First, try to see how much damage is done because of the 'misconduct' of the employee and whether how much 'punishment' you want to give him. However, punishment (i.e. warning, suspension, stoppage of increment, and ultimately termination) should be proportional to gravity of the offence.
For serious punishment, charge sheet is to be given inviting explanation of the employee. If you are not satisfied with the reply, then proceed with domestic enquiry for which an external enquiry officer (mostly an advocate) is to be appointed. Once the enquiry is concluded the enquiry officer would give his report.
Depending on that report, you can decide the quantum of punishment. However, conducting domestic enquiry is expensive as well as time consuming but essential when you are determined to give exemplary punishment for the misconduct.
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