Minimum turnover clauses in Tenders can not defeat the Public Procurement Policy for Micro and Small Enterprises (MSEs) Order 2012 – SC
In a recent judgment, Hon’ble Supreme Court has held that minimum turnover clauses in Tenders can not defeat the Public Procurement Policy for Micro and Small Enterprises (MSEs) Order 2012. Minimum turnover clauses cannot undermine or override the Procurement Preference Policy 2012 which has force of law.
ABCAUS Case Law Citation:
4428 (2025) (02) abcaus.in SC
In the instant case, the Petitioner(s) had filed a Writ Petition Article 32 of the Constitution before the Hon’ble Supreme Court seeking directions for all States and their instrumentalities to inter alia consider the bids of MSMEs irrespective of the minimum turnover clauses in the tender notification.
The Petitioner(s) were Micro Enterprise under Section 7 of the MSMED Act, 2006. The grievance of the Petitioners was that they continuously face disqualification from participation in the procurement process evolved by the Central and State Governments and their instrumentalities. The cause for such disqualification is the presence of mandatory minimum turnover clauses, requiring the participants to meet a certain financial threshold in terms of past sales or revenues generated for participation.
It was submitted that this requirement of minimum turnover disadvantages them since their turnover is bound to be lower than that of their competitors for two reasons. First is obvious, the enterprise would qualify as a Micro Enterprise only when its turnover is lower. Secondly, the turnover of the Petitioner Micro Enterprise was low since it only dealt in specialised areas.
It was submitted that petitioners sought exemptions from the said minimum turnover requirement, but the concerned authorities had not granted the same. Consequently, they cannot participate as the difference between the required turnovers and the company’s turnovers was often huge.
It was submitted that the restriction on the participation of petitioners due to the minimum turnover clause violates the Procurement Order 2012 which makes it mandatory for every government, its ministry, department or instrumentality to procure 25% of their supplies from MSEs, and by prescribing minimum turnover clauses, they are circumventing the mandate, thereby defeating the very purpose and object of the policy.
It was also submitted that prescription of such minimum turnover clauses is arbitrary and violative of Articles 14 and 19 of the Constitution. That turnover is not an accurate indicator of the manufacturing capability of the participating bidders, and there is no empirical data to show that turnover has a direct bearing on the manufacturing capability of pharmaceutical companies.
The Hon’ble Supreme Court formulated the following two questions for our consideration:
1. Does the MSMED Act, coupled with the Procurement Preference Policy, 2012 mandate procurement of 25 percent of goods and services by the government, and its instrumentalities from the Micro and Small Industrial Enterprises? and
2. Is the prescription of mandatory minimum turnover clause in NITs violative of articles 14 and 19 of the Constitution, provisions of the MSMED Act and the Procurement Preference Policy, 2012?
The Hon’ble Supreme Court observed that following the 2012 enactment, the constitution of the National Board for MSMEs (Section 3), the Advisory Committee (Section 7(2)) and the Facilitation Council (Sections 20 & 21) on the one hand and notification of the Procurement Preference Policy (under Section 11), followed by the constitutions of the Review Committee (Clause 12) and the Grievance Cell (Clause 13) are statutory and executive bodies established to realise the purpose and object of the Act.
The Hon’ble Supreme Court opined there is no mandatory minimum procurement ‘right’ of an individual MSE. However, there is certainly a statutory foundation for the Procurement Preference Policy, 2012, having force of law as it ‘encapsulates a mandate and discloses a specific purpose’.19 Clause 3 of the policy mandating procurement of 25 per cent of supply from MSEs is simply the statutory duty of the bodies constituted under the Act and the Policy.
The Hon’ble Supreme Court held that bodies created and established under the MSMED Act and the Procurement Order 2012, are accountable, and their function is subject to judicial review.
The Hon’ble Supreme Court observed that though the data provided by the Union of India shows that Central Govt. have complied with the policy requirement of procuring minimum 25% from MSMEs preceding five years, it was not clear as to whether the said procurement includes procurement of some of the 358 items that have been reserved exclusively for MSEs under clause 11 of the Procurement Policy.
The Hon’ble Supreme Court opined that a holistic reading of the procurement policy, incorporating clauses 3, mandating 25 percent from MSEs and clause 11 reserving 358 items for procurement from MSEs, gives an impression that these mandates are independent of one another.
In view of the above, the Hon’ble Supreme Court directed the Review Committee constituted under clause 12 of the Procurement Preference Policy 2012, to examine this issue of mandatory procurement of 25 per cent of goods and services by the Government, its departments and instrumentalities from the MSEs under clause 3 of the Policy and notify whether the said procurement would be independent of the 358 items reserved for procuring from MSEs and take such action as is necessary for compliance of the Procurement Order 2012.
On the second issue of minimum turnover clause the Hon’ble Supreme Court observed that the two most relevant criteria for framing suitable conditions in NIT relate to the ‘capacity’ and ‘capability’ of the bidder. Previously, the Hon’ble Supreme Court had an occasion to address a similar issue and it was held that the insistence of the State to search for an experienced manufacturer with sound financial and technical capacity cannot be misunderstood. Unless the action of tendering authority is found to be malicious and a misuse of its statutory powers, tender conditions are unassailable. On intensive examination of tender conditions, we do not find that they violate the equality clause under Article 14 or encroach on fundamental rights of the class of intending tenderers under Article 19 of the Constitution. In the said judgment, it was further held that no person can claim a fundamental right to carry on business with the Government. All that he can claim is that in competing for the contract, he should not be unfairly treated and discriminated, to the detriment of public interest.
However, in the instant case, the Hon’ble Supreme Court observed that the law as applicable for procurement through MSEs stands on a different footing. As there is a statutory prescription for notifying a procurement preference policy (Section 11), and in furtherance of such a statutory prescription, the Preference Policy 2012 has been notified mandating procurement of a minimum of 25 per cent from the Micro and Small enterprises. Although it is generally permissible for the government, and its instrumentalities to provide minimum turnover criteria wherever “public safety, health, critical security equipment, etc.”, are involved, it must be ensured that such prescriptions do not defeat the Procurement Order 2012.
The Hon’ble Supreme Court directed the authorities under the Act, including the Review Committee and in particular the Grievance Cell, which is specifically entrusted with the obligation to redress “imposition of unreasonable conditions in tenders floated by Government Departments or agencies that put Micro and Small Enterprises at a disadvantage” to examine limits of minimum turnover clauses and issue necessary and appropriate policy guidelines.
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Author’s Note: This judgment can be of instrumental help to domestic CA firms competing with big shots. It would not be out of context to mention that as held by Hon’ble Delhi High Court a CA Firm may be registered as a Micro or Small enterprise and may be entitled to invocation of the jurisdiction of the MSMED Act for purposes (other than special tax audit u/s 142(2A) done on behalf of Revenue).
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