Sherina Petit and Nosherwan Vakil explore how Indian businesses can manage the challenges and opportunities presented by Britain’s EU exit
After several rounds of negotiations, the Brexit process in the UK has reached an impasse. Under the terms of article 50 of the Lisbon Treaty, Britain is required to leave the European Union on 29 March 2019. However, as that date draws nearer, it appears increasingly unlikely that Britain’s major parliamentary parties will agree upon a coherent withdrawal framework. In the coming weeks, they will vote on a measure to extend the timeline for Brexit in order to ensure that Britain does not crash out of the EU with “no deal”.
In the past two years, much ink has been expended on the significant impacts this would have on the British economy. The government’s own “no deal” impact assessment suggests that the economy would be 7-9 % smaller in the long term (over a period of 15 years), and the Organisation for Economic Co-operation and Development (OECD) predicts a likely near-term recession in the UK in the event of a no-deal Brexit.
Regardless of the form Brexit takes, it is clear that Britain’s place in the global economy will undergo a fundamental re-evaluation. Indian companies with significant operations in the UK should seek to take advantage of the opportunities that this presents.
RIDING OUT THE STORM
About 800 Indian companies operate in the UK, spanning a wide variety of industries from pharmaceuticals to financial services. Particularly in the past few years, these companies have flourished: 87 of them grew at an average rate of 44%, according to India meets Britain tracker 2018, a 2018 report by Grant Thornton and the Confederation of Indian Industry. Companies such as TMT Metal Holdings and Wipro Holdings UK have done particularly well and rank among the fastest-growing Indian companies in the UK, according to the report.
Brexit poses a challenge to their continued growth. If, as predicted, the British economy slows down post-Brexit, Indian companies will have to adapt to survive. Behemoths such as Tata Motors, Tata Steel and Hindalco will have to redesign their strategies for success in the UK market. And much will depend on how the UK rebuilds its trade ties with the EU and other countries.
However, two particular issues give cause for concern. First, Indian companies operating in the UK are exposed to fluctuations in the British currency. In some cases, this exposure is reportedly as high as 13%. Brexit may lead to volatility in exchange rates and a change in the value of the pound. Companies may face additional expenses or uncertainty in procuring raw materials and goods.
Second, Indian businesses rely on the UK as a convenient entry point into continental Europe. The EU Single Market is the bedrock of the union’s “four freedoms”: free movement of goods, services, capital and labour. These freedoms will be far from guaranteed in the event of Brexit. For instance, Indian companies operating in Britain may no longer be able to rely on British ports to gain unimpeded access to continental Europe.
The risks posed by these changes can be mitigated to some extent. Indian companies can reduce their exposure to currency fluctuations in anticipation of the upheavals. Some companies may also be able to escape Brexit’s potential effects through European mergers and acquisitions. Tata Steel has done this once before. In a widely reported move in 2007, Tata Steel purchased Anglo-Dutch steelmaker Corus in order to gain access to the UK and European markets.
However, the inherent uncertainty surrounding Brexit makes any planning beyond this difficult. Jaguar Land Rover, a subsidiary of Indian carmaker Tata Motors, has expressed concerns that Brexit could jeopardize thousands of jobs and cost the company nearly £1.2 billion (US$1.5 billion).
BREXIT AND BEYOND
While Brexit does pose challenges to Indian companies with significant operations in the UK, there is ground for cautious optimism. Brexit grants India a unique opportunity to forge new ties with Britain. This will involve some careful negotiation. India has an opportunity to reset the legal terms of its trade with the UK and the EU, at the multilateral level and through free-trade agreements (FTAs). In the absence of EU regulations, the UK will be free to do more business with India.
First, India may need to negotiate new World Trade Organization (WTO) trade terms with the UK. Britain has previously proposed retaining the concessions it receives as part of the EU. In negotiating with the UK, India may want to ensure that any changes to the terms of trade between the two countries reflect the realities of a post-Brexit world. Needless to say, the value of the concessions that India gave the EU in the past ought to be re-evaluated once the UK leaves. This will require India to traverse the provisions of both the General Agreement on Tariffs and Trade and the General Agreement on Trade in Services carefully. There will have to be particular attention paid to the provisions dealing with the Modification of Tariff Schedules of WTO.
Second, India can use this opportunity to negotiate new FTAs with the EU and UK. In the past such talks have failed. India-EU FTA talks were suspended in 2013 after the parties failed to reach a deal after six years of negotiations. India has been unwilling to budge on some of its high tariffs, particularly on industries such as automobiles. Additionally, access to the banking and legal services sectors has always been out of bounds. India may now use Brexit as an occasion to re-engage in FTA negotiations with the EU and UK, and demonstrate more flexibility on these issues. As part of these negotiations, India could also demand greater mobility for its service professionals within the EU.
The signs are encouraging. The UK government has stated that it intends to work closely with Commonwealth countries to build increased trade links. It has gone so far as to suggest a free-trade agreement covering all the Commonwealth countries. This would create international opportunities for Indian companies far beyond just the UK – and open up a market of 2.3 billion people. Further, Britain and India have laid the groundwork for a possible post-Brexit FTA. The two governments recently signed a number of commercial agreements amounting to nearly £1 billion. This is in addition to ongoing talks with Germany and France. India should take advantage of this critical window.
THE BRIGHT SIDE
Despite the disruption that Brexit is likely to cause, Indian companies with a significant presence in the UK should bear in mind that the UK will remain an important hub for legal disputes. Brexit is unlikely to have a significant impact on the UK’s pre-eminence as a centre for the resolution of international disputes. The UK’s reputation as an impartial venue for dispute resolution is not derives from EU law or from UK membership of the EU. The English judiciary is internationally recognized for its impartiality, experience and skill, particularly in dealing with complex and multi-jurisdictional matters. London’s success as a seat of arbitration, in particular, can be attributed to certain features of English law, and the confidence of parties in the English judicial system. Further, Brexit will have no impact on the enforcement of English arbitration awards.
This is noteworthy since the number of commercial disputes is expected to rise in the years after Brexit. Disruptions in financial markets and fluctuations in asset values often lead to parties defaulting on, or looking for ways to avoid, their contractual obligations. Indian companies in the UK foreseeing arbitration proceedings may find that the comparative weakness of the pound sterling makes London a less expensive place to arbitrate disputes.
Brexit confronts UK-based Indian companies with some grave challenges. However, with the right planning, its impacts can be mitigated. The greater challenge falls upon the Indian government to leverage Brexit to promote Indian businesses in the UK. This would involve formulating a coherent, time-bound strategy for the negotiation of new FTAs with both the EU and UK. Handled with care, Brexit could present India with unprecedented opportunities.
SHERINA PETIT is a partner at Norton Rose Fulbright based in London. She is the head of arbitration across Europe, Asia and the Middle East, and heads the India practice of the firm. NOSHERWAN VAKIL is an advocate of the Bombay High Court. Nimoy Kher, a trainee solicitor at Norton Rose Fulbright, provided inputs for the article.