- #Brexit will have “adverse impact” on India investments
- Indian companies are the 3rd largest source of FDI in UK
- Over 800 Indian companies in the UK
- Fastest-growing Indian companies in UK generate over 22 billion pounds of turnover
- Many will need to find another European city to serve as gateway to EU
- For others like Tata Motors, profit may be affected significantly
If Britons Vote ‘Leave'
On June 23, the British people willdecide to ‘Leave' or ‘Remain' in the European Union. Recent opinion pollssuggest that history is about to be made – Britain may exit after four decadesof being a member of the political union.
Based on a recent YouGov/Sunday EU referendumvoting intention survey, ‘Leave' voters stand at 43 percent just edging the‘Remain' camp, which stands at 42 percent. The remaining peoplepolled are still undecided.
“Brexit could mean fewer JPMorgan jobs in the U.K. and more jobs in Europe” says JP Morgan Chase & Co CEO Jamie Dimon, in comments provided to Bloomberg.
Gavin Williams, partner at law firm Herbert SmithFreehills says uncertainty is already impacting business.
Even the talk of a referendum has already created a fair amount of uncertainty amongst the global business community. Some data suggests that UK-facing M&A deal volumes have dropped by nearly 40% in the last 3-4 months.Gavin Williams, Partner, Herbert Smith Freehills
To be fair, there are alsobusiness leaders in the UK in favour of an exit.
The #Brexit vote is perhaps the country's mostsignificant referendum in recent history. And its impact is not limited toBritain or Europe. Several Indian companies will hurt if Britons vote to‘leave'.
Why Brexit Will Hurt India Inc.
The UK has always been touted as an attractive investment destination because of the access that it provides to Europe's single market of more than 500 million people. Especially because the UK also offers a robust legal system based on the well settled principles of English common law. It has a favourable tax regime and ranks high in the World Bank's ease of doing business rankings. The fact that English is the most widely spoken language in Britain doesn't hurt, either.
UK is the third largest source of foreign direct investment in India. And Indian companies are the third-largest source of foreign direct investment for the UK, says the British Government.
Which is why FICCI, one of India's top industry groups, worries that a Brexit could create a lot of uncertainty for India Inc.
“The UK is a valued economic partner for India and we firmly believe that leaving the EU, would create considerable uncertainty for Indian businesses engaged with UK and would possibly have an adverse impact on investment and movement of professionals to the UK”.Dr A Didar Singh, Secretary General, FICCI
Peter King, partner at the London office of law firm Weil, Gotshal & Manges says Brexit could create considerable risks.
‘'Corporate India is of course a big investor in the UK and in the rest of Europe and sells many products and services from India to these markets. The uncertainty may well lead to economic recession in Europe, and the extent to which the UK is open to trade with India may be affected. Of course we do not know with any certainty what will happen, but what we can say is that a vote to leave the EU will create considerable risks for any Indian business which trades with the UK or the rest of the EU, which may well lead to job losses in India.''Peter King, Partner, Weil, Gotshal & Manges
There are over 800 Indian companies in the UK employing over 110,000 people, according to a Grant Thornton report. The report also says that the top fastest-growing Indian companies in UK generate over pounds 22 billion of turnover.
Many of these companies might need to do some serious contingency planning were Britain to exit the EU. They may want to consider another European city instead of London as their entry point into Europe, so as to continue to enjoy free trade and workforce mobility. For many, a Brexit will hurt India bottomlines too.
Case in Point - Tata Motors
For instance Tata Motors, a company with nearly $42 billion in revenue – it's largest subsidiary, the Jaguar Land Rover business, is also UK's largest automotive manufacturing business. JLR contributes around 90 percent of Tata Motors' operational profit.
Peter King thinks that in the event of a Brexit, such a company may need to rethink its European strategy altogether.
At present, for example cars assembled in the UK can be freely sold across the rest of the EU without tariffs. Following a Brexit, it may make more sense to have an assembly plant in one of the remaining EU countries rather than in the UK. Mobility of workforce is another issue for a company like Tata Motors. It will be more difficult to take a worker trained in the UK and redeploy her in France, for example.Peter King, Partner, Weil, Gotshal & Manges
Jayant Dasgupta, Executive Partner at law firm Lakshmikumaran & Sridharan and former Ambassador of India to WTO says that in such a case the impact on profits could be substantial.
One of the attractions of locating a manufacturing facility in a large integrated market like the EU is that while manufacturers from non-EU countries face a tariff barrier, a local manufacturer like Tata Motors– UK being inside the tariff wall– enjoys a 10% (the average import tariffs for cars in the EU) price advantage for cars. For an expensive item like a luxury car, this advantage is significant. Britain does roughly half of its trade with the rest of the EU. For the sake of simplicity, if we assume that the exports of Tata Motors, UK is also roughly in that proportion between the rest of the EU and elsewhere in the world, then half of the Tata UK cars exported after Brexit, would lose that 10% price advantage. Thus the profitability of Tata Motors, UK may get affected significantly.Jayant Dasgupta, Executive Partner, Lakshmikumaran & Sridharan
In the fourth quarter of financial year 2015-2016, Jaguar Land Rover sold 40,921 units to Europe, that's 27.3 percent of its global sales. While Tata Motors did not comment on the exact tariffs applicable on JLR sales to EU countries or the potential impact of a Brexit, the company said that business may be hurt.
“Jaguar Land Rover supports continued UK membership of a reformed EU. Access to our customers and suppliers is important to us - any changes could impact our sales, our costs and the skills base.”Tata Motors Statement
Other companies like Tata Steel, The Bombay Burmah Trading Corporation, and Cox and Kings may also suffer troubles on account of a Brexit as they too have important subsidiaries in Britain.
Collateral Impact?
Another scenario to be considered is that of Indian subsidiaries of British companies.
The business model of many such companies depends upon the EU being a free trade zone and on workforce mobility. One of my friends, for example, is a UK citizen working for Unilever. His job requires him to be based in Switzerland and to work extensively in Poland and Spain. This will not be so easy under a regime in which the UK is imposing restrictions on workers from the EU working in the UK and the EU is imposing reciprocal restrictions. This is more of an intra-Europe issue and I do not see it having a direct effect on the operations of a company like Unilever in India, except to the extent that management focus and investment will be directed towards restructuring the operations in Europe.Peter King, Partner, Weil, Gotshal & Manges
But earlier this month, 81 prominent British Indian businessmen came out in support of Britain's membership in the EU.
“Some of those who want Britain to leave the EU suggest that doing so will somehow help to increase our trade with high growth economies like that of India. We disagree with this assessment. Britain is a stronger economic partner with countries like India because we are part of the European Union.”Open Letter by 81 British Indian Businessmen
The Future of India's Trade Ties With UK & EU
In the event of a Brexit, June 23 would only be the beginning. If the “Leave” camp triumphs, Article 50 of EU's Lisbon treaty will be activated and that's when the UK and the EU will negotiate their future relationship. The law allows for up to two years of negotiation, post which the EU could present the UK with a deal.
Assuming the UK were not to seek EEA membership or a Swiss-style arrangement as an alternative to full EU membership (both of which are predicated on a continuation of significant financial contributions to the EU, adoption of EU rules and free movement of citizens), it would need to negotiate a new Canadian-style comprehensive trade agreement. The Canadian process began in 2004 and the agreement still awaits ratification, it covers only goods (and not services) and runs to 1,600 pages. Under the EU treaties, the responsibility for negotiating external trade agreements resides with the EU and not individual member states. Any new comprehensive deal between the UK and the EU would be expected to be the subject of difficult and long-winded negotiations. The UK would first need to first determine its own objectives and assemble a team of negotiators able to take on the task and the EU would have no incentive to make life easy for the UK.Gavin Williams, Partner, Herbert Smith Freehills
That EU-UK re-negotiation may have a collateral impact on UK's other trading partners as well. But some experts believe it will be limited.
Even after a Brexit, the UK will have to abide by its goods tariff, services bindings and all other commitments given to the WTO as an EU Member State. Thus, in terms of bilateral trade with India, nothing will change in substance. However, in respect of independent professionals or contractual service suppliers working for a business entity in the UK, the easy access enjoyed to the rest of the EU markets may get restricted. This may reduce the numbers of such professionals moving from India to the UK, after Brexit.Jayant Dasgupta, Executive Partner, Lakshmikumaran & Sridharan
As the drama plays out over the next few months, Indian business groups will be watching closely. As will India's Prime Minister. In a recent interview with the Wall Street Journal, Prime Minister Narendra Modi said that the U.K. is India's “gateway to Europe'' and that a united Europe would be favourable to all.
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