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16 April 2012 By Jeff Glekin

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 percent in 2012 up to April 13, while market heavyweight Reliance Industries had slid 26 percent.

Yet Infosys shares have plunged 15 percent since April 13, when the technology group predicted that this year’s revenue growth might slip below 10 percent, 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 percent and 4 percent respectively.

All this comes at a sensitive time. The upcoming U.S. election year means politicians may feel obliged to be tough over immigration issues. India has also challenged rising U.S. 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 percent of its workforce – in the United States.

However the investigation turns out, India’s outsourcers will now find U.S. 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.

 

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