Jack Walker, an adviser to Mr Pyne, Australia's Minister for Defence Industry, dropped his daks alongside eight friends at the Grand Prix in Sepang on Sunday, revealing budgie smugglers bearing the Malaysian flag.

The men, aged 25 to 29, chanted "Aussie Aussie Aussie, oi oi oi" for several minutes and wrapped themselves in Australian flags as they stood in the middle of a crowd, apparently celebrating a win by fellow Australian Daniel Ricciardo.

They then poured beer into their shoes and drank from them – mimicking Ricciardo on the dais – before posing for photographs with fellow spectators.

Some of those pictures show Mr Walker clad in an unbuttoned grey shirt with his shorts around his ankles and Malaysian flag underwear on display.

A spokesperson for Mr Pyne told Fairfax Media: "This matter is being handled appropriately by the Australian high commissioner. Until we have a clearer picture of the process at hand, it would be unwise to comment further."

Malaysia is a Muslim-majority country of 30 million where authorities take a dim view of acts of nudity by foreigners.

Sepang district police chief Abdul Aziz Ali told reporters the men are being investigated for breaching the peace, public indecency and disrespecting the national flag.

The men are expected to be held for at least four days while further action is considered. If charges are not laid, the men will almost certainly be deported from the country.

A witness, Dean Gillespie from Balmain, said the spectacle unfolded about 10 minutes after Ricciardo also drank from a shoe, when fans were walking down pit straight. Nobody in the immediate vicinity appeared offended, he said.

"There was a fantastic atmosphere, everyone was walking up pit straight and suddenly there was this big cheer. They stripped off in front of us. Everyone nearby stopped and sort of watched," Mr Gillespie said.

"It clearly wasn't spontaneous, because they had all dressed up as they did in the flags, but it just felt like they were a group of lads that were having a bit of a party."

The government-controlled New Straits Times newspaper reported divided opinion on the behaviour, with some finding it humorous while others considered it insulting and disrespectful to local culture.

Razlan Razali, chief executive of the Sepang International Circuit, said the men should be "locked up, investigated and action taken against them".

Australia's Department of Foreign Affairs and Trade said consular assistance was being provided to the men and would not comment further, due to privacy obligations.

Mr Walker has worked for Mr Pyne for three years in a variety of positions. Prior to that he worked for NSW Liberal Party powerbroker Michael Photios' lobbying firm PremierState and was an army reservist.

A friend and Liberal Party colleague described Mr Walker as "a really lovely guy" who was unlikely to have been the group's ringleader. "I think they would not have interpreted it as offensive ," the friend said.

Deputy prime minister Barnaby Joyce said the men "shouldn't have done it" but believed they acted out of stupidity rather than malice.

Treasurer Scott Morrison said the incident was a timely reminder for young people travelling overseas to know the local customs and respect them.

"They're their laws, their rules," he told 2GB radio. "They are on their ground, so you've got to comply."

The swimwear's Manly-based manufacturer, Budgy Smuggler, sells a range of flag-themed swimmers for $55 from countries including the US, France and Sweden.

In another political twist, the company was founded by Lachlan Harris, press secretary to former prime minister Kevin Rudd. Mr Harris tweeted that he sold the company "years ago" but supported the detained men.

"Sorry to see young blokes having harmless fun in trouble. Hope they get out ASAP. Ridiculous overreaction," he wrote.

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