Procurement Preference for Small Enterprises is a Legal Mandate, Not a Mere Policy: Supreme Court Rules in Favor of MSMEs

Government Cannot Use Turnover Clauses to Sideline Small Enterprises in Public Tenders – In a landmark judgment Supreme Court of India upheld the legal enforceability of the Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012, ruling that the policy has the force of law under Section 11 of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act). The Court directed the government to strictly implement the mandatory 25% procurement requirement from MSEs and held that minimum turnover clauses in tenders cannot be used as a tool to exclude small enterprises from competing in public procurement.

"A statutory procurement policy cannot be reduced to a mere formality. The government and its agencies have a binding duty to ensure that small enterprises are not pushed out of the market by arbitrary eligibility conditions," the Supreme Court ruled while allowing the writ petition filed by Lifecare Innovations Pvt. Ltd. and its founder, Dr. Jitendra Nath Verma.

This decision marks a turning point for micro and small enterprises (MSEs), ensuring greater access to public contracts and preventing the misuse of tender conditions to favor large corporations.

"Can Government Bypass Procurement Rules for MSMEs? Supreme Court Says No"

The petition was filed by Lifecare Innovations Pvt. Ltd., a Micro Enterprise specializing in pharmaceutical and medical biotechnology, which had been consistently disqualified from government tenders due to minimum turnover requirements. Despite producing a critical nano-drug for fungal infections (Liposomal Amphotericin B Suspension in Saline – LAmB), which was used during the COVID-19 pandemic, the company was barred from participating in public procurement processes because of financial turnover thresholds far exceeding its revenue.

The company challenged the legality of these restrictive turnover clauses, arguing that they violated the MSMED Act and the 2012 Procurement Order, which mandates that 25% of all government procurement must be sourced from micro and small enterprises.

"When a small enterprise has the technological capability and product quality, denying it participation on arbitrary financial criteria violates the very purpose of the MSMED Act," the petitioner contended before the Court.

The Union of India defended the turnover requirements, arguing that they were necessary to ensure the financial stability of suppliers, particularly in critical sectors such as pharmaceuticals. However, the Court was not convinced by this reasoning.

"Turnover is not an accurate indicator of manufacturing capacity or product quality. The exclusion of specialized small enterprises from tenders through disproportionate turnover requirements is arbitrary and unjust," the Court held.

"Procurement Policy for MSMEs is Not Just Aspirational—It is Enforceable by Law"

The Supreme Court examined the legal status of the 2012 Procurement Order and concluded that it has the force of law under Section 11 of the MSMED Act.

"The government’s procurement obligations towards MSEs are not discretionary. These obligations are legally binding and subject to judicial review," the Court clarified.

The Court further noted that government ministries, departments, and public sector undertakings (PSUs) must comply with the 25% procurement requirement and report their compliance annually.

"Procurement laws cannot be rendered meaningless through bureaucratic inaction. Public sector undertakings and government agencies must be held accountable for fulfilling their statutory duties towards MSMEs," the Court ruled.

The judgment strengthens the rights of small enterprises, ensuring that they are not merely passive beneficiaries of government policies but active participants in the public procurement system.

"Government Cannot Use Tender Conditions to Weaken MSME Protections"

The Supreme Court rejected the argument that financial turnover requirements were a neutral or necessary condition in tenders. The Court ruled that such clauses cannot be allowed to override the statutory procurement preference for MSMEs.

"The minimum turnover clause should be relevant to the specific contract value and should not be arbitrarily set so high that it effectively excludes MSMEs from participation," the judgment stated.

The Court further directed that the Review Committee under the 2012 Procurement Order must assess whether tender conditions, including turnover clauses, are being misused to undermine MSME participation.

"Procurement rules must be designed to include, not exclude. The government must ensure that its tender conditions do not undermine the statutory procurement preference for MSMEs," the Supreme Court ruled.

The Court also emphasized that the Grievance Cell under the Procurement Policy must actively monitor and address MSME complaints against unfair tender conditions.

"Judicial Review Must Ensure That MSME Protections Are Not Rendered Toothless"

The Supreme Court outlined a new approach to judicial review in public procurement cases, stating that courts must not only ensure compliance with procurement laws but also examine whether government bodies are effectively implementing their statutory duties.

"Judicial review must not be limited to ensuring procedural compliance. It must also ensure that institutions responsible for MSME protections are functioning effectively," the Court ruled.

The Court directed that:

•    The Review Committee must assess whether government agencies are meeting their procurement targets for MSMEs.

•    The Grievance Cell must strengthen its mechanisms for addressing complaints related to restrictive tender conditions.

•    The government must issue clear guidelines to ensure that turnover clauses do not become a tool for MSME exclusion.

"Ensuring a fair and competitive environment for MSMEs is not just an economic necessity—it is a legal obligation. Government bodies cannot evade their responsibilities through bureaucratic loopholes," the judgment concluded.

"Procurement Policy for MSMEs is a Matter of Right, Not Charity": Supreme Court Orders Strict Implementation
The Supreme Court’s ruling in Lifecare Innovations Pvt. Ltd. v. Union of India is a groundbreaking victory for MSMEs, reinforcing that public procurement rules cannot be selectively applied or diluted through restrictive tender conditions.

The Court’s final directions include:

•    The 2012 Procurement Order is legally enforceable, and all government agencies must comply with its mandates.
•    The Review Committee must investigate whether minimum turnover clauses are disproportionately affecting MSME participation.
•    The Grievance Cell must strengthen its redressal mechanisms to ensure MSMEs are not unfairly excluded.
•    Government agencies must issue clear guidelines to prevent the misuse of tender conditions against MSMEs.

"Public procurement is not just about buying goods and services—it is also about economic empowerment. MSMEs must be given a fair chance to compete, and government policies must be implemented in both letter and spirit," the Court declared.

With this ruling, the Supreme Court has set a strong precedent for fair competition and inclusive economic growth, ensuring that small businesses in India are not pushed out of the market by bureaucratic hurdles.

Date of Decision: 25 February 2025