Basa Eswara Reddy, the accused, had demanded Rs 2 crore from Dr K V Raman, owner of a nursing home in Gajuwaka area, police said.
On October 22, an anonymous caller demanded a ransom of Rs 2 crore from Dr Raman, threatening to kidnap and kill his family members if he didn't cough up the money, they said.
After 'negotiating' in the subsequent calls, he agreed to accept Rs one crore, said Deputy Commissioner of Police G Ram Gopal Naik.
The accused had asked Dr Raman to come to GAIL office with the first installment of Rs 50 lakh yesterday. Police had set a trap and arrested Reddy when he took a bag from Raman near the GAIL office.
Reddy worked as a technician with private contractors at Visakhapatnam Steel Plant and had been arrested for a fraud at his work few months ago, police said.
Police have registered a case of extortion and criminal intimidation against him.