The action against Lt Gen Prakash comes days after Defence Minister A K Antony advised the army chief to take disciplinary action.
Lt-Gen Prakash is involved in the scam along with two other lieutenant generals and a major general.
He is due to retire on Jan 31 and is the seniormost of the four generals indicted in the multi-crore scam.
His punishment could vary from dismissal from service to cut of pay and pension. Depending on the severity of the offence, he could ever face imprisonment.
Earlier, Gen Kapoor had recommended only administrative action against Lt Gen Prakash, leading to a wave of protests.
The court of inquiry was headed by Lt Gen VK Singh, who will be the next army chief.