Penalties & debarment

Penalties and debarment are integral components of the public procurement framework, designed to uphold principles of integrity, transparency, efficiency, economy, and accountability. The Manual for Procurement of Goods emphasizes the importance of good governance and value for money in public procurement. These measures serve to deter misconduct, ensure compliance with tender conditions and legal requirements, and protect public funds and interests.

Grounds for Imposing Penalties and Debarment

Various actions or omissions by bidders, suppliers, or contractors during the procurement process or contract execution can lead to the imposition of penalties or debarment. The sources outline several such grounds:

  1. Breach of Contract and Non-Performance:
    • When a person breaks a contract, they may be liable for reasonable compensation not exceeding the amount named as such compensation or the penalty stipulated for the breach.
    • Specific contract breaches, such as non-supply of material, abandonment of works, or substandard quality of works, can also warrant debarment.
    • Failure to abide by a “Bid Securing Declaration” is also listed as a potential misdemeanour leading to debarment.
    • Late delivery can lead to the recovery of compensation for loss, which is pre-estimated and mutually agreed upon as Liquidated Damages (LD) in the contract. While the law allows recovery of pre-estimated loss if the term is included, establishing that inconvenience and loss have been caused due to the delay strengthens the procuring entity’s rights. In certain contexts, such as GeM contracts where fund blocking fails and the seller declines supply, delay in delivery by the seller may be exempt from LD provisions.
  2. Violation of the Code of Integrity for Public Procurement (CIPP):
    • The CIPP is a crucial element of the public procurement framework. Violating the CIPP can lead to punitive measures.
    • A procuring entity may debar a bidder or any of its successors from participating in any procurement process undertaken by it for a period not exceeding two years if it determines that the bidder has breached the code of integrity [6(iii), 60(c), 62(c), 65(a)i, 68, 131(a)].
    • Specific actions considered violations include, but are not limited to, using tactics like cartel formation or pool rates to avoid or control true competition in a tender, which is considered an abuse of the transparency of Public Procurement [99, 100(b)]. Such actions can have an “Appreciable Adverse Effect on Competition” (AAEC), which is an offence under the Competition Act, 2002.
    • “Obstructive practice,” defined as materially impeding the procuring entity’s investigation by destroying, falsifying, altering, or concealing evidence, making false statements, or threatening/harassing/intimidating any party to prevent disclosure or investigation, is also a violation [57(vii)].
  3. False Declarations:
    • Making a false declaration of local content as a Class I or Class II local supplier under the Public Procurement (Preference to Make in India) Order is considered a breach of the code of integrity and can warrant debarment [65(a)ii, 68, 131(b)].
    • Wrong declaration by the bidder regarding prescribed domestic value addition, specifically related to iron & steel products procurement, can lead to penalties defined in the tender document, including forfeiting EMD, other financial penalties, and debarment [52(b)].
  4. Criminal Convictions:
    • A bidder who has been convicted of an offence under the Prevention of Corruption Act, 1988 [5(a), 60(a)i, 70(a)i, 132].
    • A bidder convicted under the Indian Penal Code or any other law for the time being in force, for causing any loss of life or property or causing a threat to public health as part of the execution of a public procurement contract [5(b), 60(a)ii, 70(a)ii, 71(a)ii, 132].
  5. Other Actions or Omissions:
    • Employing a government servant who has been dismissed or removed on account of corruption.
    • Employing a non-official convicted for an offence involving corruption or abetment of such an offence in a position where he could corrupt government servants.
    • Employing a government officer within one year of his retirement who has had business dealings with the firm in an official capacity before retirement.
    • Any other actions or omissions that, in the opinion of the Ministry/Department, warrant debarment [66(a)iii, 68, 131(c), 132, 135].
  6. Violations Related to Tender Process:
    • If a bidder withdraws or amends its bid or impairs or derogates from the tender in any respect within the period of validity of the tender, their bid security shall be forfeited.
    • If the successful bidder fails to furnish the required performance security or to sign the contract within the specified period, their bid security shall be forfeited.
    • Failing to lift rejected goods within the stipulated time can lead to charging ground rent or disposal of the material [108(3)].
  7. Defaults in Payments (Specific Contexts):
    • For loans sanctioned to State/Union Territory Governments, wholly Government owned companies, or Public Sector Undertakings, loan sanctions shall invariably include provision for the levy of penal interest on overdue installments of interest or principal and interest.
    • In other loan cases, a higher rate of interest shall be stipulated, with a lower rate for punctual payments. This penal or higher rate should generally not be less than 2.5% per annum above the normal rate, except under special Government orders.
  8. Actions by Procuring Entity Officials:
    • Including restrictive or discriminatory conditions against domestic suppliers in tender documents can lead to an inquiry to fix responsibility. Appropriate action, administrative or otherwise, shall be taken against erring officials. Intimation on such actions is sent to the Standing Committee.
    • Unwarranted discretionary delays in payments to contractors can lead to responsibility being fixed on the concerned officers.

Types and Duration of Debarment

The sources differentiate between debarment imposed by individual Ministries/Departments and debarment imposed by the Department of Expenditure (DoE), which affects all Central Government entities.

  1. Debarment by a Single Ministry/Department:
    • A Ministry/Department can debar a bidder (including its successors/allied firms) from participating in any procurement process for a period not exceeding two years [6(iii), 60(c), 62(c), 65(a), 68, 136(5)].
    • Grounds for this type of debarment include breach of the code of integrity, false declaration of local content, or other actions/omissions that warrant debarment in the opinion of the Ministry/Department [65(a), 66(a)iii, 68, 131(a), 131(b), 131(c)].
    • Debarment orders issued by a single Ministry/Department are applicable only to that Ministry/Department and all its attached/subordinate offices, Autonomous bodies, and Central Public Sector Undertakings (CPSEs) [66(b)]. The order is generally not circulated to other Ministries/Departments [66(b)].
    • Ministries/Departments may delegate powers to debar bidders to their CPSEs, Attached Offices/Autonomous Bodies, etc. [69(4)]. Debarments by such bodies are applicable only to their specific procurements [69(4)]. The Government e-Marketplace (GeM) can also debar bidders for up to two years on its portal [69(4)].
  2. Debarment across All Ministries/Departments (by DoE):
    • In certain situations, a firm may be debarred from taking part in any tendering procedure floated by all Central Government Ministries/Departments.
    • The primary ground for this wider debarment is conviction for an offence under the Prevention of Corruption Act, 1988, or under the Indian Penal Code or any other law for causing loss of life or property or a threat to public health as part of a public procurement contract [5(a), 5(b), 60(a), 70(a), 71(a)].
    • For these specific convictions, the debarment period can be for a period not exceeding three years [5(ii), 6(ii), 60(b), 70(a)].
    • The Department of Expenditure (DoE) maintains a list of such debarred firms, which is displayed on the GeM-Central Public Procurement Portal (CPPP) [6(ii), 72(g)]. This list on CPPP is applicable to all Ministries/Departments, Attached and Subordinate Offices, CPSEs, and Autonomous bodies [72(g)].
    • Any successor of a bidder debarred under these conviction grounds shall also not be eligible to participate in a procurement process [5(ii), 6(ii), 60(b), 62(b)].
  3. General Provisions on Duration:
    • Ordinarily, the period of debarment should not be less than six months [76(h), 136(5)].
    • The duration mentioned in the debarment order can range from six months up to two years (for integrity breach etc.) or up to three years (for specific convictions) [136(5)].

Other Penalties and Measures

Beyond debarment, procuring entities have several other punitive and recovery mechanisms at their disposal:

  1. Forfeiture of Securities:
    • Bid Security/Earnest Money Deposit (EMD) can be forfeited if a bidder withdraws/amends their bid within validity, or fails to furnish performance security or sign the contract. EMD should be sufficient to ensure bidders honour bids but not so large as to reduce competition. Forfeiture of EMD is also a possible penalty for wrong declaration of domestic value addition [52(b)] and for tactics avoiding competition [100(b)]. Forfeiture of Bid Security/Performance Security is listed in the debarment order format [136(d)].
    • Any other security or bond relating to the procurement can be forfeited and/or encashed for violations of the code of integrity [59(ii)].
    • In disposal cases, if the Balance Sale Value (BSV) is not paid within extended time (up to two weeks with late payment charges), the Security Deposit (SD) stands forfeited without notice [109(xii)].
    • Note: Submission of Performance Security is generally not necessary for a tender value up to Rupees 50 Lakh [93(2)]. Also, certain entities like Govt. Ministries, Departments, Attached and Subordinate Offices, Autonomous bodies, and OEMs in PAC tenders may be exempt from submitting Performance Security [94(3)].
  2. Financial Penalties and Recoveries:
    • Recovery of compensation for loss incurred by the procuring entity due to contract cancellation [59(i)].
    • Recovery of payments, including advance payments, made by the procuring entity along with interest thereon at the prevailing rate [59(iii)].
    • Other financial penalties as defined in the tender document for wrong declaration of domestic value addition [52(b)].
    • A penalty up to 10% of the contract value may be imposed if a contractor/supplier does not meet the stipulated local content requirement, leading to a change in their supplier category. However, the contract is not terminated on this account.
    • Charging ground rent (e.g., 0.2% to 0.5% per day of goods value) if the supplier does not lift rejected goods within the stipulated time [108(3)].
    • Disposal of unlifted rejected material as scrap to recover dues [108(3)].
    • Charging late payment charges (e.g., 1% per week or part thereof up to two weeks) for extended time granted for BSV payment in disposal cases [109(xii)].
    • Recovery of overcharged amounts.
    • Procuring entities may recover public money from a supplier’s bill based on requests from other ministries/departments, but the requesting entity is responsible for defending against legal action and paying any interest.
  3. Contractual Actions:
    • Cancellation of the relevant contract for violation of the code of integrity [59(i)].
    • Termination of the contract, treating it as a misdemeanour or breach, and taking punitive remedies available thereunder.
    • Procuring entity shall not pay for consignments of incomplete components unless the full useable Scope of Goods is received, and deficiencies in incidental works/services also amount to incomplete delivery.

Debarment Procedure

The sources provide a framework for the debarment process, emphasizing fairness and due process:

  1. Current Guidelines: Debarment procedures are guided by current ‘Debarment Guidelines’ issued by the PPD DoE, which supersede earlier instructions. Procuring organizations with existing guidelines must revise them to conform.
  2. Reasonable Opportunity to Represent: A bidder shall not be debarred unless given a reasonable opportunity to represent against such debarment [60(d), 62(d), 71(c)]. This includes providing them with a show-cause notice and allowing them to submit a written reply.
  3. Show-Cause Notice: A formal show-cause notice must be issued, stating the subject and referencing relevant tenders/contracts. It must detail the “serious misdemeanour” or “articles of misdemeanour” committed, including breach of the Code of Integrity, false declaration of local content, or other actions/omissions. The notice should include a deadline for response (e.g., 15 days) [132(e)]. Failure to respond may result in further action, including a debarment order [132(e)].
  4. Evaluation and Hearing: The procuring entity evaluates the firm’s submission [69(v)]. An oral hearing may be granted if requested by the firm [69(v), 71(c), 133].
  5. Timeline (for Single Ministry/Dept. Debarment): A suggested timeline includes 1 week for issuing the show-cause notice, 3 weeks for submission (including reminders), 3 weeks for evaluation and oral hearing, and 2 weeks for the final order and appeal opportunity [69(iii)-(vi)]. The total process for the debarment period to start is suggested as 12 weeks from the zero-day [69(vii)]. The appeal disposal may take an additional 4 weeks [69(viii)].
  6. Final Order: A formal debarment order is issued. It must state the reason(s) for debarment, the jurisdictional extent of the order, and the validity period [75(a), 136]. Details of the misdemeanours are included in an annexure. The order should explicitly state that no contract of any kind shall be placed with the debarred firm within the specified jurisdiction and period [75(b), 134]. It also states that the debarment applies to allied firms and partners in a JV/consortium [135(a)].
  7. Appeal Process: The debarment order must indicate an opportunity to appeal [69(vi), 136(6)]. An appeal may be submitted within 15 days of receiving the order, supported by relevant evidence, and addressed to the designated appellate authority (e.g., the Secretary of the Ministry/Department for debarment by a single Ministry) [136(6)].
  8. Publication: For debarment across all Central Government entities (by DoE), the list of debarred firms is maintained by DoE and displayed on the GeM-Central Public Procurement Portal (CPPP) [72(g), 137(2)]. For debarment by a single Ministry/Department, the order should be published on the Ministry/Department’s website [137(2)]. Publication is important as the debarment takes effect prospectively from the date of uploading on websites for procuring entities other than the issuing one, in a manner that doesn’t disrupt ongoing procurements [76(g)].

Implications of Debarment

Once a firm is debarred, it faces significant restrictions:

  • Ineligibility to Participate: The debarred firm, including its allied firms and partners in a JV/consortium, is not eligible to participate in any procurement process within the specified jurisdiction during the debarment period [5(ii), 6(ii), 6(iii), 65(a), 69(4), 70, 72(h), 75(b), 134, 135(a), 136(5)].
  • Bids Not Considered: Bids from debarred firms will not be considered for placement of contract [75(b)]. This applies even in cases of risk purchase [75(b)].
  • Effect on Ongoing Procurements: The debarment takes effect prospectively from the date of uploading on websites for procuring entities other than the issuing one, to avoid disrupting ongoing procurements [76(g)]. Contracts concluded before the debarment order is issued are not affected by the order [135(c)].
  • Other Rights Unaffected: Debarment in any manner does not impact any other contractual or other legal rights of the procuring entities [74(f), 76(f), 135(b)].
  • Revocation: Upon completion of the specified debarment period, the debarment automatically stands revoked [136(7)]. The company may then apply for registration again as per procedure [136(7)].

Safeguarding Procuring Entity’s Interests

While punitive actions are necessary, the sources suggest a balanced approach:

  • Punishing delinquent suppliers should be the last resort.
  • Developing and registering a new supplier requires considerable time and effort.
  • In situations where there is a shortage of suppliers for particular goods or equipment, punitive action could negatively impact the procuring entity’s ability to procure necessary items.
  • Therefore, when considering punitive action, the Procuring Entity should seek the views of the concerned department regarding the potential repercussions on the continuity of procurements.
  • Due weightage should be given to the supplier’s past performance.
  • In cases of less serious misdemeanours or where there is a supplier shortage, the Procuring Entity should pragmatically analyze the circumstances. Efforts should be made to reform the supplier and obtain a written commitment for improved performance. If this fails, the possibility of a shorter debarment period should be explored. This approach is mentioned in the context of Rule 151 of GFR 2017.

Transparency and Public Disclosure

Transparency is a fundamental principle in public procurement. Mandatory publication of information is required under Section 4 of the Right to Information (RTI) Act.

  • All Ministries/Departments of the Central Government, CPSEs, and Autonomous and Statutory Bodies are mandatory to publish on the CPPP all their tender enquiries and information about the resulting contracts. This includes notice/tender enquiries, corrigenda, and details of bid awards, specifying the vendor/contractor name, rate, and total amount.
  • The CPPP provides access to information on bidder registration, debarments, and other procurement-related details. The DoE maintains the list of firms debarred across all ministries and displays it on the GeM-CPPP [6(ii), 72(g)].
  • Exceptions to publishing award details can be made in cases where confidentiality is required for reasons of national security or commercial sensitivity, requiring approval from the Secretary of the Ministry/Department with the concurrence of associated Finance [7(ii), 101(2)]. CPSEs procuring for commercial resale can delay sharing contract award details for six months on electronic portals to protect financial data while still complying with transparency requirements [101(2)].

In conclusion, the sources provide a comprehensive overview of the penalties and debarment mechanisms in public procurement, outlining the grounds for such actions, the types and durations of debarment depending on the issuing authority and reason, other associated penalties, the procedures involving show-cause notices and appeals, and the importance of balancing punitive measures with the procuring entity’s interests. These measures are underpinned by legal frameworks such as the GFRs, the Contract Act, the Prevention of Corruption Act, the IPC, the Competition Act, and the RTI Act.