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Moneylife » Companies & Sectors » Sector Trends » US immigration bill would disrupt the Indian IT business model

US immigration bill would disrupt the Indian IT business model

Moneylife Digital Team | 24/05/2013 03:45 PM | 

According to Nomura, the US immigration bill, if passed, would place the Indian IT business model at competitive disadvantage compared with MNCs and depress margins irrevocably
 
The overriding factor in the information technology (IT) sector currently remains the overhang due to the US immigration bill, which has damaging provisions for Indian IT. These provisions have the potential to flatten sector earnings over FY13-16F or take them to negative territory as well in certain cases if one of the clauses related to outplacement debarment of H1B employees passes, says Nomura in a research paper.
 
This is a bipartisan bill (backed by four Democrat and four Republican senators) and was tabled in the US Senate recently. The bill focuses on comprehensive immigration reform encompassing a wide range of issues like border security, immigrant/non-immigrant visas, and citizenship paths for illegal immigrants and employment verification. The bigger pieces of the bill are focused on what happens to the 11 million illegal immigrants in the US, while H-1B reform is a smaller part of the bill, although more relevant from an Indian IT perspective.
 
According to Nomura, there are four key proposals in the bill that are most damaging for Indian IT companies. These are outplacement debarment of H1-B workers at client sites, increase in visa fees, increase in local proportions to 50% by 2016 and increase in H1B mandated salary levels. 
 
Outplacement debarment of H-1B resources on client sites by H-1B-dependent 
employers 
According to the bill, “an H-1B-dependent employer may not place, outsource, lease, or otherwise contract for the services or placement of an H-1B non-immigrant employee”. 
 
Nomura says, this means that employees on H-1B visas will be restricted from working at the customer sites, although they can work from global delivery centres. Since all Indian IT companies are classified as H-1B-dependent employers, this provision would restrict them from placing their staff on H-1B visas (work visas) at customer sites. H-1B dependent employers are those companies, which have at least 15% of their US staff on H-1B visas. 
 
Typically, Indian IT companies place people onsite for interfacing with clients, coordinating with the offshore teams and for critical development/support related work at client sites. Majority of IT services staff in the US are typically posted at customer sites. Therefore, the debarment provision would disrupt this arrangement and would mandate placing only local employees at client sites. 
 
“We believe it is difficult to quantify the impact of the severest of all provisions in the US immigration bill, which is ‘Debarment of outplacement of H-1B employees at customer sites’, as it will hit existing business, existing margins, business models and future growth. This provision will impact all tier-1 IT companies severely if passed in its current form. TCS could have lower disruption initially as it has historically been more dependent on L1 visas (company transfers), compared to peers who have been more H-1B dependent, but nevertheless the troubles would be industry-wide,” Nomura said.
 
Increase in visa fees 
If a company has between 30-50% of its US staff on H-1B or L1 visas, the bill proposes to charge $5,000 extra for additional people above the 30% norm. If, on the other hand, a company has more than 50% of its US staff on H-1B or L1 visas, the bill proposes to charge $10,000 extra for every additional person above the 50% norm. 
 
Local headcount proportions of 50% by 2016 
The bill mandates that companies should have at least 25% of staff as locals by 2014, 35% by 2015 and 50% by 2016. If these conditions are not met, the companies would not be able to apply for further visas (H-1B and L1). 
 
Increase in H-1B mandated salaries 
Currently, H-1B visa salaries are mandated by USCIS, depending on the geographical area, skill or experience level that a person has, with which companies need to comply with by paying at least the same or higher salaries. What the bill proposes to do is to increase mandated salaries for H-1B visa holders, given the view held by the framers of this bill that H-1B visas are being used by Indian IT companies to undercut American employees. The quantum of the increase to the mandated salaries has not been mentioned.
 

“We expect 150-400 basis point impact on margins for tier-1 IT companies on account of three of the four provisions (ie, excluding the outplacement debarment of H1B clause). This essentially has the potential to flatten sector earnings with a reduction in earnings per share (EPS) compounded annual growth rates (CAGRs) by 4-9% across companies under various scenarios. Though some of the cost escalation could be passed to clients, we believe the impact is still likely to be substantial. The impact is likely to be severest for TCS and Cognizant Technology Solutions Corp, followed by Infosys, Wipro and HCL Technologies,” said Nomura. 

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1 Comment
Kiran R Bhagwat

Kiran R Bhagwat 1 year ago

I don't think it will be easy for the US to meet the objective of increasing local employment for the following reasons:
1. The talent availability in the US is a major problem. Even with the Indian companies placing their people on site, there are thousands of positions open in large IT companies in the US even today! The problem would be worse after restrictions are put in place!
2. The pressure on off-shoring the work will increase - and that may in fact indirectly benefit the Indian companies and take even more work away from the US!
3. There will be some shifting of local workforce across IT services companies and also movement of people on H1 back to India in order to get the balance right. This may mean that the increase in new employment will not be to the extent the numbers suggest!

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