Stagecoach Group PLC said Wednesday the United Kingdom government has chose to nationalise the London to Edinburgh InterCity East Coast train service.
Mr Grayling had hinted that the franchise was not going properly, revealing in February that Stagecoach had incurred losses of virtually Â£200million.
He added that he has received "official advice" that restrictions should not be placed on Virgin and Stagecoach's "passport" which entitles them to bid for future rail franchises, as "there is no suggestion of either malpractice or malicious intent".
However, he also said: "The route has its challenges but it is not a failing railway".
The companies promised to pay £3.3bn to run the franchise until 2023, but at the end of a year ago it become clear they were running into trouble.
The government insists that renationalisation is not a "long-term" answer, and that its control over the service will last only until a new public-private partnership can be appointed in 2020.
"I'll be speaking to UK Govt later today & demanding Scot Govt is involved new board SoS is setting up - we can not be ignored". Grayling suggested that Virgin and Stagecoach had lost around £200m supporting VTEC, while the franchise had returned approximately £1bn in premium payments to government.
Employees working for Virgin Trains East Coast will transfer over to LNER. "It's a significant setback to improvements promised at the start of the Virgin/Stagecoach franchise and we need urgent clarification that those improvements will still be delivered under the new arrangement".
The failing East Coast Main Line is being brought back under Government control for the third time in ten years.
Stagecoach Group, which owns 90 per cent of VTEC, said it was "surprised and disappointed" that the Government chose not to award it a new deal to continue running services on the London to Edinburgh route.
Opposition MPs and labor unions seized on the decision as evidence that the Conservative government's franchise policy is failing.
There will be a short transition, so any passengers should carry on using Virgin Trains East Coast's customer and ticket booking services.
Virgin Trains East Coast's contract will be ended on June 24.
"Having more stability in the underlying contract between Government and the train company will help achieve these things that matter most to passengers", said Anthony Smith, the chief executive of watchdog Transport Focus.
The news comes three months after Transport Secretary Chris Grayling told the Commons the big-money franchise would only be able to continue in its current form for a "very small number of months" as Stagecoach had "got its numbers wrong" and "overbid".
"Anything else risks playing out the same expensive farce over and over again".
He said: 'It's important staff and passengers are properly protected while, once again, the transport secretary tries to patch up a failing franchise system that everyone knows doesn't work.