Infosys' legal troubles in the United States may complicate life for India's feted outsourcing industry. Outsourcers have been a relative bright spot in a market dogged by worries about India's growth prospects. But an investigation into allegations Infosys broke visa rules to get Indian employees into the United States will put them on eggshells. Until the air clears, this is another reason to avoid Indian stocks.
Indian outsourcers have been a shelter of sorts for investors, offering a way to play the India theme without the worries about domestic growth and political paralysis. They had a recession-proof appeal: companies eager to cut costs in good times would be more desperate to do so in bad times. As a result, Infosys shares had fallen only 8% in 2012 up to April 13, while market heavyweight Reliance Industries had slid 26%.
Yet Infosys shares have plunged 15% since April 13, when the technology group predicted that this year's revenue growth might slip below 10%, and warned that the visa investigations could affect earnings -- the first time the case appeared in its financial statements since the allegations emerged in early 2011. Shares of competitors Tata Consultancy Services and Wipro fell 5% and 4% respectively.
All this comes at a sensitive time. The upcoming US election year means politicians may feel obliged to be tough over immigration issues. India has also challenged rising US visa fees in the World Trade Organization. The industry is maturing, too. While once it could rely on moving jobs from expensive America to cheap India, many big companies now want services performed locally, which puts Infosys up against the likes of IBM and Accenture. The Indian group now has 15,000 employees - 10% of its workforce - in the United States.
However the investigation turns out, India's outsourcers will now find US revenues come at greater expense. Even if a legal crackdown or political backlash doesn't make it harder to bring Indian workers in, making sure the i's are dotted and t's are crossed is likely to raise costs and put a brake on expansion. For global investors, that's likely to reduce India's allure even further.
Infosys shares slid 13% on April 13 after the company forecast slower-than-expected revenue growth in its current fiscal year. The technology and outsourcing company reported a 27% increase in fourth quarter net profits, to 23 billion rupees. But it said it expected revenues in the year ending March 31, 2013, to grow between 8% and 10% to as much as $7.7 billion.
In its financial statement, the company said it had been notified by the US Attorney's Office that it and certain employees were targets of an investigation over its use of business visas. It said it was also being reviewed by the US Department of Homeland Security, and that the department had found errors in its employee documentation which may be subject to fines and penalties.
Infosys has denied the allegations and issued a statement April 13 saying: "Any allegation or assertion that there is or was a corporate policy of evading the law in conjunction with the B-1 visa program is simply untrue."