Ofcom, the independent regulator and competition authority for the UK communications industries, launched its investigation after 46,000 or more complaints were received over Shetty's racism row in the television series in January.
Fellow contestants Jade Goody, Danielle Lloyd and Jo O'Meara allegedly ganged up against Shetty during her stay in the Big Brother house. Shetty became the subject of their snide and biting comments because of her svelte figure, poise and charm, good dressing sense and background as a popular Bollywood actor.
The racist comments caused outrage in India and Britain with the issue figuring in the House of Commons and even two Indian ministers demanding corrective action.
Shetty finally won the reality TV show and bagged an estimated 100,000 pounds (almost Rs.9 million) in prize money.
Ofcom's adjudication report Wednesday concluded that Channel 4 breached the broadcasting code after making "serious editorial misjudgements" that were "compounded by a serious failure of its compliance process".
As a result of the breach, a statutory sanction will require the channel to air a summary of Ofcom's findings on three occasions during the new series of "Big Brother" starting next week, the Guardian reported.
"Ofcom takes allegations of racist abuse and bullying on television extremely seriously. An unprecedented number of complaints were received and whilst 'Celebrity Big Brother' was still on-air, we launched a full investigation," said Ofcom chief executive Ed Richards.
"Broadcasters must be allowed to air controversial material but when they do their compliance and editorial procedures should be even tougher and sharper," he added.