"Alibhai tells the story of Anwar Ali (Mohanlal) known as Alibhai a King ""Dadha"" of Palayam market, Kozhikode. He is the unquestionable hero in that area and savior of the poor and downtrodden. The movie opens with the flashback sequences which establish young Ali, a member of a barami family famous for making Urus, who leaves his home in his childhood when his own father Ahmed Sahib (Innocent) mistakes him for an unexpected thief and beats him black and blue in front of people. Ali's friends Sundaran Thampi (Siddique), tells the mob he saw the theft which was actually done by himself for avenging his fathers rivalry with Ahmad Sahib. Ali knowing he was cheated by his friend grab the butcher sword and chops off his hand and flees from his home to the Palayam market. He never backs out from a fight where he grows up as Alibhai, an undisputed leader of the proletarian class, one who stands up to speak for them and even to clench his fists and fight for them and their rights. The son grows up to be a good-hearted toughie.

There are many whose lives revolve around Alibhai. There is Kunjikannan, known popularly as Market Kunji, who is Alibhai's mentor and sort of guardian. There are a bunch of friends and well-wishers who form his gang, including Hameed, Salim Babu, Ramu, Podipaatti Kunjaattu, Sameer Das, Vijayan, Dasappan and a little boy Ganapathy. There is the flower girl Chenthamara who loves him deeply, and there is young Kingini, who is brought up by Alibhai just as a father brings up his daughter. Then comes another girl Ganga, who is given refuge by Alibhai under some special circumstances. He also looks after Abraham, who earlier used to rule over the Palayam market as a goonda, and who was defeated in a fight by Alibhai, following which he was so badly injured that he has been bedridden ever since. All these and many others constitute the near and dear ones of Alibhai.

Once in a while Alibhai goes to his own house to meet his mother and to secretly leave behind a gift for his father, whom he loves dearly. But all this is destined to change when Sundaran, who was actually the one who had plotted against Ali in his childhood resurfaces after a long time and with a remorseful heart, begs of Ali to forgive him and to return home. At almost the same time someone else appears – Danny Abraham, the son of Abraham, who has certain motives of his own. From here Alibhai's life is destined to change dramatically. They wanted to drive out Alibhai from the market and build a shopping mall with the help of local politicians. They are hand in glove with the city corporation and the state administration and are having the aid of big investors from foreign countries. They are into anything, to settle their old scores and change the Kozhikode city into an international tourist centre which provides fun, wine and women. How Alibhai resists their attempts to save the market and the city. At one stage, they planted a bomb and killed many of his friends and neighbours, including his foster daughter. Ali bhai kills every one behind it single-handedly and become the godfather of that area."