There is no such cancellation of licence, but there can be suspension of license by the Licencing officer if he finds that the licence has been obtained by misrepresentation or if the rules are not being followed by the Contractor. He can also amend it. The licence will stand cancelled if he does not renew it after its expiry.
Now if he does not want to be a contractor, he can terminate the contract with you. After that you can issue form VI to his relatives so that he can take a fresh licence in his name and continue working with the same employees. These are the possible ways by which he can get way from the legal formalities. But I would say that, as a principal employer, you should not encourage it. Keeping the employees unchanged under various contractors would be viewed as an attempt to defray the legal rights of workers and the contract will be treated just as a camouflage or wind screen and thus a sham contract. Once it is established that the contract is sham or is executed for name sake only, you will be in trouble and may even lead to regularisation of service of contract workers. Taking legal opinion on behalf of the contractor itself is an evidence to show that your contract with the contractor is sham. Therefore, get out of it, if your firm believes in genuineness.
Madhu.T.K