Sharma is already facing a murder case in connection with the fake encounter killing of Chhota Rajan gang member Lakkhan Bhaiya and is in jail.
Another encounter specialist Daya Nayak, who was reinstated in police force a few months ago, is also an accused in the extortion case.
According to complainant Tariq Ahmed, a scrap dealer from suburban Kalina, on March 19, 1997 when he was travelling in his car, he was stopped by Nayak, Sharma and five others.
However, 15 days later, Nayak allegedly called Ahmed and demanded more money. Ahmed then filed a complaint with the National Human Rights Commission (NHRC) which directed the Police Commissioner to inquire into these allegations.
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State CID had in 1999 filed a chargesheet which named only Nayak. But Ahmed moved the magistrate's court in 2008 seeking to add Sharma's name as an accused.
A hearing is likely on June 27.