Mumbai // India’s information technology firms are facing the looming threat of immigration reforms in the United States, which could hit profitability and disrupt their operations in the sector’s largest export market.

Immigration challenges for India’s US$108 billion IT outsourcing industry have come to the forefront after the Bangalore-based software giant Infosys last month announced a $34 million settlement with America’s justice department over alleged manipulation of the US visa system. Infosys came under investigation for accusations of using short-term business visas, known at B1 visas – which are relatively cheap and easy to secure – instead of H1B work visas, required for foreign skilled employees working in the US on a longer term basis. Infosys denied systemic fraud. IT outsourcing companies in India, including Infosys, Tata Consultancy Services and Wipro, are heavily dependent on revenues from the US. They keep their costs down and secure the employees they need by sending skilled workers to America, often on H1B visas. There is an annual cap of 65,000 of these employment visas and this year the quota was exhausted in a matter of days.

Under a proposed US immigration law, unveiled this year, the number of employees Indian outsourcing companies would be able to send to theSS would be restricted and each visa could cost thousands of dollars more. The bill prevents firms from securing more H1B visas in 2014 if they already have 75 per cent of their workforce on these visas. The following year would be even tougher, with companies only permitted to have 65 per cent of their team on the visas, to be reduced even further to 50 per cent in 2016.

More than three-quarters of positions in the US at the major Indian IT firms are estimated to be held by Indian expatriates. The immigration bill was passed by the US Senate in June and requires approval by the House of Representatives before becoming law. President Barack Obama has called for the reform to be passed by the end of the year, but issues including the recent partial government shutdown could delay the process. If it goes through, the bill will have far-reaching consequences for India’s outsourcing industry.

“These challenges are definitely significant for the Indian IT sector,” says Sandeep Ladda, the technology leader at PwC India. “About 62 per cent of the export revenues for this sector come from the US. The proposed bill would create more hassles for the Indian outsourcing companies – in fact has a good potential of disrupting their current business models.

“Stringent H1B visa restrictions, higher visa costs on newer visa applications and increased H1B worker wages will have an adverse impact on the operating margins, which are already under pressure, of the companies. Additionally, this could also lead to overall increase in the cost of doing business in the US for the Indian companies and it would to an extent erode the cost advantage the customers are looking for.”

A report by the National Association of Software and Services Companies (Nasscom) highlighted the significance of the Indian outsourcing industry in the US.

“With challenging labour market conditions in these geographies, governments are increasingly resorting to protectionism to boost their economies,” according to Nasscom.

The organisation estimates that the direct workforce employed in the US by the Indian IT sector doubled over five years between 2006 and 2011 to 107,000 and that the industry supports more than 280,000 jobs in the country. Over that same period, the Indian technology industry paid more than $15bn in taxes in the US and invested more than $5bn through 128 acquisitions, according to Nasscom.

“The issue of skilled workers travelling for short durations is unfortunately being linked to the larger debate on immigration and does not take into account the contribution of the Indian IT industry to the US economy,” the organisation says.

Faisal Husain, the chief executive of Synechron, a global IT services outsourcing company, says the proposed changes are worrying.

“I think that fundamentally what the US government is trying to do is encourage local recruitment, which we are very supportive of,” Mr Husain says. “But the government should also recognise that there is a shortage of IT workers in the US, so companies like us do have to rely on local recruitment and recruitment from India and other places.”

Raj Jain, the chairman and managing director of RS Software, an India-based technology solution provider to the electronic payments industry, says American firms are themselves lobbying against restrictive legislation.

“The customers of the Indian IT industry – the Microsofts of the world or the major Wall Street banks or people like Apple or Google, all the major companies that spend a lot of money on technology – they themselves recognise the need for such talent which originates in India,” says Mr Jain. “All these customers of the Indian IT industry are themselves lobbying that they need the laws to be reasonable; otherwise America’s competitiveness will be impacted negatively.”

Nonetheless, Indian companies will have to be ready to adapt, should the reforms go through, analysts say.

“The proposed bill has pushed a few of the leading Indian companies to work out on a contingency plan to minimise the impact,” says Mr Ladda. “Indian companies have initiated efforts in scouting for acquisitions and also to set up their development centres in the US to increase the US workforce count.

“The proposed bill has also forced some of the companies who do not have a large local workforce to hire more locally, so that they get the percentage of workforce already on H1B to below 50 per cent. This would have an impact on the margins of these companies.”

Mr Ladda says firms would have to look at various strategies to sustain revenues and margins.

“The Indian companies would have to restructure their existing staffing/business models and look at increasing their near-shore staff in locations like Canada and other low cost regions,” he says.

“They can also look at passing on the increased cost due to the visa reforms to customers by renegotiating/reworking on their existing contracts. However, this might not please the customers and might have an adverse impact on the business.”

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