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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
Every country that seeks Foreign Investment in a global and competitive market has to
ensure that, its laws/ regulations are in sync with the ground realities and
expectations of the global and domestic business community, while keeping in mind
the national interest. This article seeks to study specific FEMA regulations, specifically
those regulations where escrow accounts may have a role to play, with the intent of
While the primary focus of this article is on escrows in cross border deals and
examines the need for escrows due to singular focus on seamless exchange of
consideration, some views have also been shared on matters incidental to cross
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
5(R)"); and inter alia the Master Direction - External Commercial Borrowings, Trade
the powers conferred under the Foreign Exchange and Management Act, 1999
("FEMA"). This article attempts to look for ways in which certainty could be infused in
some of the existing regulations set out below. Also, this article attempts to provide
alternate views for helping parties better manage specific Capital Account[2]
One of the main benefits of an escrow account in capital account transactions is, to
help assuage any concerns of the buyer (re. financial risk) and to facilitate the
transactional documents, is adhered. Despite this benefit, it appears that, escrows are
accounts as well – more particularly specified in this article.[3] Considering that the
RBI has already delegated various supervisory functions to AD Banks, it would only be
appropriate that the supervision of the below mentioned escrow accounts (opening,
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
operation, and closing) also be delegated to Authorized Dealer Category-I Banks (AD
Cat-I Banks).
The extant Foreign Exchange Management (Transfer or Issue of Any Foreign Security)
(Amendment) Regulations, 2004 ("FEMA 120") read with Master Direction – Direct
Abroad ("ODI Regulations") doesn't allow any deferral for payment of consideration
nor does it allow for opening of escrow accounts in India for any ODI transaction
under general permission. While RBI may be open to welcome applications (reviewed/
escrow account opening within India or outside, it would certainly facilitate and
caveats/ conditions for better regulation). This would help save precious time
otherwise spent in the drafting, review and approval of such applications to RBI.
The RBI could consider allowing, under general permission, deferral of consideration,
as well as the option of keeping part of the total consideration in an escrow account
within India for ODI transactions. The said deferral/ escrow could mirror the guidance
for escrows under FDI transactions with the exception that: (a) escrow account be
allowed to be opened for a period of 3 years[4] (from the date of opening); (b) Indian
Party (as defined in the ODI Regulations) is in compliance with Regulation 6 of the
FEMA 120 dated July 07, 2004 (as amended from time to time); (c) no credit facilities
be availed against the balance in the said escrow account; and (d) escrow be non-
interest bearing.
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
The extent ECB Master Direction in Para 7.5 (Security for raising ECB) and more
particularly Point (iii) (b) thereof (Creation of Charge over Financial Securities) seems
to allow the opening of Rupee Accounts also in the form of escrow accounts or debt
service reserve accounts (DSRA) for servicing/ securing ECB loan payments.
The said provision doesn't explicitly state anything about what conditions will govern
the opening, operation or closing of such escrow or DSRA accounts, but needless to
say, if the Overseas Lender is not allowed to be a named party to the escrow
agreement/ DSRA agreement then exclusive control of the ECB borrower over such
accounts may frustrate the purpose of allowing such escrow / DSRA accounts.
Having said this and considering that, guidance regarding opening, operation and
Overseas Lender / Overseas Security Trustee can be a named party to such an escrow
or DSRA agreement in connection with ECB transactions. This can further be fortified
Such an escrow/ DSRA where the Overseas Lender / Overseas Security Trustee is
• Improves confidence of the lender: Lender gets visibility and control on the
borrower's receivables thereby ensuring timely repayable of loan.
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
• Opens up access points within global debt markets for domestic corporates.
Trade Account Bank structure. Trade (international or domestic) is something that will
always continue in some shape or form – it is the author's view that maybe escrows/
account bank construct could play a role here as well. The payment mechanisms e.g.
Letter of Credit, Standby Letter of Credit, Bank Guarantees etc. could be replaced by
trade escrows.
Those who are unable to secure such non-fund based facilities from their bankers,
mechanism.
Therefore, where "A" USA supplies goods to "B" India, which goods are then sold by "B"
India to "C" India (after value addition by "B" India) – the payment to "A" USA can be
Permitted Credit: (a) Deposit by "C" India against invoices raised; and/ or (b) Deposit
by "B" India.
Permitted Debits: (a) Payment to "A" USA; and/ or (b) Payment to current account of B
Parties to the Account Bank Agreement shall be "A" USA; "B" India; and the Account
Bank (i.e. any AD Cat-I Bank that could also review the trade documents and release
payment after checking compliance with the regulations governing such trade
payments.
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
Such account bank structure may help a new trader or start-up in the place of "B" India
– who may not easily find a banker to support any Factoring or LC/ SBLC requirement.
There is also the possibility that "C" India may not want to acknowledge assignment of
A simpler variation to the above construct may be possible if "C" India happens to be a
group company or subsidiary of "A" USA. Also, if permitted, a similar construct could
be explored for export related transactions. It seems that, one of the main benefits for
the Indian party in such instances could be the reduction of cost of funds, which may
business requirements, keeping in line with the best interest of the nation. It will
certainly help if a study is undertaken to see what other variations of escrows could
genuinely help balance both the commercial/ business needs of the market and the
In this regard, it may be said that, RBI's Authorised Persons Directive Circular 58 of
2011 (May 02, 2011) was certainly a good step towards liberalising the conditions and
granting general permission for 6 (six) months for opening escrow accounts with a
non-resident entity/person as a named party (the said six months began from the date
(from the date of the Transfer Agreement (SPA) - with a non-resident entity/person as
a named party.
While Point 2(d) of Schedule 5 of the Deposit Regulation allows parties to an escrow
agreement to approach RBI (through AD Banker) to seek an extension for any period
beyond 6 months, no such explicit provision has been made for seeking extension of a
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
period beyond 18 months (in Point 2(e) of Schedule 5 of FEMA 5(R)). It is humbly
considered for addition in in Point 2(e) of Schedule 5 of FEMA 5(R) by the Regulator in
dehors the laws of countries like United Kingdom, USA, Singapore, or the EU. It is not a
practice in any of the top 10 free market economies. If the objective is to be at par
with the global competition, maybe one could try to mould the capital account
regulations in line with the practice prevalent in these jurisdictions. Many parties in
prefer making an application to the regulator, while other mould their transfer
commence from the date of opening of escrow account because invariably there will
always some time lag between the execution of the actual Transfer Agreement and
the opening of the escrow account. The parties have to address several conditions
precedent (CPs) before they begin to address the payment mechanism (escrow). This
may help give some immediate relief while the overall period enhancement from 18
Noting the intent behind the original framework, perhaps the meter clock could be
reset by the Regulator with relative ease. The time of opening of an escrow account
may be an easy update, as the Regulator has already allowed the seller to give an
indemnity undertaking for 25% of the total consideration for a period of 18 months
from the date of receipt of full consideration. Any indemnity undertaking without
assurance of escrow behind it, may easily run into litigation. This can be addressed by
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
mutually acceptable contractual provisions of SPA and Escrow. [Regulation 9(6) of the
Non-Debt Rules: "In case of transfer of equity instruments between a person resident
in India and a person resident outside India, an amount not exceeding twenty five
percent of the total consideration… (iii) may be indemnified by the seller for a period
not exceeding eighteen months from the date of the payment of the full consideration,
if the total consideration has been paid by the buyer to the seller] [Emphasis added]
It is suggested that, if the aforesaid is not possible, then in the least, the Regulator
may consider substituting the word "or" with "and/ or" at the end of Regulation 9(6)(i)
Escrow For Earmarking More Than 25% Of Total Consideration And Remittance
The Regulator's guidance on payment of Fair Market Value (FMV) in capital account
transactions, while being helpful, could be further deliberated basis the commercial
realities prevalent. The objective is to protect the interest of the resident party, but if
the objective is also to augment investor confidence, then maybe an additional proviso
general permission, allow payment (clawback or otherwise) of more than 25% of the
total consideration where the investor has obtained a court order and an AD Banker
Considering that buyers and sellers in M&A transactions are quite commercially
Regulator could consider allowing more than 25% to be deferred for a period of 3
undertaken.
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
Also, it is observed that, several investors do not prefer the approval route on account
of the time required in making an application, and the time required to get a definitive
answer,. It is humbly submitted that maybe the time for review/ approval could be
defined e.g.: rejection/ approval decision be conveyed with some rational within 20
working days from the date of submission of the application through an AD. Breach of
law should always be prohibited; but liberty for deal structuring (sans opaqueness)
should be allowed.
Where FDI Does Not Fall (Clawback Terms Of SPA, Subject To Pricing Guidelines
Being Adhered):
A minor proviso could be added in Point 2(b)(ii) (read with Point 8) of Schedule 5 of
FEMA 5(R) to also allow debits in the escrow account for partial/ complete remittance
of funds in the said account for clawback, or otherwise where there is no failure/ non-
Since general permission has been granted by RBI for Non-Resident (NR) – Resident
granting similar general permission for allowing escrow accounts in connection with
transactions involving shares/ units of LLPs/ INVIT/ REITs may be considered by the
Regulator. Note: There seems to be no rationale provided in the current regulations for
Also, it will be helpful if the definition of "Capital Instruments" under FEMA 5(R) is
revised to help ensure proper cross referencing with "Equity Instruments" under Non-
Debt Rules and the definition of equity instruments (or capital instruments) be
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
Reporting Requirements:
With the increase of FDI inflow in India, one may need to consider the associated
reporting requirements. It is suggested that, the next step in making the process of
It is suggested that the following points be considered in the next review of Reporting
Guidelines:
i.e.: when FOCC buys a resident company's shares from a non-resident. This will
address the additional requirement of filing Form DI which one would file after the
Form FC-TRS is reported. Alternatively, it could be suggested that, maybe the RBI
could explicitly state in the Master Direction on Reporting that when a FOCC buys
the FOCC.
FC-TRS and FC-GPR: Form FC-TRS (for transfer of shares) and FC-GPR (for allotment
of shares) could be revised to all add the consent letter or extract of SPA/ SSA
requirements therein. Possibly, a field in the Form to add comments, if any could also
help. This modification of the Form will remove few physical pages that need to be
printed and signed by the parties. Retaining requirement of attaching the following
resolutions of the parties involved, and a no-objection certificate (NOC) (i.e. on-behalf
guidelines to allow one seller to undertake FC-TRS filing for all other sellers, when all
of these sellers are selling the capital instruments of the same Indian company to the
same buyer.
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
With due regard to the nature of structured transactions, it would certainly be helpful if
the RBI could consider opening a single window for receiving, reviewing and approving
(or rejecting) various applications under approval route for FDI/ ODI/ ECB
transactions. If possible, maybe a scanned copy of the client application, along with
the covering letter of the AD Banker to such single-window will help expedite the
application and review process. Even a dedicated and specialised single department/
team within RBI - addressing such FDI/ ODI/ ECB applications will help process the
applications and possibly bring more clarity for the parties involved and their
respective deal structures. Also, with all due respect to the citizens' charter, perhaps
the number of days for such review could be crystalised at 20 working days, this will
Standalone Master Direction For Escrow/ Trust Retention Account/ Account Bank/
DSRA:
While there are several touch points in the FEMA guidelines for addressing escrows, it
Account/ Account Bank/ DSRA could be circulated for better and uniform
The explanation (i) under the definition of the term "equity instruments" re. Non-Debt
Rules seems to state that: "Share Warrants" are those issued by an Indian company in
accordance with the regulations by the Securities and Exchange Board of India. This is
also captured in Point 4.4.1 of the Master Direction – Foreign Investment in India.[9]
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
Though Point 4.1 of the same Master Direction also reads as follows: An Indian
It is suggested that the Regulator may please consider adding an express provision to
While the market has interpreted that an NRI may buy shares of an unlisted Indian
Regulation 12(1) (under Chapter V) as well as in Schedule III of the Non-Debt Rules to
NB: Point 7.3.1 of the Master Direction on Foreign Direct Investment[10] confirms that
NRI can hold (and therefore sell) shares of Indian company on repatriation basis]
NB: Point 4.1 of the Consolidated FDI Policy[11] states as follows: "…In case the buyer
is an NRI, the payment may be made by way of debit to his NRE/FCNR (B) accounts.
However, if the shares are acquired on non-repatriation basis by NRI, the consideration
shall be remitted to India through normal banking channel or paid out of funds held in
NRE/FCNR (B)/NRO accounts."
Considering that unlisted companies can also list their debt instruments, it is
submitted that, if possible, the Regulator may consider revisiting the definition of
listed Indian company and keep the reference to companies whose debt instruments
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
Final Remarks:
The Regulator has been helpful in ensuring that best practices in capital account
transactions are adopted. However, given that the aforesaid regulations are issued
under specific powers granted to Regulator under FEMA, it is befitting that the law/
there is less room kept for interpretation, as it will help all parties concerned in the
long run. It is recommended that a wider consult with other market participants
(including on-ground transaction managers) to help simplify the regulations (by end
The views expressed here are shared to evoke further review and discussion from a
One hopes that popular opinion on these points will help move the discussion in the
right direction. The objective is to help commercial transactions, ensuring: (a) they
remain within the legal framework, and (b) that the regulations are in step with the
market requirement.
Author is a lawyer with cross border transactional banking experience of more than
10 years
The views are personal and do not reflect the views of any organisation or firm.
[1] NB: Non-Debt Rules and the Foreign Exchange Management (Mode of Payment
and Reporting of Non-Debt Instruments) Regulations, 2019 were issued by the Central
Government.
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
Regulations, 2000.
[3] See – Point 2(d) and (e) of Schedule 5 of Deposit Regulations for specifics on
[4] Inter alia, addressing taxation or capital adjustment clauses in their underlying
transfer agreements.
[5] FEMA 5(R) was issued first on April 01, 2016. Please see Point 2 (d) of Schedule 5
of FEMA 5(R).
[7] ibid
[10] ibid
[11] https://dipp.gov.in/sites/default/files/FDI-PolicyCircular-2020-
29October2020_1.pdf
[12] See – Regulation 2(ag) of Non-Debt Rules: "listed Indian company" means an
Indian company which has any of its equity instruments or debt instruments listed on
a recognised stock exchange in India and the expression "unlisted Indian company"
shall be construed accordingly.
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7/31/2021 Escrows and Specific Capital Account Regulations – A Brief Study
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