Gursewak Singh alias Babla (51) was allegedly trying to collect funds to revive the KCF and was in touch with gangs in Delhi with a plan to commit bank robberies, they added.
He was arrested yesterday from National Highway 8 at Mahipalpur and a "sophisticated" pistol, loaded with four cartridges, was seized from his possession, police said.
Gursewak was an associate of Jarnail Singh Bhindranwale who was killed during the army's Operation Blue Star in 1984.
Gursewak had twice managed to run away from the custody of police, once in Delhi and once in Rajasthan, he added.
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In the 1980s, Gursewak was involved in over 50 cases of terrorist activities, murders of police officials and informers, bank and police station dacoities etc. In Punjab, Delhi, Rajasthan and Madhya Pradesh, said Ranjan, adding that his elder brother Swaran Singh was a member of the militant group run by Bhindranwale.
In May 1984, Gursewak and other KCF members allegedly killed the Group Editor of Hind Samachar newspaper, Ramesh Chander, in Jalandhar, said Ranjan, adding that the scribe was a "vocal critic" of Bhindranwale.
He was arrested in 1984, following an encounter with Ludhiana Police, while the other members of his group were arrested by the army post Operation Blue Star.
In June 1984, Bhindranwale was killed and most of his associates, aided by Pakistani intelligence agency ISI, fled to that country, said Ranjan.
This was the period when he and his associates were allegedly involved in dozens of murders of suspected informers of Indian security agencies as well as bank dacoities in Punjab, Delhi and Rajasthan.
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In 1985, Gursewak managed to flee from police custody at Bhilwada railway station in Rajasthan. He was being taken to a court in Jaipur.
That year itself, he and his associates killed eight Punjab Police personnel in a court complex in Jalandhar, while helping then KCF chief Labh Singh and militants Gurinder Pal Singh Bhola and Swaranjit Singh to flee from their custody.
From Tihar Jail, he managed to contact his bosses in Pakistan and asked them to supply a huge cache of arms and ammunition, including AK-47 rifles, as he was planning to commit "a big crime" in the national capital, police said.
The plot was foiled by Delhi Police and two suspected terrorists were arrested in connection with it in 1998.
Gursewak has told the police that the ISI used to supply "huge amounts" of drugs and fake Indian currency for circulation to the terrorist group he was associated with, said JCP (Crime) Praveer Ranjan.
The investigation in the matter was handed over to the Special Cell but, he was arrested by Ludhiana Police after a week from Punjab.
Gursewak again spent six years in jail, from 2004 to 2010. After coming out on bail, he changed his house in Punjab and did not appear in courts during the trial of the cases against him. Subsequently, he was declared a proclaimed offender by the Patiala House court in Delhi.
Gursewak continued with his criminal activities and was thrice arrested by Ludhiana Police in connection with robbery and other cases in 2014, 2015 and 2016.
A team, led by Deputy Commissioner of Police Bhisham Singh, laid a trap and arrested him.