped doing so, our correspondent says.
Blood banks in the state are now reported to be running short of supplies.
People like 22-year-old Shampa Das have been devastated. She was suffering from thalassaemia and needed regular blood transfusions.
Doctors say that she was probably infected with HIV during one such transfusion at the Central Blood Bank at Manicktala in northern Calcutta.
Monozyme is based in the state of Andhra Pradesh, and has 256 distributors across India - including 12 in Calcutta.