MSE EMD Exemption and L1+15% Purchase Preference

By Khanal Group · Tenders and bids · Updated 25 October 2026 · Not legal or tax advice

The policy in one paragraph

The Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012 was issued by the Ministry of MSME under section 11 of the MSMED Act, 2006, and amended in 2018 and 2021. General Financial Rules (GFR) 2017 Rule 153(ii) makes it part of central procurement. It requires central ministries, departments and public sector undertakings to procure a minimum of 25% of their annual value of goods and services from MSEs, and gives MSEs three practical advantages in tenders: free tender documents, exemption from earnest money deposit (EMD), and purchase preference within a price band of L1+15%. The figures below are from the Department of Expenditure's Manual for Procurement of Goods (Second Edition, 2024), which restates the Order, and the Ministry of MSME's Sambandh portal.

Who qualifies

Micro and small enterprises registered on Udyam. Medium enterprises are outside the policy. The Goods Manual says MSEs registered under Udyam Registration are eligible. See the Udyam registration guide.
For goods they produce and services they render. The policy excludes traders, distributors, sole agents and works contracts.
SC/ST and women-owned MSEs are recognised where the proprietor is SC/ST or a woman, or SC/ST or women partners or promoters hold at least 51% in a partnership or private limited company.
Upward reclassification: under S.O. 4926(E) of 18 October 2022, an enterprise that moves to a higher category keeps the non-tax benefits of its earlier category for three years from the change.

The policy binds central bodies. The Goods Manual notes that state governments and state PSUs are not covered by it but have similar policies of their own.

Targets and sub-targets

Target	Measured on	Note
25% of annual procurement from MSEs	Annual value of goods and services of the ministry, department or CPSE	Includes subcontracts to MSEs by large enterprises and NSIC consortia of MSEs
4% from MSEs owned by SC/ST entrepreneurs	Out of the 25%	Met from other MSEs if SC/ST-owned MSEs do not participate or qualify
3% from MSEs owned by women entrepreneurs	Out of the 25%	Same fallback
358 items reserved for exclusive purchase from MSEs	Item list reviewed by the Review Committee	Defence weapons systems and armament imports are outside

The targets are annual goals for the buyer, not a quota in any particular tender. The Ministry of MSME launched the MSME Sambandh portal on 8 December 2017 to monitor procurement by central public sector enterprises against them.

EMD exemption and free tender documents

The policy reduces transaction costs by providing tender documents free of cost and exempting MSEs from EMD. GFR Rule 170 repeats the exemption for bid security. Three limits apply:

Performance security is not exempt. The Goods Manual says exemption from performance bank guarantee or security deposit is not covered under the policy.
Proof is needed. Upload the Udyam certificate, and anything else the tender asks for, with the bid. A claim without proof is usually treated as a bid without EMD.
Works tenders. Works contracts are outside the MSE Order, and the Manual for Procurement of Works (Second Edition, 2025) names start-ups and registered bidders, not MSEs as a class, among those who may be exempted from bid security. Read the NIT of each works tender to see whether it grants an MSE exemption.

On GeM

The General Terms and Conditions on GeM (version 1.29, 25 March 2026) exempt MSEs holding valid Udyam registration that are the manufacturer of the offered product or the provider of the offered service (for a bunch bid evaluated total value-wise, of the primary product or service), who confirm this and claim the exemption at bid submission, and whose credentials are validated online and by the buyer. State government buyers may exempt only MSEs from their own state, or seek EMD from MSEs, by saying so in the ATC.

Purchase preference: how L1+15% works

When the L1 bidder is not an MSE, MSEs that quoted within L1+15% are allowed to supply up to 25% of the total tendered value by bringing their price down to L1. If more than one eligible MSE agrees, the 25% is shared proportionately. If the item cannot be split, the MSE within the band may be awarded the full quantity at the L1 price. If the buyer negotiates with a non-MSE L1, the 15% band is calculated on the original L1 price, and eligible MSEs are asked to match the negotiated price.

Worked example

Illustrative: a central PSU tenders 1,000 units, divisible. Bids are A (non-MSE) ₹1,000 per unit, B (MSE) ₹1,100, C (MSE) ₹1,140 and D (MSE) ₹1,180.

The band is L1 + 15% = ₹1,000 + ₹150 = ₹1,150. B and C are within it; D is not.
Both B and C agree to match ₹1,000. The MSE share of 25% (250 units) is split between them proportionately; A supplies the remaining 750 units.
If C declined, B would get the 250 units. If neither agreed, A would get all 1,000.

With Make in India

Many tenders apply MSE preference and the Make in India preference together. GeM bid documents refer buyers to the Department of Expenditure's OM No. 1/4/2021-PPD of 18 May 2023 on concurrent application of the two policies. See Make in India preference in tenders.

In GeM reverse auctions

Under GeM's Bid to RA rules, an MSE whose bid is within 15% of a non-MSE L1 is allowed into the reverse auction even if it would otherwise be eliminated, and award after the auction follows the MSE Order. See how GeM bids are evaluated.

Other relaxations and protections

Prior turnover and experience: the Goods Manual says procuring entities may relax these for DPIIT-recognised start-ups, which may or may not be MSEs. Many GeM bids also state an MSE exemption from years of experience; whether it applies is set in each bid.
Payment within 45 days: Chapter V of the MSMED Act limits the agreed payment period to 45 days from acceptance or deemed acceptance, with compound interest at three times the RBI bank rate on delay. See MSME delayed payment interest and the MSME interest calculator.

Checklist for an MSE bidder

Udyam registration valid, in the right category, with the offered product or service in its activity list.
You manufacture the goods or render the service yourself; no claim on traded items.
Tender is a goods or services tender of a central buyer, or the state or works tender grants the benefit in its own terms.
EMD exemption proof uploaded where the tender asks for it.
Performance security budgeted; it is not waived.
Ready to match L1 at short notice if you are within 15%.
SC/ST or women ownership proof kept, if it applies.

K-Tender keeps the Udyam certificate and other company documents in a versioned vault with expiry alerts and records EMD payments and refunds against each tender. Whether a benefit applies is for your team to confirm against the tender document.

Common questions

Are MSEs exempt from EMD in works tenders?

Not under the MSE Order itself. The Manual for Procurement of Goods (2024) says works contracts are excluded from the policy. GFR Rule 170 is written for goods, and the Works Manual (2025) exempts start-ups and registered bidders rather than MSEs as a class. A works tender may still grant an exemption, so read its NIT.

Are MSEs exempt from performance security?

No. The Goods Manual says exemption from performance bank guarantee or security deposit is not covered under the policy. Only bid security and the tender document fee are waived.

Can a trader registered on Udyam claim MSE benefits in tenders?

No. The policy covers goods produced and services rendered by MSEs and excludes traders, distributors and sole agents. GeM's GTC likewise limits the EMD exemption to MSEs that manufacture the offered product or provide the offered service.

What does L1+15% purchase preference mean?

If the lowest bid is from a non-MSE, MSEs whose prices are within 15% of L1 may supply up to 25% of the tendered value by matching the L1 price. If the item cannot be split, an MSE within the band may be awarded the whole quantity at the L1 price.

Does the MSE policy apply to state government tenders?

The central Order applies to central ministries, departments and public sector undertakings. States have their own policies. On GeM, state buyers may specify in the ATC that they will seek EMD from MSEs or exempt only MSEs from their own state.

What if my enterprise moves from small to medium?

A Ministry of MSME notification of 18 October 2022 (S.O. 4926(E)) lets an enterprise that is reclassified upwards keep the non-tax benefits of its earlier category for three years from the change, as the Goods Manual records.

MSE EMD exemption and purchase preference in public procurement