New bump on IT highway

When it is election time in the US, the Indian IT ecosystem feels the heat.

With outsourcing of jobs such a prickly issue, naturally the debates in the US tend to get more high-decibel and poll candidates proactively champion ‘Buffalo, not Bangalore' cause.

But, this time around, the IT industry finds itself in a fresh dilemma. One that could become a hot point of debate in the run-up to next year's presidential elections in the US. It is probably the first time that the integrity of large software outsourcing giants is being questioned.

Over the last few months, there have been allegations that Indian vendors are misusing US work permits, by making employees on B1 and Blanket L visas perform the same tasks as workers on H-1B visas. That includes functions like writing and testing software code.

Subpoena set ball rolling

The visa trouble came under full media glare earlier this year when Infosys received a subpoena from a lower court in the US asking it to provide sponsorship details of B1 visas. This was after a US-based employee of Infosys alleged that the company was misusing the visa programme to bring Indian employees to the US, to work at clients' site.

The plaintiff described ways that Infosys — one of the top ten H-1B users — allegedly used to “creatively” veer around the H-IB visa programme, in order to bring in ‘low-skilled and low-wage workers'.

He also alleged that Infosys coached employees going to the US on B1 visa on how to pass the immigration interview.

If Infosys is found guilty of visa misuse, it will have larger ramification for the industry. “I hope that the (Infosys) issue turns out to be a non-issue,” says Ganesh Natarajan, Vice-Chairman and Chief Executive Officer of Zensar Technologies.

“We have heard stories of how people were turned back from the airport as they were found to be travelling on the wrong visa type. Though these incidents are sporadic, what will be worrisome is if it becomes a trend, especially with US elections around the corner,” says Natarajan.

Typically, B1 visas are issued for short-term business trips, for such purposes as attending business seminars, and restricts employees from engaging in gainful employment during their stay. H-1B visas, on the other hand, are longer-term visas issued to people with a bachelor's degree who work in speciality occupations.

Only persons with a valid H-1B visa can be involved in actual delivery of software services in onsite locations.

However, in certain, limited circumstances, the US Consulate may issue an employment-authorised B1 visa, where the work to be undertaken would usually require an H-1B visa.

This provision is particularly applicable to situations where you may need a non-US company to send a member of staff to the US for a limited period in order to undertake specific projects for you, or where you wish to bring in an employee of an overseas subsidiary, affiliate or parent for a limited period.

The US government has set a cap of 65,000 H-1B visas to be issued every year and a chunk of it is used by Indian computer software firms. There is no such cap on B1 visas.

Hike in visa fee

India Inc's visa woes have been building up for a while now. It may be recalled that in August last year, the US effected an increase in visa fee after the Congress passed the “Border Security Bill” — that translated into a $2,000 hike in H-1B application fee.

The hike, it is estimated, added some $250 million to the Indian industry's annual visa costs and was termed “discriminatory” by New Delhi.

And that's not all. Equity research publisher CLSA, in a report on the industry a few months back, flagged the doubling of rejection rates for H-1B and L1 visas.

“Checks indicate that H-1B/L1 visa rejection rates have doubled from 4 per cent to 8 per cent for larger companies, with even higher rejection rates for smaller companies…” CLSA had said.

The BEP Scanner

Moreover, companies such as IBM, TCS, Cognizant and HCL were under the scanner of the US Embassy last year for visa application-related irregularities. The irregularities were detected in application made as part of the Business Executive Programme or BEP. This programme is designed to speed up business-related visa applications and interviews for companies that have a requirement of sending large numbers of employees to the US.

A communication between Senator Chuck Grassley and the US Department of Labour stated that five large employers (in India) were suspended from the Business Executive Programme due to “fraud discovered in visa applications filed by purported employees”. While TCS and IBM were later re-instated in the scheme, there is still no update on the status of Cognizant and HCL.

‘Tweak B1 visa scheme'

Top IT companies have a rotation policy in place which ensures that a diverse set of people go for onsite assignments.

The company applies for H-1B visas and then the person concerned is sent to the US for the onsite work. Given the thrust on driving more work offshore, the onsite assignment would come to an end in, say, three months.

“In many cases, when the person is back, he is poached by a smaller IT company that cannot afford to apply for an H-1B visa. And then the person takes off again for an overseas assignment. Thus, the larger IT company not only loses the engineer but also a valid H-1B visa holder to competition,” says Hanuman Tripathi, Chief Executive Officer and Managing Director of Infrasoft Technologies.

Tripathi feels that the B1 visa scheme needs to be further tweaked so it can help employees do billable work within the three-month period.

Such tweaking is necessary, given the shortage of qualified workers in the areas of science and technology within the US and Europe.

In fact, Europe is set to see shortage of several million university-educated workers in the next 10 years.

Meanwhile, India will become the world's largest source of labour, adding as many as 64 million university-educated workers by 2020.

“So it can be expected that immigration laws in the US and other developed countries will need to be adjusted to reflect these new realities,” says Peter Schumacher, CEO of consultancy firm Value Leadership Group. At the same time, companies operating in India will gain even more strategic significance, as they hold the key to this talent pool, he notes.

Onsite delivery costs may escalate

Work permit situation is not too rosy in other western countries, either. Switzerland, for instance, has introduced minimum wage requirements in addition to quotas, while the UK has increased minimum wages for visas for a period greater than 12 months.

Though the market is waiting for cues from the management of top IT companies (the first quarter result announcements kick off this week), analysts feel that the spike in visa costs and the increase in rejection rates of visas will result in higher onsite delivery costs and lower competitiveness of IT companies in some cases.

Certain kinds of projects, namely those with a high onsite component, will become more difficult to execute, points out Natarajan of Zensar.

In the US, the silver lining is that rejections are high only on the H-1B visa category and not the L1, according to Sandip Agarwal, IT Analyst with Antique Stock Broking.

Also, while there are some delays in Europe, there are no issues in Canada, says Agarwal.

“Our analysis shows us an impact of just 1.4 per cent on our earnings per share estimates even if we assume a 60 per cent visa rejection ratio, which is on the higher side,” he adds.

Though margins will be under pressure in the near term, IT companies can hope to improve pricing, reduce SG&A (Selling, General and Administrative Expenses) and increase offshore revenues, to counter the same.

“Moreover, companies will try to transition a project from onshore to offshore as quickly as possible, so that they do not incur additional visa costs,” says Pralay Das, IT Analyst with Elara Capital.

For a five-year engagement, it takes between two and three quarters to move a significant chunk of the processes offshore.

In fact, companies that generate a high percentage of their revenues in the US and have high onshore revenue will be more severely hit by the impact of higher visa costs, points out Schumacher.

In comparison, the top three IT vendors, TCS, Infosys and Wipro, generate more than 50 per cent revenues from services delivered from offshore locations such as India.

There is also a view that increase in visa rejection rates will benefit temporary staffing companies. In a bid to reduce overall costs, IT firms are on the lookout for temporary staffers for short-term work.

TCS saw a 76 per cent rise in fees paid to overseas business associates to about Rs 982 crore, from Rs 559 crore in previous financial year.

This expenditure, as a percentage of overall revenues, increased to 2.63 per cent from 1.86 per cent in the previous fiscal.

“During fiscal 2011, the customer-centric strategy adopted by the company… required increase in the use of the services of business associates… The company normally engages these consultants to bridge shortages in certain skill-sets,” TCS said in its annual report.

adith@thehindu.co.in

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