Guide 04 Procurement and tendering
MSME benefits in Indian public procurement, and what is excluded
Central ministries, departments and CPSUs, including defence public sector undertakings, must buy at least 25 percent of their annual procurement from micro and small enterprises under the Public Procurement Policy for MSEs. Registered MSEs get free tender sets, EMD exemption, price-matching rights and reserved items, but the policy explicitly excludes works contracts.
- Topic
- Procurement and tendering
- Checked
- 23 September 2026
- Sources
- 3
- Questions
- 7
01
The 25 percent target, and its carve-outs
Every Central Public Sector Undertaking, defence PSUs included, must source at least 25 percent of its annual procurement value from micro and small enterprises, with sub-targets of 4 percent from SC/ST-owned MSEs and 3 percent from women-owned MSEs. If those sub-target groups do not participate or cannot meet the L1 price, the sub-targets can be met from other MSEs instead.
Defence carries its own carve-outs: armament imports are not counted when computing the Ministry of Defence's 25 percent goal, and defence equipment such as weapon systems and missiles sits outside the reservation policy altogether. The policy also applies only to central buyers; state governments and state PSUs are not bound by it, though the Ministry of MSME has asked states to frame similar policies of their own.
02
What a registered MSE actually gets
None of this extends to a performance bank guarantee or security deposit: those still apply to an MSE winner on the same terms as any other supplier, unless the specific tender says otherwise.
- Tender sets free of cost
- Exemption from earnest money deposit, for enterprises registered on Udyam
- Possible relaxation of prior turnover and experience conditions, subject to meeting quality and technical specifications
- An L1 plus 15 percent price-matching right, letting an MSE supply part of the requirement at the L1 price
- 358 items reserved for exclusive purchase from micro and small enterprises, kept under review by a committee the Ministry of MSME's Secretary chairs
03
What the MSME policy does not cover
This matters directly for a company doing both supply and works-type contracts: EMD exemption and the other MSE concessions apply to the supply side of the business, but not automatically to a civil, electrical or mechanical works contract, even for the same registered MSE. Read each notice inviting tender for whatever concession that specific buyer chooses to give a works bidder.
Outside the Public Procurement Policy for MSEs
- Works contracts
- Excluded from the policy's purview entirely; a CPWD or building works tender gives no automatic MSE concession
- Traders and distributors
- Not covered; the policy is for goods produced and services rendered by MSEs, not resale
- State government tenders
- Not bound by the central order; check the specific state's own policy
- Defence armament and weapon systems
- Kept outside the reservation policy
04
Being eligible: Udyam, not Udyog Aadhaar
Since 1 July 2020, Public Procurement Policy benefits go to micro and small enterprises registered under Udyam, not the older Udyog Aadhaar Memorandum, which stopped being valid for this purpose after 31 March 2022. Udyam registration itself is free, paperless and based on self-declaration; the Ministry of MSME states plainly that no fee is payable to anyone for it and that no website or app other than the official portal is recognised.
Once registered, buyers must also pay on time: under Section 15 of the MSMED Act, 2006, a government or private buyer must pay a micro or small enterprise supplier by the agreed date, which cannot exceed 45 days from acceptance, or 15 days if no date was agreed in writing.
Asked next
Questions people also ask
MSME benefits in Indian public procurement, and what is excluded
What benefits do MSMEs get in defence procurement?
Under the Public Procurement Policy for MSEs, central ministries and CPSUs, including the Ministry of Defence and defence PSUs, must source at least 25 percent of annual procurement from micro and small enterprises. MSEs get free tender sets, exemption from earnest money deposit, possible relaxation of prior turnover and experience, and an L1 plus 15 percent price-matching right.
Does the MSME procurement policy apply to works contracts like CPWD jobs?
No. The Public Procurement Policy for MSEs covers goods and services only; works contracts are outside its purview, with definitions in the General Financial Rules. MSE benefits such as EMD exemption do not apply automatically to works tenders. Read each notice inviting tender, which states any concession the buyer chooses to give.
Can traders and distributors supply to defence under the MSME policy?
They can bid where the tender allows, but they do not get MSE policy benefits. The Public Procurement Policy for MSEs covers goods produced and services rendered by MSEs; traders, distributors, sole agents and works contracts are excluded from its purview. Manufacturers and service providers registered on Udyam are the intended beneficiaries.
What is the L1 plus 15 percent rule for MSMEs?
If the lowest bid (L1) is from a non-MSE, micro and small enterprises quoting within L1 plus 15 percent may supply part of the requirement by matching the L1 price, up to 25 percent of the tender value, shared proportionately among them. Where the item cannot be split, the full order may go to the matching MSE.
How many items are reserved for purchase from MSEs?
358 items are reserved for exclusive purchase from micro and small enterprises under the Public Procurement Policy, and a review committee chaired by the Secretary, Ministry of MSME, keeps the list under review. The list is published by the Development Commissioner (MSME); recheck the current count before relying on it.
Does the central MSME procurement policy apply to state government tenders?
No. The Public Procurement Policy for MSEs Order, 2012 applies to central ministries, departments and CPSUs. State governments and state PSUs are not bound by it, though the Ministry of MSME has asked all states to frame similar policies. Check the relevant state's own procurement policy for concessions.
What interest applies if an MSME is paid late?
Under the MSMED Act, a buyer who pays a micro or small enterprise late owes compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India, from the date payment fell due. The supplier can file a claim through the MSME Samadhaan portal for reference to the MSE Facilitation Council.
Checked against
Sources
- 01FAQs on the Public Procurement Policy for MSEs, Development Commissioner (MSME), Ministry of MSME
- 02MSMED Act, 2006, MSME Samadhaan, Ministry of MSME
- 03Udyam Registration portal, Ministry of Micro, Small and Medium Enterprises
This guide explains how the system works in general, as the documents above describe it, and was last checked on 23 September 2026. Rules and thresholds change: the governing document is the authority, not this page.
On this site
Where this meets the work
- Vendor registration information for new suppliers
- The maintenance contract record
- Defence contract works
More in Procurement and tendering
- DAP 2020 procurement categories explained, and the DAP 2026 draft
- What changed in the Defence Procurement Manual 2025 (DPM 2025)
- How GeM works for defence suppliers
- Where Indian defence tenders are published, and how to bid
- EMD and performance bank guarantee rules in defence tenders
- How L1 evaluation and reverse auctions work in government tenders
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