If Indian IT stocks have held their own, after the initial collapse when news of the US immigration Bill first came in some months ago, it is for good reason—after collapsing in April, the BSE IT index rallied from 5,709 at the end of April to 6,246 on July 8 while the Sensex fell marginally from 19,504 to 19,324. The reason for this resilience is two-fold: one, the fall in the value of the rupee is expected to provide some cushion; second, with a dramatic difference in the Bills passed by the Democrat-controlled Senate—12 Republicans, though, did vote for the Bill in the Senate—and the Republican-controlled House of Representatives, most believe critical provisions of the Bill will get watered down in the joint session around October or November this year when the two Bills are reconciled. Indeed, though this Bill is the most comprehensive immigration reform – and large parts of it are very progressive since they award higher marks to the educated and the skilled—seen in a long time, the IT industry has survived around 40 pieces of legislation in the last 3 years that sought to put some curb or the other on it. In most cases, US industry that benefited from India’s IT sector, managed to persuade US politicians to dilute critical bills. Whether that will work this time around, though, is open to question since two electoral defeats should have convinced the Republicans—who are against the Bill—that they will have to make critical concessions to immigrants if they are to have a hope of wresting the Presidency the next time around.
The most critical part of the otherwise reformist Bill, the outplacement section, relates to what are called H1B-dependent employers, or those who have more than 15% of their US staff on such visas—this applies to all Indian software majors but not to US MNCs like IBM whose large US workforces ensure they don’t fall in this category. All manner of restrictions have been put on these firms, including higher visa fees and ensuring that jobs have been offered to US citizens before more H1B employees are brought to the US to work on client sites. Since the medium-term solution is to do less work onsite and simply offshore it back to India, it is in the immediate short-term that a problem exists. If the Bill is passed in its current form, the impact on margins of Indian IT firms could be anywhere between 150-300bps. But it’s early days yet, and a lot of mitigating factors exist, apart from the rupee. For one, US clients could absorb H1B staffers to provide more headroom for Indian firms to get fresh H1B staffers; Indian IT firms could buy up more US firms to increase their operational space; most important, the Bill does not have an effective date to implement the outplacement provision, so there will be some discretion for the government in terms of the actual date when the restrictions kick in. Indian lobbyists, meanwhile, are using US government data to show that since the US has insignificant unemployment in this category of workers, the H1B-dependent clause should be dropped.