Escrow Account

Definition

You're buying a flat in Mumbai for Rs 1.8 crore. The developer wants your money upfront. You want to make sure the building actually gets built. Enter the escrow account, a neutral holding zone where your payment sits, managed by a third party, released to the developer only when specific construction milestones are met. Under RERA (Real Estate Regulation and Development Act, 2016), developers must deposit at least 70% of buyer collections into a designated escrow account, and that money can only be used for constructing that specific project. Before RERA, developers routinely diverted buyer funds to other projects or land purchases. The escrow mandate changed that.

In M&A deals, escrow serves a different purpose. Say a Bengaluru startup is being acquired for Rs 200 crore. The buyer typically holds back 10-15% (Rs 20-30 crore) in an escrow account for 12-24 months after closing. Why? In case the buyer discovers undisclosed liabilities, pending lawsuits, or breached representations and warranties that weren't visible during due diligence. The escrow release schedule and conditions get negotiated intensely, they're often the most contentious clauses in the Share Purchase Agreement.

For payment gateways and fintech platforms, RBI mandates a different flavour of escrow called a nodal account. When you pay Rs 2,000 on an e-commerce platform, that money doesn't go directly to the seller. It sits in the platform's nodal account (ring-fenced from the company's own funds) until delivery is confirmed. This protects buyers, enables dispute resolution, and prevents platforms from treating customer money as their own working capital. Interest earned on escrow funds is taxable and must be allocated between parties as per the agreement. The documentation matters: clear release triggers, dispute resolution mechanisms, and tax treatment should all be spelled out upfront.

Key Points

• An escrow account holds funds with a neutral third party until contractual conditions are met: protecting both sides of a transaction.
• RERA mandates 70% escrow of buyer collections for real estate projects, preventing developers from diverting construction funds.
• M&A escrows typically hold 10-15% of deal value for 12-24 months to cover post-closing indemnification claims.
• RBI requires payment aggregators to maintain nodal (escrow) accounts, keeping customer money separate from company funds.
• E-commerce marketplace escrows hold buyer payments until delivery confirmation, reducing fraud and enabling disputes.
• Interest earned in escrow is taxable: the escrow agreement should specify how it's allocated between parties.