A founders’ agreement (“Agreement”)
Introduction to Public Procurement
- The foundation and legal framework for procurement in India is derived from the Constitution of India.The Constitution via Article 53 of Constitution of India vests the executive powers of the Union of India in the President of India. The President, by his order, and issuance of allocation rules of the Government of India, vested the financial powers of the Indian Government in the Ministry of Finance.
- These powers in turn are delegated to the subordinate authorities under the General Financial Rules, 2005 (GFR)(amended 2017) which, inter alia, prescribe the broad rules and procedures for the procurement of goods and services and for contract management.
- There is no central legislation governing procurement in India. Comprehensive rules and directives in this regard are contained in the GFR 2005 and Delegation of Financial Powers Rules (DFPR). A broader framework is also provided by the Contract Act, 1872, the Sale of Goods Act, 1930, the Law on Arbitration and Limitation and the recent Right to Information Act, 2005.
- As India is a union of states, each state, including the Union Territories, have their own rules, guidelines or legislation on procurement. State governments and Central Public Sector Units (CPSUs) have their own general financial rules, which are based on the broad principles outlined in the GFR. Some states like Tamil Nadu, Andhra Pradesh and Karnataka have even introduced legislation for procurement.
- The constitutionally appointed Comptroller and Auditor General (CAG) oversees the accounts of the Union and states. The reports of the CAG on Union accounts are presented to each house of the Indian Parliament, while those relating to the accounts of the states are presented to the legislature of each state assembly. These reports also cover procurement. The Parliamentary Accounts Committee (PAC), the Standing Committees and the Legislative Accounts Committees in the states oversee the functioning of the executive power. To ensure transparency in the process at each level of the Indian Government, a local fund audit for local bodies has been established. Reports on the audits are presented to each state legislative assembly.
- In addition, guidelines are issued by the Directorate General of Supplies and Disposals and the Central Vigilance Commission (CVC) together with instructions by Ministry of Finance (MoF) that are responsible for bringing about integrity in public sector procurement. Further, public procurement are also subject to review (where deemed necessary) by the CVC, and the procuring entities in all public procurement are required to adhere to the guidelines issued by the said commission in relation to all such procurement.
General Financial Rules (GFR) 2017
- The policy framework primarily covered by the General Financial Rules (GFRs) 1963 (amended in 2005 and 2017) framed by the Ministry of Finance by executive order and the Delegation of Financial Powers Rules 1978 (again framed by the Ministry of Finance). The Ministry of Finance issued GFRs on 11 February 2017 and came into force on 8 March 2017. Rule 153(iii) of the GFRs 2017 allows the Central Government to provide (by way of notification) mandatory procurement of any goods or services from any category of bidders, or provide for preference to bidders on the grounds of promotion of locally manufactured goods or locally provided services.
- The main features of GFRs are as follows:
- Defines works, goods, and services to be procured and the scope of public procurement
- Outlines the fundamental principles of public procurement like enhancing transparency and efficiency, instilling fair practice, and promotion of competition
- Prescribes monetary thresholds for using specific procurement methods across the categories of procurement, i.e., works, goods, and services
- Describes different procurement methods and their applicability
- Prescribes Code of Integrity
- Specifies tender award criteria
- Outlines general principles and rules of contract management
- While GFR 2017 had kept intact the monetary threshold limits for a few categories as given in GFR 2005, it has augmented the threshold limits for others. For instance, GFR 2017 had kept intact the threshold limit for the procurement of original works through limited tender. However, it has enhanced the upper threshold limit for open tender enquiry from INR 10 lakhs to 30 lakhs.
- Alternatively, it has increased the upper threshold limit for procurement of goods by the purchasing committee from INR 1 lakh to 2.5 lakhs.
- While GFR 2005 had recognised procurement of all kinds of services to be similar, GFR 2017 had procurement of services into two broad categories viz., ‘consulting services’ and ‘non-consulting services’.
- In addition to these changes, GFR 2017 also incorporated a few important in order to streamline the public procurement activities in the country.
- GFR 2017 recommended two-stage bidding where a procuring entity holds discussions with the bidder community to finalize the technical specifications in the first stage. The financial bid was called from those whose ideas were accepted, and the bid is awarded to the bidder with the best quality-price ratio. It was expected to enhance the technical capacity of the procuring entity by drawing on the know-how from the market.
- It directed towards assigning higher weightage to quality as compared to the price especially in the procurement of services through the quality and cost-based selection.
- It provided emphasis on the use of information technology in public procurement to ensure greater transparency and competition by mandating the use of Central Public Procurement Portal (CPPP)for publication of all tender details, compulsory e-bidding for all procurements, and promotion of electronic reverse auction.
- It introduced Code of Integrity to address probity in procurement activities.
- It urged to include environmental issues in the bid documents.
- It directed towards sharing the reasons of rejecting a tender or non-issuing a bid document to a prospective bidder upon request.
Public Procurement System In India
In general, Indian public procurement system involves five different stages namely planning of procurement, preparation and publication of bids, submission and evaluation of bids, award and execution of bids, and redressal mechanism
Planning of bids
- The procurement process starts with the need assessment of the procuring entity followed by an internal research for technical and financial specifications. India does not consult the private parties (bidders) for need assessment and procurement specifications.
- Recently, GFR 2017 had advised to adopt two-stage bidding process (for the procurements where an entity does not have expertise). Once the need is finalized, the stage of bid planning then involves a few other elements such as sanction of the procurement (administrative, technical, and financial), cost estimation, and assignment of officials for different stages (bid preparation, bid evaluation, etc.).
- Given the inputs received from the internal assessment, a procuring entity describes the need, specifies the technical and financial requirements, and accordingly, prepares the bid documents.
- Although GFRs have advised the procuring entities to include all relevant information such as the evaluation criteria including respective weightage in the bid documents, many bids do not incorporate the same.
- Even in many cases, the weightages given to different cost and quality parameters seem to be inconsistent.
- GFRs have permitted the procuring entity to draft the procurement activities at their discretion which lead to inconsistent and fragmented bid documents even for the similar procurement.
Preparation and Publication of bids
- The bid documents should also comprise of critical information such as bid fee, earnest money deposit (EMD) or bid security, performance security, etc.
- While the procuring entity charges a fee for most of the bids, a few bids are exempted. The EMD in India has an average validity of 45 days beyond the final bid validity period, and it is stipulated to be 2-5 percent of the estimated procurement.
- The MSEs registered with the concerned ministry/department/procuring entities are exempted from depositing the EMD. The EMD of the unsuccessful bidders should be returned at the earliest after the expiry of the final bid validity and latest within one month after the contract award, but there has always been some delays.
- Adoption of e-payment for depositing the different bid related fees is a recent initiative, and it is playing a crucial role in reducing bidders’ transaction costs. Bid documents also include the time-frame of the procurement process, i.e., dates of accessing bid documents, pre-bid meetings, submission, opening, and evaluation. A few bids also include clauses on environmental concerns especially in construction tenders which is an important step for ensuring GPP.
- The bids so prepared are then published through multiple channels including e-portals with a reasonable time to access and submit the bids.
Submission of Bids and Evaluation
- Once a bidder has decided to submit a bid in response to a notice inviting tender/bid, it needs to properly prepare and submit the bid (offline/online) complying to all the specifications and procurement timeline as mentioned in the bid documents.
- Both the concerned government officials and bidders use valid digital signature certificate (DSC) to access the e-portals.
- Meanwhile, the procuring entities take some steps to ease the preparation of bids by addressing questions of the bidders through e-portals and holding pre-qualification/pre-bid meetings.
- Once submitted through CPPP, the bidders are given the opportunity to modify/withdraw their bids within a stipulated time which ordinarily happens to be the last date of the bid submission. Most of the bids are submitted in a two-envelope system, i.e., the bidders submit technical bid and financial bid separately.
- Although the bids need to be opened and evaluated immediately after the submission deadline, there are often delays in bid opening and evaluation. However, there have been some improvements in this regard, and a few entities have started electronic bid opening. The delays of opening and evaluation of bid have been drastically reduced after the introduction of e-procurement.
- The bids are opened in the presence of the bidders or their representatives and evaluated for compliance with the tender specifications to select the qualified bids. The minutes of bid opening are often published online and sent to the participating bidders electronically. Only the bids that meet the necessary requirements are retained for technical evaluation, and others are returned unopened.
- The concerned officials then undertake technical evaluation, and only technically qualified bids are retained for financial evaluation. Many entities hire consultants to evaluate technical bids due to lack of in-house procurement expert.
Award & Execution
- After the selection of technically qualified bidders, the contract is awarded promptly and transparently to the most favoured bidder/s as per the award criteria (often the lowest price L1).
- GFR 2017 had mandated on using quality-price criteria for awarding the contract especially in the procurement of services. In order to enhance transparency in the system, the procurement framework has mandated the publication of contract awards.
- Another significant improvement in this direction is that the unsuccessful bidders can obtain the feedback on request, which will emerge as a learning opportunity for them in submitting future bids. It should be noted that no price negotiation is allowed in India other than in a few special circumstances.
- The awardee is asked to accept and sign the contract for execution. The awardee has to deposit a performance security in the form of a certificate of deposit. The performance security is regulated to be 5-10 percent of the contract value and remains valid for sixty days beyond the date of completion of all contractual obligations including warranty obligations.
- While in some cases, EMD is accepted as a part of the performance security, it is usually refunded to the successful bidder on receipt of performance security. The provision for online payment request through CPPP/GeM for the bidders is an improvement in the contract payment. However, in the absence of a legal time-frame for processing the contract payment, the later often is delayed; and thus, seeks attentions from the policy makers.
- Establishment of an efficient redressal mechanism is a key element for ensuring transparency and accountability in public procurement by addressing the faults and non-compliances in a procurement process.
- India exercises a two-tier review system although this is not formally specified in the procurement framework. In the first tier, an aggrieved bidder can report the irregularities to the concerned officials of the procuring entity.
- As a first tier review authority, many tenders engage arbitrator (Dispute Review Expert) to resolve any possible disputes in the procurement activities as per the Indian Arbitration and Conciliation Act 1996. In the second tier, the aggrieved bidder can move to the courts for settlements. In many cases, CCI is also approached for addressing anti-competitive issues in public procurement. A bidder (including successful), if found guilty, is debarred either indefinitely or for a given period from participating in public procurement.
Public Private Partnership (PPP) and Procurement
- If the public entity or function is transferred into private ownership, a procurement procedure is required. On 16 May 2007, the Ministry of Finance issued special procedures and guidelines for procurement of PPP projects. The bidding process for PPP projects has been divided into two stages.
- The first stage is generally referred to as a request for qualification or expression of interest. The objective of the first stage is to shortlist eligible bidders for the second stage of the process.
- The second stage is generally referred to as the request for proposal or invitation of financial bids. Here, shortlisted bidders conduct a comprehensive examination of the project and submit their financial offers. On 18 May 2009, the Ministry of Finance issued revised guidelines for request for qualification (RFQ) for pre-qualification of bidders for PPP pro- jects. Some of the main changes in the RFQ include elimination of the provisions relating to shortlisting of bidders for more than one project. Provision has been made to:
- enable the project authority to specify restrictions to prevent concentration of projects in the hands of a few entities.
- make suitable amendments to meet social sector and other project requirement
- increase the number of shortlisted bidders from five to six and further to seven in projects costing less than 5 billion rupees or for repetitive projects
- create a reserve list of bidders in case of substitution in the event of their withdrawal or rejection
- In 2011, the Department of Economic Affairs formulated an extensive policy for PPP projects including rules for regulating expenditure, appropriation of revenue, contingent liabilities, etc. However, this is still at the consultation stage within the government and has not yet been financed. In April 2016, the Department of Economic Affairs introduced the PPP Guide for Practitioners, which serves as a manual for practitioners to develop projects through appropriate PPP frameworks
Small and Medium-sized Enterprises (MSMEs)
- The Ministry of Micro, Small and Medium Enterprises had formulated a public procurement policy for micro, small and medium-sized enterprises (MSMEs), which had been approved by the cabinet in November 2011.
- An order in 2012 was issued, titled the Public Procurement Policy for Micro and Small Enterprises Order 2012. It stated that the Central Government, Departments and Public Sector Undertakings would procure a minimum 20 percent of their annual value of goods or services from micro and small enterprises.
- This minimum procurement has become mandatory since April 2015.
- The policy further included a reservation of 4 percent in favour of MSMEs owned by specific ‘backward classes’. The Ministry of Micro, Small and Medium Enterprises issued a Circular dated 10 March 2016 allowing central public sector undertakings to relax the norms of ‘prior experience and prior turnover’ for those MSMEs that could deliver goods as per prescribed technical and quality specifications.
- The Ministry has also stated that there is a need for central public sector undertakings to achieve the minimum 20 percent annual procurement target including 4 percent by socially disadvantaged classes. It was stated by the Ministry that during the financial year 2017-18, 38 public sector undertakings managed to achieve the 20 percent procurement target.
Issues in the Public Procurement in India
- In reality, procurement practices in the country often differ from what is prescribed because of the hurdles such as inefficient monitoring process, limited accountability and governance, limited awareness, and organizational culture. Given below are the major challenges involved in the Indian Public Procurement System:
- The absence of a comprehensive procurement Act-In the absence of a comprehensive procurement Act, GFRs allow the government entities to frame procurement process with its own understanding of public interest.
- Lack of standard bid documents- In spite of the initiatives for standardizing the bid documents and code of contract following the international agencies such as IMF and the World Bank, there continues to be a multiplicity of bid documents across the entities in terms of addition/rephrase/repetition of clauses/provisions. Such ambiguities and contradictions in the bid documents stand against the principles of standardization, transparency, and accountability.
- Delays in activities in procurement cycle- The introduction of e-procurement has managed to reduce the procurement cycle especially in the stages of publication, submission, opening, and evaluation of bids. However, the procurement process is often delayed in the stage of need assessment, budget preparation, and approval.
- Unfair practices and corruption– Despite the procedural safeguards corruption level in India is perceived to be high in recent years leading to low quality of public services which ultimately hampers the development process.
- Anti-competitive elements -The existence of anti-competitive practices by the bidders’ community tends to hamper the procurement process by negating the best value of money. Competition issues in India mainly concern with collusive bidding, bid rigging, cartelization, and abuse of dominance.
- Low participation of the domestic MSEs– Despite the MSMEs provisions, the participation of domestic MSMEs in the public procurement activities remains low in India. Apart from resource-related entry barriers including anti-competitive elements, many MSMEs do not also take part in public procurement due to a perception that government procuring entities often delay in releasing the contract payments.
- Absence of an independent grievance redressal mechanism- India does not have an Independent Grievance Redressal Mechanism in the procurement system. The GFR 2017 only allows the aggrieved bidders to file complaints with procuring entities, arbitrators, and courts.
- Competency and skill of the procurement officials– There are implementation challenges concerning the skills and competency of the government procurement officials as these activities require professional skills. The officials need to be more acquainted with the procurement management, rules and regulations, legal issues, contract management issues, and others.
The use of deceptively similar trademarks was allowable for goods or services falling under different classes and it never became a major issue of concern. For instance, the trademark MARUTI for cars also exists for tissue papers, hosiery products and also hardware items. Such independent existence of the same or similar trademark was acceptable and has been in use for products falling under different classes and do not pose any conflict or overlap between the relevant consumers. However, the courts maintained a consistent view that existence of deceptively similar trademarks were not permissible for goods or services falling under the same class.
But now, post the recent judgment of Nandhini Deluxe v. Karnataka Co-Operative Milk Producers Federation Ltd. Civil Appeal No. 2943-2944 of 2018; same or deceptively similar trademark can be used even for goods falling under the same class if they are visually distinct when compared. Supreme Court held that the use of similar trademarks for different goods or services, even though they might be falling under the same class, cannot be termed as infringement.
Karnataka Co-Operative Milk Producers Federation has been producing and selling milk and milk products since years and had obtained registrations for their trademark “NANDINI” along with its variants in class 29 for milk and milk products, in English as well as several other languages, with a user date of 1985. Nandhini Deluxe, a restaurant chain, which is in the market since the year 1989, applied for registration of their trademark “NANDHINI”, in class 29 for meat, fish, poultry, meat extracts, preserves, dried and cooked fruits and vegetables, jellies, jams, eggs, milk and milk products, edible oils and fats, salad dressings etc. This trademark application was allowed by the Registrar of trademarks post the completion of the opposition proceedings, whereas it was declined by the IPAB (Intellectual Property Appellate Board) as it disapproved of the registration of trademark “NANDHINI” as being deceptively similar to another trademark “NANDINI”, already in use prior to the adoption of the trademark “NANDHINI”, for having a similar pronunciation and only a basic difference of a single alphabet ‘H’ between the two marks. The IPAB held that the Karnataka Co-Operative Milk Producers Federation was in “regular and consistent use of the trademark “NANDINI” and it had become entrenched in the minds of the consumers and it would not be in the interest of the public to allow the restaurant chain to use the trademark “NANDHINI””. Thereafter, based on this, the High Court concurred with the above mentioned reasons as given by the IPAB and affirmed both marks to be deceptively similar, thereby disallowing the registration of the trademark “NANDHINI”. Additionally, the HC noted that Karnataka Co-Operative Milk Producers Federation was using the trademark “NANDINI” for goods like milk and milk products since 1985, whereas Nandhini Deluxe adopted the trademark “NANDHINI” for their restaurants since 1989 which proved the fact that Karnataka Co-Operative Milk Producers Federation was a prior user and adopter of the trademark “NANDINI”.
With the IPAB and the HC restraining Nandhini Deluxe, the restaurant chain, from using the “NANDHINI” trademark and considering its use to be an infringement of the well-known trademark “NANDINI”, Nadhini Deluxe further appealed against before the Supreme Court.
The Supreme Court put together a detailed comparison on the trademarks in dispute and observed that the marks in question, “NANDHINI”/”NANDINI” of Nadhini Deluxe (Appellant) and Karnataka Co-Operative Milk Producers Federation (Respondent), respectively, cannot be claimed to be deceptively similar, and not amounting to any confusion among the general public. The Court held as follows: “Though there is a phonetic similarity insofar as the words “NANDHINI”/”NANDINI” are concerned, the trademark with logo adopted by the two parties are altogether different. The manner in which the Appellant has written “NANDHINI” in totally different font as compared to the style adopted by the respondent for its trademark “NANDINI”. Further, the Appellant has used and added the suffix ‘Deluxe’ and, thus, its trademark is “NANDHINI DELUXE”. It is followed by the words ‘the real spice of life’. There is device of lamp with the word “NANDHINI”. In contrast, the Respondent has used only one word, namely, “NANDINI” which is not prefixed or suffixed by any word. In its trademark, “NANDINI” encircled by an egg shaped circle has been placed below the ‘Cow’ logo. A bare perusal of the two trademarks would show that there is hardly any similarity of the appellant’s trademark with that of the respondent when these trademarks are seen in totality.”
The Court held, ““NANDHINI”/”NANDINI” is a generic name, representing a goddess and a cow in Hindu mythology, and it is not an invented or coined word by anyone to the dispute.”
Further the Court concluded that there is no provision of law which expressly prohibits registration of a trademark which is similar to an existing trademark and used for dissimilar goods, even when they fall under the same class. It was held that no person can have exclusive right or monopoly over the entire class of goods, especially when the trademark is not being used with respect to all the goods falling under the said class. Supreme Court’s decision clearly construes that two visually distinct and different marks cannot be called deceptively similar especially when they are being used for different goods.
This in turn would be a huge relief to the trademark owners having trademarks similar to already existing trademarks for dissimilar goods falling under same class.
The complete judgment can be accessed at this link.
Rohit Jain is a Senior Associate at Singhania and Partners LLP, one of the top tier firms in the country with 70 fees earners and offices in New Delhi, Bengaluru and Hyderabad. He is currently working out of their New Delhi office and is advising clients on issues relating to commercial contracts, general corporate advisory and dispute resolution. Rohit advises clients on commercial disputes and regularly appears before the NCLT, Delhi High Court and the Supreme Court of India.
Rohit started his career with the law firm Shardul Amarchand Mangaldas Suresh S. Shroff & Co. (Erstwhile Amarchand Mangaldas Suresh S. Shroff & Co.) where he worked with the Corporate and Intellectual Property teams and advised clients on intellectual property licensing issues. A qualified engineer, Rohit actively participates and advises clients on technology related issues especially, in the areas of energy efficiency. Rohit is on the panel of Bureau of Energy Efficiency (BEE), Ministry of Power and has been advising it on issues arising under the PAT Scheme relating to enhancing efficiency of heavy energy consumption industries in the country.
Rohit has been advising World Bank since 2014 on Company Law issues and has been recently awarded for his contribution in the 2018 edition of their annual publication “Doing Business in India”. Besides, he represents National Highways of India, Ministry of Road, Transport and Highways, in various contractual disputes and arbitrations and advises on various contentious as well as non-contentious legal issues. He provides both hands-on legal advice and overall strategic inputs to reflect the clients’ interest at all times.
A recent article by Rohit on ‘Hybrid Instruments’ has made it to the ‘Capital Markets’ special issue of the Chartered Secretary Journal. Rohit has been associated with startups since his college days at IIT Kharagpur where he had his own startup named, CLIP (acronym for Corporate, Litigation and IP) that provided advise on IP and agreements to engineering students who were early stage entrepreneurs. Since 2015, Rohit has been associated with IIM Calcutta Innovation Park (IIMCIP) and has been advising IIMCIP and its incubatee on all kinds of legal issues including compliances, contracts, trademarks, legal opinions etc.
Rohit is also on the advisory board of a number of startups and advises many startups regularly on different issues.
Bureau of Energy Efficiency
Master Trust Limited
National Highways Authority of India
Sanmina SCI Technology
Sig Sauer, Inc.
Sri Maruti Wind Park Developers
Delhi High Court Bar Association
Indian Institute of Engineers
International Pacific Bar Association
The Government of India has bought out revised Foreign