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Managerial steps to speeding up payment recovery procedures and benefit from the above provisions

Startups and early stage businesses can take certain steps to ensure that their payment recovery process is streamlined with reduced delays:
  1. Although registration is discretionary, it is strongly advisable that MSMEs obtain a registration under the MSMED Act under the appropriate category (depending on investment in their equipment, or plant and machinery). All official communications, bills (whether in electronic form or hard copy form with customers/ buyers should state (by way of an email signature or on the letterhead) that the entity is registered under the act. A recent notification by the Government mentions that the EM Number allotted by the appropriate authority should also be mentioned. This notifies the recipient that it is dealing with a registered entity and prevents it from later on taking the argument that it was not aware of the status of the MSME.
  2. Invoices issued to suppliers should, in addition to mentioning the registration, also state the terms of payment, and the consequences of delayed payment in terms of the MSMED Act.
Benefit #3 – Advantage with respect to government contracts
The government is the largest spender in the economy, and any startup or SME can significantly benefit with respect to both its revenues and market positioning if it has a government entity as a client. The government follows an elaborate process for purchasing products or services from private market players – how can startups or SMEs ensure that they can compete with powerful corporate giants?

In March 2012, the Central Government released a policy (SME Procurement Policy) stating that it would reserve a minimum of 20 percent of its procurement requirements from micro and small enterprises registered under the MSMED Act (see module 4 for more details). The reservation requirement will be mandatorily applicable to all Central Government ministries, departments and public sector undertakings controlled by it (collectively referred to as the Central Government Entities) from 1st April, 2015, but Government departments have already started making arrangements to source from SMEs.

Mechanism for fulfilling the reserved quota: Usually, a contract is awarded to the bidder who is willing to perform it at the lowest price (provided he meets the technical criteria). This is known as the L1 price. Other bids which satisfy the technical criteria but are priced higher than the L1 price are rejected. However, a bid submitted by a micro or small enterprise may not necessarily be the lowest in terms of price – how should the government procure the reserved component of products and services from the SME in that case?

The SME Procurement Policy provides a special benefit to eligible enterprises. Micro and small enterprises which meet requisite technical criteria, but whose bids are priced at up to 15 per cent higher than the lowest bidder will not lose the tender. They will be given another opportunity – if they can match the L1 price, they can be selected to supply up to 20 percent of the amount sought to be procured. Does this prejudice the L1 bidder? No, this probably does not make a significant difference, since the winner will still be eligible to supply the balance 80 percent requirement. The order size will reduce by 20 percent.

In addition, there are already 358 items (listed in the Appendix to the SME Procurement Policy) which must be exclusively purchased from micro and small enterprises by Central Government Entities as of date (uploaded on LMS).
See notification dated 27 November 2012 available at http://www.dcmsme.gov.in/publications/act%2030.11.2012.pdf
Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012

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