A judicial report made public on Monday said Natwar Singh had helped close contacts procure oil contracts, but had not benefited personally.
The party said Mr Singh had been given two weeks to explain why it should not expel him, as a political row grew.
Mr Singh denies wrongdoing and has said he is being made a scapegoat.
In response the announcement, he declared that he was ready for a "decisive battle", the Press Trust of India reported.
"I am a man of strong nerves. I won't take things lying down," he was quoted as saying.
