Large corporates setting up small subsidiaries to get public procurement tenders, will hurt MSEs: Experts

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Updated: July 28, 2021 5:09 PM

Ease of Doing Business for MSMEs: The government has not been aware of large companies setting up their wholly-owned MSE subsidiaries to acquire public procurement tenders. In response to a question in the Rajya Sabha in March this year on whether the government is aware of the situation, former MSME Minister Nitin Gadkari had replied, “No”.

Under the scheme, eligible investors in air-conditioners, LED lights and such components will get incentives of 4-6% on incremental sales (to be calculated over the base year of 2019-20) of products manufactured in India. The total incentives of Rs 6,238 crore will be disbursed over five years.On May 9, 2007, the erstwhile Ministry of Small-Scale Industries and the Ministry of Agro and Rural Industries were merged to form the Ministry of MSME. (Image for representation)

Ease of Doing Business for MSMEs: Even as the government has been surpassing its annual public procurement target of 25 per cent from micro and small enterprises (MSEs) of their overall buying, a number of large corporates have been setting up MSE subsidiaries to eat into standalone MSEs’ share of public procurement tenders, experts told Financial Express Online. While on one hand, procurement from MSEs has been 26 per cent, 30 per cent, and 28 per cent during FY19, FY20, and FY21 respectively as per the available data on the public procurement policy monitoring portal MSME Sambandh, large enterprises have tapped into the public procurement opportunity for MSEs through their own sister MSEs concerns on the other hand.

“There are certainly around 5-5.5 lakh MSEs that are basically subsidiaries of some of the very well-known Indian corporates and have a stronghold in the public procurement process. Businesses operate them without lending their names to them. Since June, the number seems to have increased,” Chandrakant Salunkhe, Founder and President, SME Chamber of India told Financial Express Online. The association represents over 90,000 MSMEs as members. Salunkhe, however, declined to name corporates involved in public procurement through their MSEs.

Comments from the Office of the Development Commissioner-Ministry of MSME were not immediately available over calls and email for this story.

While the MSME sector has been struggling to overcome the challenges imposed due to the Covid pandemic, the government had last year announced relaxation in the public procurement process. As per the initiative – part of the Atmanirbhar Bharat programme — Department of Expenditure had amended Rule 161 (iv) of General Financial Rules, 2017 to restrict global tenders up to Rs 200 crore, unless prior approval is obtained from the Cabinet Secretariat, in order to benefit MSEs. As the government is one of the biggest buyers of goods and services in the country, this restriction had boosted the morale of MSEs as it aimed at providing a level playing field to MSME units in public procurement. 

“This announcement, hence, posed a risk of loss of business to large entities and as a result, they set up MSE units with the sole motto of participating in the revised public procurement process. Large firms have inherent advantages such as funds, extending the use of their existing systems for running their MSEs leading to lower operations cost and overall cost of product and services, advantages of bulk procurement from their existing suppliers extended to their MSEs for latter to sell at a lower price without compromising on the margins, hiring better talent, and more, that will only worsen the sufferings of MSEs,” Vishal Kumar, Co-founder and COO of MSME advisory platform MSMEx told Financial Express Online.

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Interestingly, the government has not been aware of large companies setting up their wholly-owned MSE subsidiaries to acquire public procurement tenders. In response to a question in the Rajya Sabha in March this year on whether the government is aware of the situation, former MSME Minister Nitin Gadkari had replied, “No”.

“The observation that the large sector is setting up their own offshoots as MSME units to take extra advantage of the government procurement scheme meant for MSMEs is not appreciated. Even though there may be certain loopholes in the system, which the government may take time to plug, it is the responsibility of the large sector not to violate the sensitive MSME space. There have also been occasions when products reserved for MSMEs were de-reserved for the benefit of the large sector. This is worrisome considering the advantages of the MSME sector to the nation’s economic fabric,” Subodh Jindal, President, All India Food Processors’ Association told Financial Express Online.

Competing with MSEs backed by large enterprises, which offer competitive pricing, is likely to shrink the margins of regular MSEs. This might further defeat the purpose of giving dedicated space to MSEs in the public procurement process. Moreover, the number of MSE players vying for the opportunity has also been increased after the government recently reinstated retailers and wholesale traders under the MSME definition. Also, the MSME definition was revised last year to enhance turnover limit to up to Rs 50 crore for small units while for micro-units, it was increased to Rs 5 crore that expanded the volume of enterprises in these categories.

Importantly, corporate-backed MSEs cannot be questioned as they are registered entities operating in the market. “We are observing the situation but we cannot stop them as anyone can do business but the government should take necessary steps to help MSEs,” added Salunkhe. “The government should look into the MCA/ ROC data to validate this scenario. In addition, the government should come up with the revised guidelines for public procurement and restrict wholly-owned MSE units of such large entities to stop participating in the public tendering process,” said Kumar.

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