Image caption Former Sky chairman James Murdoch's conduct "fell short", Ofcom said

UK media regulator Ofcom has concluded that BSkyB is a "fit and proper" company to hold a broadcasting licence.

Ofcom was investigating the broadcaster in the wake of the phone hacking scandal that engulfed Rupert Murdoch's media empire, which owns 39% of BSkyB.

However, Ofcom has criticised former BSkyB chairman James Murdoch, Rupert's son, for his role in the scandal.

Ofcom said his actions "repeatedly fell short" of what was expected. But News Corp hit back, defending his record.

Under the Broadcasting Act 1990, Ofcom has to ensure holders of broadcasting licences are "fit and proper".

Amid allegations that senior executives at News International, Rupert Murdoch's newspaper arm, knew the extent of the phone hacking, Ofcom decided to investigate if the affair had any bearing on BSkyB.

In a ruling on Thursday, Ofcom said: "In July 2011, in light of the public debate about phone hacking and other allegations, Ofcom confirmed that it had a duty to consider whether Sky was fit and proper to continue to hold its broadcast licences.

We recognise that whether it is appropriate for James Murdoch to be a director in light of the events is a matter for the board and shareholders of Sky. Ofcom

"Ofcom considers that, on the evidence currently available and having taken into account all the relevant factors, Sky is fit and proper to hold its broadcast licences."

Ofcom said, however, that "should further evidence become available" it may review the issue. Criminal investigations into phone hacking continue and several court cases involving senior executives from News International are pending.

BSkyB welcomed the decision, saying: "Ofcom is right to conclude that Sky is a fit and proper broadcaster. As a company, we are committed to high standards of governance and we take our regulatory obligations extremely seriously."

'Difficult to comprehend'

However, the conduct of James Murdoch, who resigned as chairman of BSkyB in April (but remains a non-executive director) and has also relinquished his role at the UK newspaper group, was questionable, Ofcom concluded.

The regulator said: "Ofcom considers on the basis of the evidence available to date... James Murdoch's conduct in relation to events at NGN [the newspaper group] repeatedly fell short of the conduct to be expected of him as a chief executive officer and chairman.

"However, Ofcom considers that the evidence available to date does not provide a reasonable basis to conclude that James Murdoch deliberately engaged in any wrongdoing."

While acknowledging that many of the circumstances over phone hacking were outside of Mr Murdoch's control or unknown to him, Ofcom criticises severely his failure to make himself aware of the deepening scandal.

We disagree... with certain of the report's statements about James Murdoch's prior actions as an executive and director, which are not at all substantiated by evidence News Corp

"We consider James Murdoch's conduct, including his failure to initiate action on his own account on a number of occasions, to be both difficult to comprehend and ill-judged.

"We consider that the events... raise questions regarding James Murdoch's competence in the handling of these matters, and his attitude towards the possibility of wrongdoing in the companies for which he was responsible," Ofcom said.

The regulator said that Mr Murdoch's non-executive role on the BSkyB board did not impact on its "fit and proper" test, because there were other "experienced individuals who would be expected to be capable of exercising effective independent oversight".

Ofcom continued: "We recognise that whether it is appropriate for James Murdoch to be a director in light of the events is a matter for the board and shareholders of Sky."

'Distinguished record'

News Corp - Rupert Murdoch's main holding company - welcomed Ofcom's decision but defended James Murdoch, saying he deserved credit for helping build BSkyB into an outstanding broadcaster.

In a statement to the Press Association, News Corp said: "We are pleased that Ofcom recognises BSkyB as a fit and proper holder of a broadcast licence and remain proud of both News Corporation's and James Murdoch's distinguished record in facilitating the transformation of Sky into Britain's leading pay television and home communications provider.

"We disagree, however, with certain of the report's statements about James Murdoch's prior actions as an executive and director, which are not at all substantiated by evidence."

Last May, the Commons media committee concluded that Rupert Murdoch was "not a fit person" to run a major international business. However, four of the 10 committee members disagreed, as the MPs split on party lines.

Tom Watson, MP, a leading campaigner on phone hacking, told the BBC on Thursday that Ofcom may "come to regret" its fit and proper clearance. "We are half-way through a criminal investigation and there may be further evidence," he said.

However, David Elstein, a former BSkyB executive, said he was "not surprised" by Ofcom's decision on BSkyB's broadcasting licence. "It's an interesting verdict, but life goes on".

New BSkyB bid?

John Whittingdale, chairman of the Commons Culture Media and Sport committee, which looked into phone hacking, said that Ofcom had came to the same conclusions as the MPs.

He told the BBC: "We concluded that James Murdoch was guilty of failing to carry out his duties as properly as he might, but that we couldn't see evidence to prove that he had any knowledge or involvement in phone hacking and that is essentially what Ofcom have concluded as well.

"They have been very critical of him, saying that he has failed to meet the standards expected on several different matters, but they too have said that there is no proof that he had any involvement."

Public outrage over phone hacking last year forced News Corp to drop its $12bn (£7.7bn) bid to buy the 61% of BSkyB it did not already own.

However, some analysts believe the Ofcom ruling could pave the way for a fresh BSkyB bid. News Corp plans to split its operations into two: publishing (including newspapers) and the more profitable News Entertainment division, which includes Fox television and film studios.

Investment bank Morgan Stanley said: "This (Ofcom ruling) is very positive for Sky. It removes the regulatory overhang from the company and potentially opens up the way for the entertainment arm of the demerged NewsCorp to bid for Sky in due course."

The previous regulatory hurdles of media plurality and the "fit and proper" test have been lowered, the bank said.

"News Entertainment, shorn of the UK newspaper titles, should present no issue as an owner of BSkyB," Morgan Stanley said. "The fit and proper issue - this would appear now to be resolved."