The imminent exit of the UK from the EU will not only create political and economic instability that could impact economies globally, but also heighten the insecurity of investors including Indian corporations investing in the UK and EU.
India was the third largest investor in the United Kingdom (UK) in 2014-15, behind only the US and France, but ahead of China. The only European country that receives more investment from India is the Netherlands. The fallout of the UK referendum to leave the European Union (EU) has, on a more immediate term, led to uncertainty and volatility in the financial markets, with the greatest effect being the depreciation of the British pound.
While a depreciating pound makes investments in the UK attractive, it also makes existing contracts unviable and impacts earnings of Indian companies. The actual exit of the UK from the EU (Brexit) will involve the UK invoking Article 50 of the EU treaty (Treaty of Lisbon), which marks the beginning of the legal process to leave the EU. Once invoked, it could take the UK up to 2 years or more to exit. It will now be incumbent on the newly appointed UK Prime Minister to take a decision on invoking Article 50.
In this update, we examine Brexit's likely impact on Indian companies having a presence in the UK and Europe.
UK as a European Headquarters
Many Indian companies across different sectors ranging from banking and financial services to IT, pharma and manufacturing have established their European headquarters in the UK. The language, legal system, London's status as a commercial and financial hub, and access to the single European market have been key determinants for this choice.
The UK's imminent exit from the EU would impact the free movement of people and products between the UK and the EU, and could therefore force Indian companies to realign their investment strategies and set up new headquarters within the EU.
Disruption of economic cooperation and trade
Indian companies manufacturing in the UK for the European market have so far benefitted from preferential access to the EU market. They have also enjoyed lower tariff barriers while importing and exporting within the EU. This could likely change, if UK exits the EU, unless the UK negotiates a deal with continued access to the EU single market.
Listing on UK bourses
The London Stock Exchange (LSE) has been one of the preferred choices for overseas listing of Indian companies. There are over 58 India...