EMD exemption for MSMEs: rules, proof and how to claim

If you’re a micro or small enterprise with a valid Udyam registration, you’re exempt from EMD in central government tenders, but nobody applies the exemption for you. You have to claim it in the bid and attach the certificate. If you don’t, the buyer can treat your bid as one that failed to furnish bid security and reject it.

That’s the whole trap in one sentence. The rule is generous; the process is unforgiving. I work with small suppliers every day, and I’ve seen more bids die on a missed exemption claim than on the exemption not existing. So here’s where the exemption comes from, who actually qualifies, and how to claim it so it sticks.

Where the exemption comes from

Two documents do the work.

The two central rules

First, the Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012, issued under the MSMED Act. It’s the same policy that reserves a share of government procurement for MSEs, and among its benefits: tender documents free of cost and exemption from earnest money deposit for MSEs.

Second, Rule 170(i) of the General Financial Rules, 2017, which governs bid security in central procurement. It exempts MSEs as defined in the MSE procurement policy, and startups recognised by DPIIT, from furnishing bid security. The startup part came in through a Department of Expenditure amendment dated 25 July 2017. The same rule also exempts firms registered with the Central Purchase Organisation or the concerned ministry or department.

Under the GFR, bid security ordinarily runs 2–5% of the estimated value, so on a ₹50 lakh tender the exemption keeps ₹1–2.5 lakh of your working capital free. For a small firm that can decide whether you bid on three tenders this month or one.

State tenders work differently, and I’ve given them their own section below.

How GeM sets the EMD amount

GeM uses its own numbers, set in its General Terms and Conditions (GTC). Going by GeM 4.0 GTC version 1.29, dated 25 March 2026:

• No bid security at all on bids or reverse auctions with an estimated value under ₹5 lakh.
• Above ₹5 lakh, GeM recommends 1% of the estimated value, and the buyer can pick anything from 0.5% to 5%.
• The bid security must stay valid for 45 days beyond the bid validity.
• Non-exempt sellers upload a scanned copy with the bid and get the hard copy to the buyer within 5 working days of bid opening.

So on GeM the exemption only matters above ₹5 lakh, and the amount at stake is often smaller than the GFR’s 2–5% suggests. Even so, a few lakh you don’t have to lock up is worth the ten minutes it takes to claim.

The GTC exempts more sellers than MSEs and startups:

Exempt on GeM	Condition
Micro and small enterprises	Valid Udyam, manufacturer of the offered product or provider of the offered service, claim made at bid submission
DPIIT-recognised startups	Valid recognition certificate uploaded; turnover within the DPIIT scheme limits
KVIC, ACASH, WDO, Coir Board, TRIFED, Kendriya Bhandar	None beyond being that body
Vendor-assessed sellers	Valid vendor assessment (or exemption) report for the primary product or service
BIS licence holders	Valid licence for the primary product category
Central and state PSUs	None beyond being a PSU
Sellers registered with an agency the buyer names	The bid itself must name that agency

What the exemption doesn’t cover

EMD only. The Ministry of MSME’s FAQs on the procurement policy (revised 25 March 2022) say plainly that there’s no exemption from security deposit or performance bank guarantee. If you win, the ePBG is due like it is for everyone else, so budget for it before you bid.

Why “exempt” doesn’t mean “automatic”

Here’s how the trap works. The tender asks for EMD. You know you’re exempt, so you submit without depositing it. If your bid doesn’t also carry a properly claimed exemption (the declaration ticked, the Udyam certificate attached, the claim visible in the bid), the evaluator sees a bid with no bid security. That’s a ground for rejection, and evaluators use it. They’re not going to go look up your Udyam number for you.

So the discipline, every single bid:

1. Read the EMD clause. Confirm the tender actually allows the MSE exemption (most do; some don’t — more below).
2. Claim it where the form asks. On GeM this is a specific confirmation at bid submission. On CPPP and state portals it’s usually a declaration plus document upload.
3. Attach the current certificate. Udyam certificate with your enterprise shown as micro or small, and, where asked, matching the category of what’s being procured.
4. Verify before submitting. Open the bid preview and check the exemption claim and attachment are actually in there.

Ten minutes of work. It has to happen on all of them, not most of them.

Udyam or NSIC: which proof do you use?

Both show you’re an MSE, but Udyam is the base and NSIC sits on top of it. The Ministry of MSME’s FAQs say the procurement policy applies to MSEs registered under Udyam. NSIC’s own Single Point Registration Scheme asks for your Udyam number before it will register you.

	Udyam registration	NSIC single-point registration
Cost	Free	Paid (fee scales with turnover)
Process	Online, self-declared, PAN/GST-linked	Application plus inspection
Needs first	Nothing	A Udyam registration
Validity	Ongoing (keep details current)	Two years, then renewal
On GeM	Validated online automatically	Doesn’t replace Udyam; GeM’s exemption clause asks for valid Udyam
Extra benefits	The statutory MSE benefits	Adds tender-facing credibility for some buyers

For the EMD exemption, Udyam registration is what you need. It’s free, it’s what the exemption rules reference, and GeM validates it online against the Udyam registration website, so your MSE status is checked against the registry, not against a PDF you uploaded. Some tenders outside GeM still ask for an NSIC certificate, and some suppliers keep both. You don’t need NSIC to claim the EMD exemption, and NSIC without Udyam won’t get you there.

One thing Udyam’s automation does not do: it doesn’t claim the exemption for you. GeM knowing you’re an MSE and you claiming MSE benefits in a specific bid are two different events. The confirmation at bid submission is still yours to give.

Your Udyam has to cover what you’re bidding on

A valid Udyam isn’t enough by itself on GeM. The central policy itself is looser than it used to be: the Ministry’s revised FAQs (25 March 2022) say its benefits go to all eligible MSEs “irrespective of relevance of product Category”, replacing the January 2022 answer that tied them to the item’s NIC code.

GeM’s rule is stricter: you must be the manufacturer of the offered product or the provider of the offered service, checked against your Udyam data. My guide to NIC codes in Udyam covers how to check and update yours.

A Delhi High Court case shows how this plays out. In Glomet Corp LLP v. Union of India (W.P.(C) 6198/2025, decided 9 May 2025), a GeM buyer procuring a shotcreting machine refused a bidder’s Udyam-based exemption claim because the firm wasn’t registered as a manufacturer of the offered product. That bidder ended up furnishing EMD as a fixed deposit receipt instead.

Before you bid, open your Udyam certificate and check that the NIC codes and activity cover the item in the tender. If they don’t, update the Udyam record first.

Growing out of “small”

Also check that you’re still micro or small. The classification thresholds changed, and I covered the current limits in the revised MSME classification. It’s worth five minutes if you haven’t checked since your last filing.

Growing past the ceiling doesn’t cost you the benefits overnight. Under the Ministry of MSME’s notification S.O. 4926(E) of 18 October 2022, an enterprise that moves up a category keeps the non-tax benefits of its old category for three years from the date of the upward change. The Ministry’s press release on the change listed the public procurement policy among those benefits.

GeM checks your Udyam data online, though, so if your record now shows medium, read the bid terms and keep the notification handy in case the evaluator asks. After the three years, the exemption goes.

Traders don’t qualify — and GeM asks you directly

This part surprises a lot of people. The MSE procurement benefits, EMD exemption included, are for manufacturers and service providers, not traders.

An office memorandum of 2 July 2021 let retail and wholesale traders register on the Udyam portal, but explicitly for priority-sector lending purposes only, not for procurement benefits. Traders, distributors and sole agents sit outside the purview of the Public Procurement Policy for MSEs Order, 2012. So a trading firm can hold a perfectly valid Udyam certificate and still have no claim to the EMD exemption.

GeM enforces this at the bid level. The standard bid clause extends MSE benefits to sellers who are the manufacturer of the primary product category or service provider of the primary service category and who give a specific confirmation to that effect at bid submission. If you resell someone else’s product, that confirmation isn’t yours to give.

Give it anyway and you’re making a false declaration in a government bid. Competitors complain about exactly this (the Glomet case above began with one), and GeM’s GTC lets GeM debar a seller whose bid information turns out to be false, for at least three months on a first offence.

If you both manufacture and trade, the question is what you’re supplying in this bid. Manufacturer of the tendered item: claim it. Reseller of it: don’t.

Startups get their own route

GFR Rule 170(i) also exempts DPIIT-recognised startups from bid security. It runs in parallel to the MSE route: a recognised startup that doesn’t count as a micro or small enterprise still gets the exemption. The proof is the DPIIT recognition certificate, and the same discipline applies: claim it explicitly, attach the certificate, verify it’s in the bid.

On GeM, the GTC adds two conditions. The buyer validates the recognition certificate you upload, and your turnover for every financial year must stay within the limits of the DPIIT startup scheme. A startup that has outgrown those limits shouldn’t be claiming.

Many tenders relax other conditions for startups too (prior turnover, prior experience), but read each tender. Those relaxations vary far more than the bid-security exemption does. And don’t assume a state tender gives startups the same deal; see the next section.

Do state government tenders give MSEs the EMD exemption?

Often, but not because the central policy makes them. The Ministry of MSME’s FAQs say the Public Procurement Policy for MSEs Order, 2012 applies to central ministries, departments and CPSUs, and not to state government departments or state PSUs. States have been asked to frame their own procurement policies on similar lines.

Most states mirror the central policy, but the wording and the proof they accept vary. One rule holds everywhere: the tender document in front of you governs, and you have to make the claim explicitly.

State buyers on GeM

When a state buyer uses GeM, the GTC gives it two options, and both show up in the bid’s additional terms and conditions (ATC):

• It can limit the exemption to MSEs from its own state. If the ATC doesn’t say so, eligible MSEs from all states are exempt.
• It can ask MSEs for EMD outright. State government departments, state autonomous and local bodies, state PSUs and cooperatives can seek EMD from MSE bidders by saying so in the ATC or STC. If the bid has no such clause, the exemption stands.

So on a state-buyer GeM bid, read the ATC before anything else. If it doesn’t mention EMD for MSEs, the exemption applies.

State e-procurement portals

On a state’s own portal, the state’s financial rules apply. Tripura is one example: it adopted GFR 2017, and in 2022 restated its version of Rule 170(i) to exempt MSEs and firms registered with the Central Purchase Organisation or the concerned ministry or department. That version doesn’t mention startups. A startup exemption you’d get on a central tender may simply not exist in a state’s rulebook, so check the state’s rules and the tender before relying on it.

When the tender says no

Not every tender allows the exemption, and a refusal isn’t always wrong.

• Works contracts are outside the MSE procurement policy’s purview, so a works tender demanding EMD from everyone, MSE or not, is usually within its rights. The Ministry’s FAQs say this in so many words.
• Specific carve-outs. Some tenders state plainly that MSE/startup exemptions won’t apply, or replace cash EMD with a bid-securing declaration for everyone. Ministries have latitude here, and the tender’s own clause governs.
• Bid-securing declaration. Plenty of tenders now take no cash EMD from anyone, but every bidder signs a declaration accepting consequences (like a bidding ban) if they withdraw. If the tender asks for this, the MSE exemption doesn’t excuse you from signing it.
• Security deposit and performance guarantee were never part of the exemption, as covered above.

How the bid-securing declaration works

The Department of Expenditure set this out in Office Memorandum No. F.9/4/2020-PPD of 12 November 2020. In place of bid security, ministries may ask bidders to sign a “Bid Security Declaration” accepting that if they withdraw or modify their bids during the validity period, they’ll be suspended for the time the tender specifies.

That OM went further for a while. For tenders issued until 31 December 2021, it told departments to keep only the declaration in bid documents and to ask for bid security only with approval from a higher authority. Since that window closed, it’s tender by tender again.

The declaration catches exempt firms too. Some GeM bids state outright that the declaration requirement also applies to bidders exempted from EMD, MSEs and startups included. Sign it, and treat it as binding: walking away from a bid you declared on can get you suspended from bidding.

The habit that protects you is the same one I keep coming back to: read the EMD clause of every tender, every time. If it’s ambiguous, ask in the pre-bid query window, not after rejection. This sits alongside the other terms you should be checking anyway; I walked through EMD, ePBG and the related jargon in EMD, ePBG, MII and MSE.

A pre-bid checklist for the EMD exemption

Run this before you start filling in any bid where you plan to claim the exemption.

Check	Where to look	If it fails
Is EMD even required?	Bid value; on GeM, nothing under ₹5 lakh	No claim needed
Is it goods or services, not works?	Tender type and scope	Expect to pay EMD
Does the ATC restrict MSEs or ask them for EMD?	ATC/STC, especially on state-buyer bids	Pay, or raise it pre-bid
Is your Udyam still micro or small?	Udyam record	Check the three-year rule; otherwise pay
Do your NIC codes cover the tendered item?	Udyam certificate	Update Udyam first
Are you the manufacturer or service provider?	What you’re actually supplying	Don’t claim
Is a bid-securing declaration required?	EMD clause and buyer annexures	Sign and upload it as well
Is the claim visible in the bid?	Bid preview before submission	Fix it before you submit

To the evaluator, an exemption you’re entitled to but didn’t claim looks exactly like a missing EMD.

When a buyer wrongly rejects a valid claim

It happens: you claimed correctly, attached a valid certificate, and the buyer still demanded EMD or rejected the bid. Some evaluators genuinely don’t know the rule; some apply an old checklist. Here’s the sequence I’d follow.

1. Respond in writing, immediately

Time matters, because once the award moves, unwinding gets much harder. Send a representation to the tender inviting authority citing GFR Rule 170(i), the Public Procurement Policy for MSEs Order 2012, your Udyam registration number, and exactly where in your bid the claim and certificate sit.

2. Use the portal channel

On GeM, the GTC’s grievance clause sends bid representations to the buyer or the buyer’s designated authority, with your GeM seller ID and entity name. GeM itself steps in only for violations listed in the bid’s disclaimer, and seeking EMD from bidders against the GTC exemption is one of them.

Even then, you must have raised it with the buyer before the bid opening date and got no satisfactory answer, and GeM takes it only until technical evaluation is finalised. The GTC also says any ATC or STC clause demanding EMD from exempt sellers is null and void. Other e-procurement portals have their own representation routes; file there too, so there’s a timestamped record beyond your email.

3. Escalate up the department

If the evaluator doesn’t move, write to the higher authority: the head of the procuring office or the department’s designated grievance officer. Keep the tone factual: rule, certificate, bid reference, request. If a central ministry, department or CPSU is ignoring the MSE policy, the Ministry of MSME’s grievance cell for that is the CHAMPIONS portal.

4. Know when to bank the lesson

If the award is already made, you’re realistically documenting for the future, not reversing this tender. The rejections you could have prevented with a cleaner claim should change how you bid. I wrote about the broader patterns in why tenders get rejected, and the same rule holds here: the supplier with the clean paper trail wins the argument.

Object before bids open, not after

The timing point in step 2 matters most. If the ATC demands EMD from MSEs and you think that’s wrong, object before bids open. On GeM, waiting until after rejection closes off the route to GeM itself.

One last connection. Every rupee of EMD you’re exempted from is a rupee you never have to chase back through the EMD refund process, which, as I’ve written before, can drag for months on a badly run tender. Claim it properly, in every bid, and that problem never exists.