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When the fire broke out around 0500 hours (IST), most of the inmates of the asylum, numbering over 40, were chained as per the normal practice, police said.
Fifteen bodies had been recovered so far and the toll is likely to go up, they said.
The fire, suspected to have been caused by a lamp burning in one of the shelters housing the inmates, was brought under control after a two-hour battle by fire tenders and local people, top police officials said.
Most of the bodies were charred beyond recognition, police said adding the alarm raised by some inmates was ignored by the people and asylum owners who mistook it to be their usual cries.
The asylum is run by a private firm and its owner charged that some 'mysterious persons' had set fire to the building. Police said they were investigating this accusation.
There are about 15 mental asylums, mostly private ones, around the dargah in the Erwadi area, believed to have powers to cure mentally challenged persons, and they house more than 1,000 such people, police added.
People from Tamil Nadu and neighbouring states bring mentally ill persons to Erwadi as they believe that praying at the dargah could cure the illness.
Many mental asylums are only thatched shelters.
The asylums came under close scrutiny of the National Human Rights Commission following reports that the inmates were being chained and treated in an inhuman manner.
There were complaints that even psychiatric patients who could be cured, were being admitted in the asylums.
The previous Dravida Munnetra Kazhagham (DMK) government had ordered a probe into the running of the asylums and also arranged for the transfer of psychiatric patients to government hospitals for free treatment.
ALSO SEE: Rs 50,000 compensation for asylum victims
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