MSE purchase preference: what happens when L1 and L2 are MSEs

What is MSME purchase preference in a tender?

The Public Procurement Policy for Micro and Small Enterprises Order, 2012 asks every central ministry, department and CPSE to buy at least 25 percent of its annual purchases from micro and small enterprises. The 2018 amendment raised the figure from 20 to 25 percent and added a 3 percent share for women-owned MSEs. The purchase preference clause in a tender is the tool buyers use to get there: it lets an MSE that is not the lowest bidder still win part of the order.

Despite the 'MSME' in most searches, the Order covers micro and small enterprises only. Medium enterprises are outside it. The Ministry of MSME's FAQs also make two points owners often miss: the preference is mandatory in every procurement covered by the Order, even after the buyer has met its 25 percent for the year, and it applies to central buyers, not to state governments, which follow their own policies. The EMD side of the Order is covered separately in our guide to EMD exemption for MSMEs.

How the L1 plus 15 percent band and matching work

Once price bids are opened and the evaluated ranking is final, the buyer works through these steps:

1. Check who is L1. If L1 is a micro or small enterprise, there is nothing more to do: it gets the order on normal terms.
2. If L1 is not an MSE, multiply the L1 price by 1.15. Every eligible MSE whose evaluated price is at or below that figure is inside the band.
3. Ask each MSE inside the band whether it will bring its price down to L1. Agreeing is a choice, not an obligation.
4. Give the MSEs that match up to 25 percent of the tendered quantity or value. If more than one matches, the 25 percent is shared among them in proportion.
5. Order the rest from L1. If no MSE matches, L1 supplies everything.

What happens when L1 and L2 are MSEs?

This is the question bidders ask most often after a result, and the answer depends on where the non-MSE bidders sit in the ranking.

A tender that distributes quantity between L1, L2 and L3 under its own split ordering clause is a different mechanism. Read that clause separately; it is not the MSE preference, and it may sit on top of it.

Illustrative example: safety shoes for a Visakhapatnam plant

A CPSE plant in Visakhapatnam tenders 2,400 pairs of industrial safety shoes, divisible, with all five bidders offering the full quantity. L1 is ₹1,450 a pair, so the band ends at ₹1,667.50 and the MSE share is 600 pairs.

• E ranks second on price but is not an MSE for this purpose, so it is skipped, not counted.
• B and C both match and both offered the full quantity, so the 600 pairs are split equally.
• If C had declined, B alone would supply 600 pairs. If both had declined, A would supply all 2,400.
• C's women-owned status earns it no extra pairs in this tender. The buyer counts its 300 pairs toward its annual 3 percent target.
• Had B quoted ₹1,440, B would be L1 and win all 2,400 pairs on its own price, with no preference step at all.

Before agreeing to match, B and C should check their margin at ₹1,450 on 300 pairs, not 600 or 2,400. A share of a split order carries the same delivery, inspection and penalty terms as the whole contract.

Items that cannot be split, and tenders that drop the clause

Some purchases cannot be divided: one transformer, one software license, one consultancy assignment. The Ministry of MSME's FAQs say that where the item is not divisible, the full supply may be awarded to the MSE that matches L1. Buyers write this differently. A BPCL consultancy bid on GeM, for example, declared the job non-divisible for preference purposes and gave the whole job to the MSE in a tie with a non-MSE.

Buyers also amend the clause. In January 2024, Mazagon Dock Shipbuilders issued a corrigendum to a tender for an upper air sounding system that struck out its purchase preference clause for MSEs entirely. Whatever you think of the decision, the corrigendum governs that tender. Read every tender corrigendum before you count on a preference.

When MSE and Class-I local supplier preferences both apply

Many goods tenders carry both the MSE Order and the Make in India preference for Class-I local suppliers, which uses a 20 percent band. A Department of Expenditure OM of 18 May 2023, reproduced in the 2025 manual, sets the order in which they run.

For how Class-I status is declared and proved, see our guide to Make in India local supplier classes.

SC/ST and women-owned MSEs: is there a separate share?

Inside the 25 percent target, the Order sets 4 percent for MSEs owned by SC/ST entrepreneurs and 3 percent for MSEs owned by women. The Ministry's FAQs are clear that these are targets on the buyer's annual procurement, not reserved slices in each tender. If a buyer cannot find enough SC/ST or women-owned MSEs, it meets the gap from other MSEs.

• Ownership means at least 51 percent held by SC/ST or women entrepreneurs, as the FAQs define it.
• The social category and gender are recorded in your Udyam registration, which is how buyers count you. Keep that entry accurate.
• Buyers report the number of such units and their orders, so a qualifying MSE is worth a buyer's attention even when it gets no extra quantity in a single tender.

If a particular tender's clause does set aside a separate share for SC/ST or women-owned MSEs, follow that clause for that tender. Raise it in the pre-bid meeting if the wording is unclear.

Who qualifies: manufacturers, service providers and traders

The manufacturer versus trader question, and the GeM clauses that test it, are covered in more depth in our EMD exemption guide; the same test decides the purchase preference.

How AI tools help with MSE preference, and what your team decides

Whether a preference applies is buried in three or four places: the eligibility criteria, the purchase preference clause, the divisibility statement and the corrigenda. TenderGenie's Document Intelligence extracts those clauses with a reference to the source page. During an eligibility check, TenderGenie Risk & Compliance compares the tender's criteria with your organization's credentials and shows which requested documents, such as a current Udyam certificate, you already hold.

Whether to match L1 on a 300-pair share, and at what margin, stays with your team. So does the call on whether a state tender's own MSE policy is worth chasing.

Questions and answers