Public Procurement Preference for Micro and Small Enterprises: Enforceability and Institutional Accountability

1. Introduction

The Supreme Court of India’s Judgment in the case of Lifecare Innovations Pvt. Ltd. v. Union of India (2025 INSC 269) addresses crucial issues concerning the Public Procurement Policy for Micro and Small Enterprises (MSEs). At the heart of this case are two significant questions:

• Whether there is a mandatory obligation for the government and its instrumentalities to procure 25% of goods and services from Micro and Small Enterprises under the relevant statute and policy framework.
• Whether the imposition of minimum turnover clauses in tender notices violates constitutional guarantees and statutory provisions when it undermines access to government procurement by MSEs.

The petitioners, Lifecare Innovations Pvt. Ltd. and its founder, argued that they were disadvantaged by the procurement criteria set out in various government tenders, especially the mandatory minimum turnover requirement. They claimed that this practice effectively excluded specialized micro enterprises from participating in large government tenders, thereby defeating the intended objective of promoting MSEs under statutory instruments such as the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and the Procurement Policy Orders issued thereunder.

2. Summary of the Judgment

Justice Pamidighantam Sri Narasimha, speaking for the Supreme Court, delivered a nuanced ruling that clarifies the legal status of the Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012 (referred to as the “Procurement Order 2012”) and sets out directions to ensure its effective implementation. Key highlights include:

1. Statutory and binding nature of the Procurement Order 2012: The Court ruled that the Procurement Order 2012, issued under Section 11 of the MSMED Act, has the force of law, imposing enforceable duties on the government and its instrumentalities.
2. No “individual right” to demand procurement: While MSEs do not have an absolute right to insist on being awarded a specific procurement share, the policy obligates government authorities to meet minimum procurement targets from MSEs.
3. Judicial review of government bodies: The Court emphasised that the functioning of statutory and administrative bodies established under the MSMED Act (e.g., National Board for MSMEs, Advisory Committee, Facilitation Council, Review Committee) is under judicial scrutiny. These bodies must be both properly constituted and functioning effectively.
4. Minimum turnover clauses: While government agencies have discretion to prescribe eligibility criteria such as minimum turnover for technical or health-and-safety reasons, these clauses should not undermine the mandated procurement preference for MSEs.
5. Directive for review and guidelines: The Review Committee and Grievance Cell are specifically directed to examine and clarify whether procurement of 25% from MSEs under Clause 3 of the Procurement Order 2012 is wholly separate from the 358 items reserved exclusively for MSEs (Clause 11), and also to issue guidelines to prevent unreasonable tender conditions (including turnover clauses) that could disadvantage MSEs.

3. Analysis

3.1 Precedents Cited

The Court relied on a combination of constitutional and administrative law precedents to illustrate the general rule that government entities have broad autonomy in setting tender conditions. In particular:

• Association of Registration Plates v. Union of India (2005) 1 SCC 679: The Supreme Court held that the State’s insistence on stringent eligibility criteria (turnover requirements, financial capacity) can be valid provided such criteria are not arbitrary and serve legitimate public interests (safety, technical capacity, etc.).
• Tata Cellular v. Union Of India (1994) 6 SCC 651: This case affirms that the standard of judicial review focuses on arbitrariness or illegality in administrative decision-making. As long as tender requirements are reasonable, the Court will be slow to interfere.
• Recent decisions (e.g., NBCC (India) Ltd. v. State of West Bengal (2025 SCC Online 73)) highlight the importance of MSEs to the nation’s economy and reinforce the principle that government procurement policy must account for the constitutional and statutory protections afforded to smaller enterprises.

3.2 Legal Reasoning

The Court’s reasoning proceeds from a detailed analysis of the MSMED Act, 2006 and the subsequent Public Procurement Policy for MSEs. Section 11 of the MSMED Act empowers the Central and State governments to notify procurement preference policies. The Court found:

1. Procurement Order 2012 is statutory: Because it was implemented pursuant to Section 11 and is closely tied to the object and purpose of the MSMED Act, the Policy has the required legal force.
2. No direct right: Though an individual MSE cannot claim a guaranteed procurement share of 25%, the Court stressed that government authorities are duty-bound to meet these targets through properly constituted bodies.
3. Focus on institutional oversight: The Court directed that judicial review in matters concerning MSE procurement should concentrate on ensuring agencies (Review Committee, Grievance Cell, National Board for MSMEs, etc.) function effectively, rather than micromanaging each tender condition.
4. Minimum turnover clauses: MSEs can still be subjected to certain financial or technical competence criteria. However, the Court found that imposing disproportionate minimum turnover requirements that effectively exclude genuine MSEs runs counter to the overall legislative and policy objectives.

3.3 Impact

The Judgment has far-reaching ramifications for both MSEs and government agencies:

• Greater accountability: Central Ministries, Departments, Public Sector Undertakings (PSUs), and other procurement entities must ensure they meet or exceed the 25% procurement mandate. Where they fail, they must provide reasons to the Review Committee.
• Strengthened scrutiny: The Review Committee and Grievance Cell are mandated to revisit existing practices, review reserved items, and ensure that the tender conditions do not improperly exclude MSEs.
• Comprehensive guidelines on turnover thresholds: Government bodies will need to issue (and follow) clearer and more proportional guidelines regarding the use of minimum turnover clauses, preventing their misuse as a proxy barrier to MSE participation.
• Reduced litigation: If statutory bodies perform robust self-oversight, MSEs’ recourse to constitutional courts may lessen, as many issues can be sorted administratively through the newly empowered Grievance Cell and periodic reviews.

4. Complex Concepts Simplified

Some of the more complex legal and administrative concepts discussed in the Judgment include:

• Statutory Duty vs. Individual Right: While a “statutory obligation” compels government agencies to procure a certain percentage of goods from MSEs, that does not automatically translate into a “right” for each MSE to demand a portion of every tender. The Court underscores that it is the collective enforcement function that matters.
• Judicial Review of Administrative Bodies: Courts often review whether an administrative body has acted within its boundaries, followed due process, or committed any arbitrariness. Here, the Supreme Court instructs lower courts to ensure that the relevant committees and cells under the MSMED Act actually function as intended, rather than interfering in every discrete dispute.
• Minimum Turnover Clause: This is a condition in tender documents that requires bidders to show a certain level of annual financial turnover. Government entities may use it to assess “capacity” or “capability,” but when it is set disproportionately high in comparison to the contract value, it de facto excludes smaller entities.
• Procurement Targets: The Procurement Order 2012 mandates that 25% of government procurement should be from MSEs, in addition to designating 358 items for exclusive MSE supply. The question often arises whether these 358 items are part of or separate from the mandated 25%—the Judgment clarifies that the Review Committee must resolve this.

5. Conclusion

The Supreme Court’s Judgment in Lifecare Innovations Pvt. Ltd. v. Union of India serves as a major benchmark for India’s evolving public procurement framework in relation to micro and small enterprises. By holding that the Public Procurement Policy for MSEs carries legal force yet does not automatically grant an individual MSE the right to insist on receiving a share of every contract, the Court has framed a balanced approach.

On the one hand, government agencies and public sector undertakings are obligated to ensure meaningful participation of MSEs by meeting the 25% procurement target, scrutinizing and revising tender eligibility criteria (especially minimum turnover clauses), and fully activating complaint resolution bodies such as the Grievance Cell. On the other, MSEs must seek redress through institutional mechanisms and demonstrate compliance with the essential capacity or safety requirements that are legitimately prescribed.

In sum, this Judgment paves the way for a more transparent, equitable, and administratively streamlined public procurement process—boosting MSEs’ role in India’s economy while maintaining the government’s discretion to set reasonable, non-exclusionary procurement standards. The directions to the Review Committee and Grievance Cell confidently place institutional accountability at the heart of public procurement reform, signaling a new era in judicial and administrative cooperation for the better promotion and development of MSEs.