MSMED Act, 2006, Public Procurement Policy, 2012 and its Relevance during the 4th Industrial Revolution

Introduction

At the World Economic Forum Summit in Davos, 2022, India became one of the key countries, attracting investment and championing the cause of sustainable development. It was echoed by all the present ministers during their interactions that any investment in India would mean investment in the “India Story” which would also need a strong domestic finance¹. In the rapidly globalising economic world, there is a requirement for a robust supply chain, to ensure economic growth which is also environmentally sustainable. This requirement, enhances in the role of micro, small and medium enterprises (MSMEs) to provide a sustainable and a robust supply chain, as has been the case in the automobile sector, where medium small enterprises have flourished by fuelling supplies into larger players². It therefore becomes necessary to promote and legally protect this sector.

The Micro, Small and Medium Enterprises Development Act, 2006³ (the said Act) was introduced as beneficial legislation, on 16-6-2006. The aim of the said Act has been to protect the MSME sector and ensure its growth. Another step taken towards protecting the interest of MSME sector has been the introduction of the Public Procurement Policy, 2012 (PPP)⁴.

This article aims to understand the Public Procurement Policy, 2012 (PPP), its benefits, approach of the judiciary towards the Policy, the stumbling blocks and possible solutions.

Understanding the Public Procurement Policy, 2012

Section 11⁵ of the MSMED Act, 2006, empowers the Central and State Government to notify preference policies, in respect of procurement of goods and services that are produced and provided by MSMEs. The Public Procurement Policy was notified under Section 11 of the MSMED Act, 2006, with an objective to promote and develop MSMEs. The core principles of the Policy are competitiveness, sound procurement practices, execution of supplies in accordance with system, which is fair, equitable, transparent, competitive, and cost effective⁶.

Benefits offered to MSMEs

Initially the Policy mandated every Central Ministry/Department/PSUs (including sub-contracts) for a minimum procurement of 20% of goods and services which are produced or provided by MSMEs. By an order of the Central Government dated 9-11-2018, the percentage of minimum procurement was increased to 25%⁷. Out of this total of 25%, 4% is earmarked for procurement from MSMEs owned by SC/ST entrepreneurs and 3% from MSMEs owned by women.

It is essential to mention that the Policy makes it mandatory and not discretionary for the Central Ministry/Department/PSUs to have a minimum procurement of 25% of goods or services, from the MSMEs.

In terms of economic concessions, the Policy grants tender sets free of cost and an exemption from payment of earnest money to registered MSMEs. MSMEs quoting price within price band L1 + 15%, when L1 is from someone other than MSME, shall be allowed to supply at least 25% of tendered value at L1 subject to lowering of price by MSEs to L1. These concessions, ensure ease of business as well as reduce the economic strain on MSMEs.

From the point of view of mandatory procurement, the Policy enlists 358 items, which are reserved for exclusive procurement from MSMEs⁸ by Ministry/Department and PSUs.

To avail benefits, under the Policy, an enterprise will have to be registered with either the District Industries Centre or Khadi and Village Industries Commission or Khadi and Village Industries Board or Coir Board or National Small Industries Corporation or Directorate of Handicrafts and Handlooms or any other body specified by the Ministry of MSME. Registration therefore becomes fundamental to the Policy.

Affirmation by judiciary

One of the most essential benefits awarded by the Policy to the MSMEs is to allow the MSMEs to get tender set free of cost and exemption from payment one earnest money. Such a benefit is applicable to all the registered MSMEs, wherein the tender/contract is question is to provide goods and/or services or both, which are manufacture by MSMEs. However, these concessions are not applicable to MSMEs which are bidding for contracts which are of composite nature such as a “works contract.”

The fact that the Policy is applicable to the MSMEs which provide “goods and services” has been appreciated by various courts, such as the Allahabad High Court, in Rahul Singh v. Union of India⁹. In the said case the issue which fell for consideration was whether the petitioner was entitled to exemption from payment of earnest money, as it was a MSME and therefore was governed by the provisions of the Act as well as the concession offered by the Policy. The Court was pleased to observe that the petitioner being an MSME would have been entitled to benefits under the said Act and the Policy, however, since the tender in question was that of composite nature i.e. a “works contract,” such contracts would not fall under the purview of the said Act or the Policy.

The fact that the said Act and the Policy is a piece of beneficial legislation, aiming to promote the MSME sector has also been appreciated. It is in fact mandatory for the Central Ministry, Departments and PSUs to procure 25% of the goods and services rendered by MSME, to the exclusion of “works contract”.

In Sterling and Wilson (P) Ltd. v. Union of India¹⁰, disputes arose due to awarding a tender for design, installation and service of firefighting and detection systems. Thus, the issue which fell for consideration was whether the MSME Act, 2006 would apply to “works contract”. While adjudicating the issue, the Court detailed the salient features of the Policy and observed the following:

41. A plain reading of these provisions clearly indicate that every Central Ministry departmental or public sector undertaking is under a mandate to procure goods produced and services rendered by the micro medium enterprises. The Central Government has enlisted a total of 358 items in the appendix, which have been reserved for exclusive purchase from MSEs. Clause 6 of the Policy allows MSEs participating in tender process and qualifying in the price band of L1 + 15% to supply at least 20% of the total tender value provided they bring down their price to L1 price. Thus, there can be no dispute that the Ministries, Departments, and public undertakings are under obligation to implement the provisions under the Act and achieve the objectives of the Act and the Policy.

42. The provisions of Section 11 of the Act and Clause 3 of the Policy envisage procurement of “goods and services” produced and provided by MSEs. The provisions of the Act and the Policy are therefore applicable to procurement of “goods and services” produced and provided by MSEs. Answer to FAQ No. 18 also makes it abundantly clear that the Policy is meant for procurement of only goods produced and services rendered by MSEs. However, traders are excluded from the purview of the Public Procurement Policy.

43. The provisions of the Act would therefore not be applicable to work contracts, which are essentially contracts of composite nature involving supply of goods as well as labour/services, etc.¹¹

In Sunvesta Pipes Ltd. v. Maharashtra Jeevan Pradhikaran¹² filed before the Bombay High Court, the petitioners, who were registered MSMEs, challenged the tender condition issued by the Maharashtra Jeevan Pradhikaran, wherein it failed to procure 25% of polyethylene and PVC pipes (enlisted Items Nos. 214 and 223) from registered MSME, although Maharashtra Jeevan Pradhikaran was governed by the Policy. After filing of the petition, the Maharashtra Jeevan Pradhikaran issued a clarification, stating that it will conduct a separate empanelment process for purchase of polyethylene and PVC pipes from MSMEs and shall remove colour code for such procurement. Accordingly, the High Court was pleased to dispose of the petition.

Thus, the Courts have also affirmed the applicability, objective and need of the Policy, to promote and protect MSMEs, in cases where the goods and/or services are provided by a registered MSME, craving out exclusions to certain types of contracts such as works contract or contracts of composite nature¹³.

Stumbling blocks and recommendations

The Public Procurement Policy, 2012, which was notified under Section 11 of the MSMED Act, 2006, seeks to protect and promote MSMEs but has certain stumbling blocks in its way to success, such as:

(i) Awareness amongst the stakeholders.—The issue of awareness is twofold. Firstly, awareness amongst the stakeholders about the Policy and various beneficial schemes rolled out by the Government. Secondly, about the required awareness amongst the governmental agencies and procurement agencies about the market¹⁴.

It therefore becomes crucial to ensure that the Policy and various funding schemes percolate to the actual stakeholders by conducting awareness camps and training. Awareness of the market will have to be achieved by creating awareness amongst the various Departments of the Government¹⁵.

(ii) Access to digital market.—In 2016, the Government rolled out Government e-Market (GeM) for MSMEs. The end-to-end e-portal provides a platform to government entity seeking to buy the goods and services selects a supplier directly with the lowest price available on the portal for procurement. GeM is, however, still evolving as a trusted supplier to the Government¹⁶. The pandemic has truly highlighted the need for digital presence for the growth of any business. At Davos, 2022, various panelists, including Sunil Bharti Mittal, highlighted the need for the rapid digital adoption in the MSME sector to be equipped to face the challenges of the Fourth Industrial Revolution. He opined that MSMEs being the firms base of distributed global supply chains, digital adoption will support these companies for future prospects¹⁷. The success story enjoyed by Due Coffee, an Indonesian MSME, in global market has admittedly been due to the digital presence and its surge during the pandemic¹⁸. Thus, the Public Procurement Policy will have to incorporate the changing needs and provide digital markets and access to MSMEs.

(iii) Adjudicator forum.—The Policy provided for a “Champion Portal,” to redress the grievances of the MSMEs, related to non-compliance of Policy. This portal is a grievance cell and has been set up by the Ministry of MSME. Although the Policy provides for a grievance cell, the same lacks adjudicatory powers. There is no provision in the Policy to take action against a particular agency for delay in payment or refund of security deposit. Neither is there any provision to take action against the procuring agency for non-compliance with the terms of the Policy or in the case of non-procurement from MSME, for the items which have been specifically notified¹⁹. Thus, there is a lack of structured organisation, which can adjudicate the disputes between the MSMEs and a procurer, in the event of default in procurement and/or payment, etc.

The legislature will therefore have to consider providing for a more structured adjudicator authority, with powers of a civil court, to ensure speedy disposal of the grievances of the MSMEs. Until such a forum is established, the legislature can enhance the scope of the MSME Facilitation Council¹⁹ empowering it to adjudicate the disputes relating to issues of non-procurement, of mandatory goods/services as per the Policy and issues of payment. An adjudicatory authority will act to the benefit of all the stakeholders and further cement its trust in the system. ²⁰

(iv) Private and foreign sector.—In the age of globalisation, it becomes necessary to provide and protect the interests of the MSMEs, with respect to foreign investors. This could be by way of providing market access, digital push as well as a legislative reform, which would protect the interest of such enterprises.

Conclusion

MSMEs contribute to 27% of the Indian economy²¹ and are not sectors which can be neglected. The sector itself has massive potential, in the era of 4th Industrial Revolution but needs a confidence boost by providing, awareness, technical knowhow, adjudicator forums and better and protected access to domestic as well as foreign markets, via digital push.