Escrow Account (Indian Contract Act, 1872 & RBI/SEBI/RERA Regulations)

By Anuj Singh | Updated March 2026

What Is an Escrow Account?

An escrow account is a dedicated bank account held by a neutral third party (the escrow agent) that safeguards funds or assets until specific contractual conditions are fulfilled. In India, escrow accounts derive their legal foundation from the Indian Contract Act, 1872 — specifically Sections 182-238 (agency law) and the principles of bailment under Sections 148-181. The escrow agent acts as a fiduciary, legally bound to follow the escrow agreement terms before releasing funds to either party.

For foreign companies entering India, escrow accounts are not optional niceties — they are regulatory requirements in most high-value transactions. Whether you are acquiring an Indian company, investing via FDI, purchasing real estate, or making a public offer for listed shares, Indian regulators (RBI, SEBI, and RERA) mandate escrow mechanisms to protect all parties and ensure compliance with FEMA and securities law.

Escrow accounts in India must be opened with a Scheduled Commercial Bank (SCB) and are typically non-interest bearing. The standard initial duration is 6 months, with extensions requiring RBI permission. As of 2026, RBI has expanded escrow mandates to payment aggregators and co-lending arrangements, making escrow the gold standard for transactional security across Indian financial services.

Legal Basis

The escrow framework in India draws from multiple statutes and regulatory directions:

• Sections 182-238 of the Indian Contract Act, 1872 — Governs the agency relationship between the escrow agent and the transacting parties. The agent's authority is limited strictly to the terms of the escrow agreement.
• FEMA (Non-Debt Instruments) Rules, 2019 — Rule 9(6) — Permits escrow accounts for deferred consideration in FDI share transfers, capped at 25% of total consideration for up to 18 months.
• Regulation 5(5) of FEMA (Deposit) Regulations, 2016 — Provides general permission to open escrow accounts for FDI-related transactions. Accounts can be funded via inward remittance or debit to NRE/FCNR(B) accounts.
• Regulation 17 of SEBI (SAST) Regulations, 2011 — Mandates escrow deposits for acquirers making public offers under the Takeover Code, with tiered deposit requirements (25% of first INR 500 crore, 10% of balance).
• Section 4(2)(l)(D) of RERA, 2016 — Requires real estate developers to deposit 70% of buyer funds into a project-specific escrow account at a scheduled bank.
• RBI (Regulation of Payment Aggregators) Directions, 2025 — Mandates that all payment aggregators hold merchant funds in segregated escrow accounts with SCBs, effective December 31, 2025.

When Is an Escrow Account Required in India?

Escrow accounts are mandatory or strongly recommended in the following scenarios:

FDI Escrow: The Deferred Consideration Framework

Under Rule 9(6) of the NDI Rules, when a non-resident acquires shares from a resident (or vice versa), up to 25% of the total consideration can be placed in escrow as deferred payment for up to 18 months from the date of the transfer agreement. This is critical in Indian M&A, where buyers routinely hold back a portion for indemnity claims, warranty breaches, or earn-out adjustments.

Separately, the full purchase consideration can be parked in escrow for up to 6 months pending completion of conditions precedent. If the transaction does not close, funds can be repatriated without RBI approval. If shares are not issued within 180 days of receipt of inward remittance or debit to the NRE/FCNR(B)/escrow account, the amount must be refunded to the investor.

SEBI Takeover Escrow: Regulation 17 Requirements

When an acquirer triggers a mandatory open offer under Regulation 3 or 4 of SEBI (SAST) Regulations, 2011, they must create an escrow account at least 2 working days before the Detailed Public Statement. The escrow amount is calculated on a tiered basis:

The escrow can be deposited as cash in a bank account, a bank guarantee from a scheduled bank, or deposit of approved securities (listed equity shares, government securities, or units of mutual funds) with an appropriate margin. If the acquirer fails to complete the open offer, the entire escrow amount is forfeited to the target company's shareholders who tendered their shares.

How to Open an Escrow Account in India

The process for opening an escrow account with an Indian scheduled bank involves these steps:

Step 1: Draft the Escrow Agreement

The escrow agreement is the governing document. It must specify: (a) identity of depositor, beneficiary, and escrow agent; (b) the exact conditions for release of funds; (c) the timeline and triggers for partial or full disbursement; (d) dispute resolution mechanism; and (e) fee structure. For FDI transactions, the agreement must comply with FEMA pricing guidelines and FDI valuation norms.

Step 2: Select a Scheduled Commercial Bank

Only SCBs can hold escrow accounts in India. Major banks offering escrow services include SBI, HDFC Bank, ICICI Bank, Axis Bank, and Federal Bank. For cross-border deals, choose a bank with a dedicated FDI desk and Authorized Dealer (AD) Category I license.

Step 3: Submit KYC and Documentation

Required documents include: PAN cards of all parties, KYC documents (identity and address proof), board resolutions authorizing the escrow arrangement, the signed escrow agreement, and source-of-funds documentation. For foreign entities, apostilled or notarized copies of incorporation certificates and board resolutions are needed.

Step 4: Fund the Account

Funding can occur via inward remittance through normal banking channels, debit to NRE/FCNR(B) accounts, or domestic bank transfer. For FDI transactions, the funding must comply with Form 15CA/15CB requirements for cross-border remittances.

Escrow Agreement: Key Terms to Negotiate

The escrow agreement is the most negotiated document in any Indian M&A deal. Critical provisions include:

• Release conditions: Specify exact milestones — regulatory approvals, completion of FC-GPR filing, receipt of FIRC, no-objection certificates from lenders, or lapse of indemnity periods
• Partial release mechanism: Allow staged releases (e.g., 50% at closing, 25% after 6 months, 25% after 12 months) rather than all-or-nothing
• Joint instruction requirement: Specify whether release requires both parties' consent or can be triggered unilaterally upon documented proof
• Dispute resolution: Arbitration (typically under the Arbitration and Conciliation Act, 1996) is standard. Specify seat, language, and appointing authority
• Interest treatment: Most escrow accounts in India are non-interest bearing. If interest accrues, specify who receives it and the tax implications under TDS provisions
• Expiry and unclaimed funds: What happens if neither party claims the escrowed amount after the agreement period ends

Costs and Fees

Escrow account costs in India vary significantly by bank, transaction size, and complexity:

How This Affects Foreign Investors in India

Escrow accounts are central to virtually every foreign investment transaction in India. Here is why they matter disproportionately for cross-border deals:

M&A and Share Acquisitions

When a foreign company acquires an Indian target, the escrow account serves as the bridge between signing and closing. Indian M&A deals routinely require 3-6 months for regulatory approvals (CCI, SEBI, RBI, or sector-specific regulators). The buyer deposits the purchase price in escrow, demonstrating financial commitment while protecting against deal failure. Under Form FC-TRS filing requirements, the escrow release must be documented and reported to the AD bank within 60 days of the share transfer.

FDI via the Automatic Route

For investments under the automatic route, escrow accounts allow the foreign investor to park funds in India while the Indian company completes share allotment formalities. The 180-day rule is strictly enforced — if shares are not allotted within 180 days of the escrow debit, the funds must be returned to the foreign investor.

Protection Against Indemnity Claims

In a typical Indian M&A deal valued at INR 100 crore, the buyer might retain INR 15-25 crore (15-25%) in escrow for 12-18 months to cover potential indemnity claims — undisclosed tax liabilities, pending litigation, regulatory non-compliance, or breach of representations. This is especially important in India, where tax assessments can be reopened for up to 10 years and labor law compliance issues frequently surface post-acquisition.

Common Mistakes

• Choosing the wrong bank for FDI escrow. Not all scheduled banks have experienced FDI desks. Using a bank without AD Category I status or cross-border expertise leads to delays in FEMA reporting, missed FC-GPR deadlines, and potential RBI penalties. Always select a bank with a dedicated NRI/FDI cell for cross-border escrow.
• Failing to align escrow duration with FEMA timelines. The 25% deferred consideration cap under Rule 9(6) runs for 18 months from the transfer agreement date, not the closing date. If your SPA is signed 3 months before closing, you have already consumed 3 months of the 18-month window. Structure the escrow period from closing, not signing, by aligning the agreement dates carefully.
• Not specifying the governing law for the escrow agreement separately from the SPA. Foreign investors often assume the escrow agreement follows the SPA's governing law (frequently English or Singapore law). But Indian banks will insist the escrow account itself is governed by Indian law. Draft the escrow agreement under Indian law with Indian-seated arbitration, even if the SPA is governed by foreign law.
• Ignoring stamp duty on the escrow agreement. Stamp duty rates vary by Indian state — from 0.1% in some states to 0.5% in others. An escrow agreement for a INR 200 crore deal could attract stamp duty of INR 20 lakh to INR 1 crore. Failing to stamp the agreement renders it inadmissible as evidence in Indian courts.
• Assuming RERA escrow protects buyers in pre-RERA projects. The 70% escrow mandate under Section 4(2)(l)(D) of RERA applies only to projects registered after RERA's effective date (May 1, 2017). Pre-RERA projects and those below the 8-apartment/INR 500 lakh threshold are not covered. Foreign investors in Indian real estate must verify RERA registration and escrow compliance independently.

Practical Example

Meridian Capital Pte Ltd, a Singapore-based investment firm, acquires 100% of the shares of TechServe India Pvt Ltd from its Indian promoters for a total consideration of INR 80 crore. The deal is structured as follows:

• Upfront payment: INR 60 crore (75%) deposited in escrow at HDFC Bank upon signing the SPA in January 2026
• Deferred consideration: INR 20 crore (25%) — the maximum permitted under Rule 9(6) of NDI Rules — held in a separate escrow tranche for indemnity claims

The escrow agreement specifies three release triggers:

1. Tranche 1 — INR 60 crore: Released to the Indian sellers upon (a) receipt of CCI approval, (b) completion of share transfer and filing of Form FC-TRS with the AD bank, and (c) issuance of FIRC by the bank. This occurs in March 2026, 2 months after signing.
2. Tranche 2 — INR 10 crore: Released after 12 months (March 2027) if no indemnity claims are pending. This covers potential undisclosed tax liabilities discovered during the first year of operations.
3. Tranche 3 — INR 10 crore: Released after 18 months (July 2027) — the FEMA deadline. Any pending indemnity claims are settled from this tranche, with the balance released to the sellers.

During the escrow period, TechServe India's former CFO discovers an unreported GST demand of INR 3.2 crore from a pre-acquisition assessment. Meridian Capital files an indemnity claim against the escrow. The escrow agent, following the joint-instruction mechanism in the agreement, withholds INR 3.2 crore from Tranche 2 and releases the remaining INR 6.8 crore to the sellers. The GST dispute is eventually settled for INR 2.1 crore, and the balance of INR 1.1 crore is released to the sellers in Tranche 3.

Without the escrow: Meridian Capital would have had to pursue the Indian promoters through Indian courts for recovery of INR 3.2 crore — a process that could take 3-5 years and cost INR 50-80 lakh in legal fees. The escrow saved both time and money while preserving the commercial relationship.

Key Takeaways

• Escrow accounts are mandatory in Indian M&A (SEBI Takeover Code), FDI share transfers (FEMA NDI Rules), and real estate projects (RERA) — they are not optional for foreign investors
• FEMA permits a maximum of 25% of total consideration as deferred payment in escrow for up to 18 months from the transfer agreement date
• SEBI requires acquirers to deposit 25% of the first INR 500 crore and 10% of the balance as escrow before a public offer
• RERA mandates 70% of homebuyer funds be deposited in a project-specific escrow, with withdrawals certified by an engineer, architect, and CA
• Escrow accounts must be held at Scheduled Commercial Banks and are typically non-interest bearing with a standard 6-month duration (extensible with RBI permission)
• Costs range from 0.10% to 2.00% of the transaction value, plus legal fees of INR 1-5 lakh for agreement drafting

Structuring an escrow for a cross-border acquisition or FDI transaction in India? Beacon Filing provides end-to-end escrow structuring, FEMA compliance, and AD bank coordination for foreign investors.