Escrow Arrangements in Share Deals: When and how to use them

Escrow is one of those SPA terms that founders agree to without fully understanding what they have committed to. A neutral third party holds a portion of the deal consideration, releases it on specified triggers, and sits between the two parties as a performance bond. That is the concept. The practice in Indian share deals is considerably more structured, more regulated, and more consequential, particularly on cross-border transactions where the Foreign Exchange Management Act (FEMA) 1999 imposes hard caps on what can go into escrow and for how long.

India’s M&A market crossed USD 26 billion in deal value in the first nine months of 2025, a 37% rise year-on-year, with escrow mechanisms appearing in a growing share of transactions. The January 2025 RBI Master Direction on Foreign Investment extended escrow rules to foreign-owned and controlled companies, expanding the regulatory perimeter further. Getting the escrow structure right at the term sheet stage matters: the sizing, duration, release triggers, and FEMA compliance of an escrow arrangement are all negotiable early and nearly non-negotiable after the SPA is signed.

What is an escrow arrangement in a share deal?

An escrow arrangement in a share deal is a contractual structure where a portion of the purchase consideration is held by a neutral third party (the escrow agent, typically a scheduled commercial bank) and released to the seller only on satisfaction of specified conditions after closing. The escrowed amount is the seller’s money in principle, but the buyer has a contractual right to draw against it for defined post-closing claims during the holdback period.

In Indian private M&A, the most common escrow amount ranges from 10% to 25% of total consideration, held for 12 to 18 months. On a ₹50 crore SPA with a 15% escrow for 18 months, ₹7.5 crore sits with the escrow agent for a year and a half. That is the seller’s cash, earning no return, and potentially reduced by buyer claims before it is ever released.

The four use cases: when does an escrow apply?

Escrow serves four structurally distinct purposes in Indian share deals. Conflating them leads to poorly designed agreements.

1. Signing-to-closing escrow

Where a share deal has a gap between signing and closing (because CCI clearance, RBI approval, or sector-specific regulatory consent is required), the buyer typically deposits the full or partial consideration into an escrow account at signing. The money sits in the account as evidence of financial commitment and is released to the seller at closing once conditions are satisfied.

The Competition Commission of India (CCI) can take up to 30 working days on Form I filings, and up to 210 calendar days on complex reviews. RBI approvals for foreign investors add further time. Indian M&A deals routinely require three to six months between signing and closing for regulatory approvals. A signing-to-closing escrow shows the seller that the buyer has the money and is committed, while protecting the buyer against the scenario where conditions are never satisfied and the deal falls through.

Under FEMA, for cross-border transactions, an authorised dealer bank can open a 6-month escrow account for the full share purchase consideration without RBI’s prior approval. If the transaction does not materialise, the AD bank allows repatriation of the full escrow balance. This 6-month window is specifically designed for the signing-to-closing bridge.

2. Indemnity escrow (holdback)

The indemnity escrow is the most common escrow structure in private M&A. A portion of the consideration (typically 10% to 25%) is withheld at closing and placed in the escrow account. The buyer can draw against it to satisfy indemnity claims for breaches of representations and warranties, undisclosed tax liabilities, and other post-closing obligations defined in the SPA. At the end of the holdback period, whatever remains is released to the seller.

The indemnity escrow is not a substitute for the contractual indemnity. It is the pre-funded enforcement mechanism for the indemnity. The buyer’s contractual indemnity right exists regardless of whether an escrow is established. What the escrow does is remove the credit risk on the seller: the buyer does not need to sue the seller and enforce a judgment to recover on a valid claim. The money is already there.

For the broader picture of what a secondary share sale involves: tax rates, documentation, FEMA filings, and timeline. See Treelife’s guide to selling founder shares in India. This article focuses on the escrow mechanics specifically.

Market benchmarks in Indian transactions as of FY 2026-27:

Bold caption: Indemnity escrow benchmarks in Indian share deals

Deal size	Typical escrow size	Holdback period	Cap on individual claims
Under ₹10 crore	15-25% of consideration	12-18 months	0.25-0.5% of consideration (de minimis)
₹10-50 crore	10-20% of consideration	12-18 months	0.1-0.25% of consideration
₹50-200 crore	10-15% of consideration	12-24 months	0.1-0.25% of consideration
Above ₹200 crore	5-15% of consideration	18-24 months	0.1-0.25% of consideration; W&I insurance often considered

3. Purchase price adjustment escrow

Where the final purchase price is subject to a post-closing adjustment (for instance, where consideration is based on net working capital at closing, with a true-up against actual working capital after accounts are prepared), a portion of the consideration is placed in escrow pending finalisation of the adjustment mechanism.

This is distinct from an indemnity escrow. The purchase price adjustment escrow does not exist because of warranty breach risk. It exists because the parties agreed on a formula for final consideration and that formula requires post-closing verification. The amount placed in the adjustment escrow is calculated at signing based on the estimated working capital gap, and is settled once the post-closing accounts are audited and the adjustment amount determined.

The locked-box mechanism is the escrow-free alternative to a completion accounts adjustment. Under a locked-box structure, the parties agree on a historical reference date (the “locked-box date”), typically the most recent set of audited accounts. The economic risk of the business transfers to the buyer as of that date, not as of closing. The purchase price is fixed at signing with reference to the locked-box accounts, and no post-closing adjustment escrow is needed. The seller’s protection against buyer-side leakage (unauthorized extraction of value from the business between the locked-box date and closing, for example dividends paid, management fees extracted, or intercompany balances moved) is handled through contractual leakage provisions in the SPA, not an escrow account. For PE-led acquisitions of larger targets with clean audited financials, the locked-box structure is often preferred by sellers precisely because it eliminates the adjustment escrow and delivers certainty on the headline number at closing. The tradeoff is that the buyer assumes economic risk from the locked-box date, which may be months before closing, and must rely on the seller’s locked-box covenants rather than a funded escrow for protection against leakage.

4. SEBI Takeover Code escrow (listed companies)

For acquisitions of listed companies triggering a mandatory open offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (the Takeover Code), escrow is not optional. It is mandatory.

Regulation 17 of the Takeover Code requires the acquirer to create an escrow account no later than two working days before the Detailed Public Statement (DPS) of the open offer. The minimum amount follows a slab: 25% of the total open offer consideration on the first ₹500 crore, plus 10% of consideration beyond ₹500 crore. Where the open offer is conditional on a minimum acceptance level, the acquirer must deposit in cash either 100% of the consideration for that minimum level or 50% of the total offer consideration, whichever is higher.

The Takeover Code escrow can be funded by cash, a bank guarantee, or (following the SEBI (SAST) Third Amendment Regulations 2020) by deposit of frequently traded and freely transferable equity shares. The escrow is operated by the manager to the open offer. Any unclaimed balance remaining seven years after deposit is transferred to the Investor Protection and Education Fund.

The FEMA 18-25 rule for cross-border escrow

For any share deal involving a non-resident buyer and resident seller, or a resident buyer and non-resident seller, Rule 9(6)(iii) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) imposes two hard limits on deferred consideration and escrow:

• The amount placed in escrow or deferred cannot exceed 25% of the total consideration.
• The escrow or holdback period cannot exceed 18 months from the date of the share transfer agreement (not the closing date).

These limits were first introduced through FEMA Notification No. FEMA.368/2016-RB dated 20 May 2016, and subsequently codified in the NDI Rules. The January 2025 RBI Master Direction extended the same framework to foreign-owned and controlled companies (FOCCs). This is a significant expansion: Indian subsidiaries of foreign parent companies executing share deals are now also subject to the 18-25 Rule.

The practical implications are stark. On a ₹100 crore cross-border SPA, the maximum pre-funded escrow is ₹25 crore. No matter how complex the indemnity structure, how large the identified risk, or how long the typical tax assessment window, the FEMA-regulated escrow mechanism is capped at 25%. A buyer who negotiates a 30% indemnity cap on paper has the contractual right but not a pre-funded escrow for the additional 5%. Recovery above the 25% escrow requires enforcement through Indian courts, which carries both cost and time risk.

The 18-month clock runs from the date of the transfer agreement (the SPA), not from closing. On a deal where closing happens four months after signing, the effective indemnity protection window via escrow is 14 months, not 18. Founders and sellers on the other side of the table should understand this distinction and use it in negotiations: the economic value of the escrow to the buyer diminishes as the signing-to-closing gap grows.

A structural nuance worth understanding: the FEMA framework regulates cross-border money movement, not the size of the contractual indemnity obligation itself. A founder can contractually agree to a 30% indemnity cap. But the mechanism by which the buyer actually receives payment (the escrow) is capped at 25% and 18 months. This means the FEMA regulatory constraint bites differently on the buyer than on the seller: the buyer’s practical enforcement capability is constrained even where the contractual right exists.

What does the escrow agreement actually contain?

The SPA provides the commercial terms of the escrow (size, duration, release triggers, claim procedure). The escrow agreement is a separate tri-party document signed by the buyer, the seller, and the escrow agent that operationalises those terms. Many Indian deals treat the escrow agreement as a standard form provided by the bank and do not negotiate it. That is a mistake.

Key provisions that must be specifically negotiated:

Release triggers. The escrow agreement must specify exact conditions for release: lapse of the holdback period, no pending claims, resolution of all notified disputes. Vague triggers (“release when matters are settled”) produce disputes. Specific triggers (“release of 50% of escrow on the first anniversary of closing, provided no written claim notice has been received”) do not.

Claim notice mechanism. The agreement should specify the form of a claim notice, the information it must contain, the timeline for the other party to dispute it, and what happens if no response is received. In Treelife’s experience, disputes about whether a valid claim notice was delivered are as common as disputes about the underlying claim itself.

Dispute resolution within the escrow. Where the buyer asserts a claim and the seller disputes it, the escrow agent should not be the arbitrator. The standard approach is to direct disputed amounts to a designated bank account pending resolution by arbitration, leaving the undisputed balance available for scheduled release.

Interest on the escrow. Escrow accounts in India are typically non-interest bearing. If the account earns interest, specify who receives it and the applicable TDS treatment under Section 194A of the Income Tax Act 2025. Failing to address interest accrual creates an unintended income event.

Agent’s fee and liability. The escrow agent’s fee is typically borne by the seller (since the holdback is the seller’s money). The agent’s liability should be limited to gross negligence and wilful default: escrow agents that face unlimited liability will either decline to act or charge fees that make the structure uneconomical.

Stamp duty on the escrow agreement. The escrow agreement is a separate deed and attracts stamp duty under the Indian Stamp Act 1899 and the applicable state Stamp Act. Rates vary by state: in Maharashtra, a deed of agreement or escrow instrument can attract ad valorem duty based on the consideration covered, which on a large-value transaction is a material cost. Stamp duty is non-negotiable and non-refundable. Factor it into deal economics before the escrow agreement is finalised, and confirm the applicable head of instrument with stamp duty counsel in the state where the agreement will be executed.

Expiry and unclaimed funds. The agreement must specify what happens if neither party claims the escrow balance at period end, including the mechanism for unclaimed amounts and whether any regulatory reporting to the AD bank is required.

How is escrowed consideration taxed?

This is the most consequential open question in Indian escrow practice, and it does not have a settled answer. The Income Tax authorities’ position and the judicial consensus pull in different directions.

The tax authority’s default position is that the full sale consideration, including the amount held in escrow, accrues to the seller in the year of transfer. Under Section 45 of the Income Tax Act 2025 (Section 45 of the 1961 Act for prior years), capital gains arise in the year of the “transfer.” The moment title to shares passes, the full consideration, including amounts the seller has not yet received and may never receive, is said to have accrued. This means the seller pays capital gains tax on the full consideration amount in Year 1, including the portion sitting in the buyer’s escrow.

The judicial position is more nuanced. The Income Tax Appellate Tribunal (ITAT), Delhi Bench, in Modi Rubber Limited v. Deputy Commissioner of Income Tax, held that where the escrow amount was neither received by the seller nor likely to be received (because contingent claims were pending), the amount should be excluded from taxable capital gains in the year of sale and taxed only in the year of actual receipt or accrual. The test the ITAT applied is whether the seller’s right to the consideration is in doubt, not merely deferred. If the escrow amount might be forfeited to indemnity claims, the seller does not have an unconditional right to it, and taxing it as accrued income in Year 1 would tax income that may never materialise.

The Bombay High Court affirmed this logic in the WMI Cranes case, holding that consideration deposited in escrow and subsequently withdrawn by the buyer to satisfy specific indemnity obligations could not be taxed in the seller’s hands. The court applied the “real income theory” established by the Supreme Court in E.D. Sassoon and Company Ltd (1954) 26 ITR 27: for income to be taxed, the recipient must have a right to receive it and the payer must have a corresponding obligation to pay.

Bold caption: Capital gains treatment of escrow: competing positions

Position	Who holds it	Legal basis	Risk to seller
Full consideration taxed in year of transfer	Income Tax Department	Section 45, accrual basis	Pays tax on amounts never received
Escrow excludable if contingent right	ITAT Delhi (Modi Rubber), Bombay HC (WMI Cranes)	Real income theory, E.D. Sassoon (SC)	Tax scrutiny on revised return
Escrow taxable when consideration unconditionally agreed	Madras HC in Carborundum Universal Ltd v. ACIT; certain ITAT benches	No contingency = full accrual	Fact-specific; escrow drafting determines outcome
Interest on escrow taxed as other income	Generally accepted	Section 194A, TDS deductible	TDS on interest if account earns returns

The key variable is the drafting of the escrow agreement itself. Where the SPA and escrow agreement are clear that the seller’s right to the escrowed amount is contingent (it may be reduced by valid indemnity claims before release), the ITAT-Bombay HC line of authority provides the strongest protection for treating the escrow amount as not accrued. Where the seller’s right is unconditional (the money will be released at the end of the period regardless of claims) the courts have held that it is accrued income taxable in Year 1.

The practical implication: sellers should structure the escrow agreement to make the contingency explicit. The escrow amount is not the seller’s until it is released. The release is conditional on there being no valid outstanding claims. Do not include language suggesting the seller has an unconditional right to the escrow funds subject only to a deduction for claims. That language can convert a contingent amount into accrued income.

The revision of a filed tax return (to exclude escrow amounts after the fact) carries its own risks: a revised return reducing taxable income will attract scrutiny, and if the limitation period for revising has passed, the seller is stuck with the original return. The better approach is to take the contingency position in the original return and document the basis.

How does escrow compare to alternatives?

Earn-outs

An earn-out is a contingent future payment based on the target company’s performance after closing. It is not money already owed. It is money that may become owed if certain milestones are hit. An escrow holdback is money already owed to the seller, withheld temporarily as security for defined post-closing risks. The two are conceptually and legally distinct.

Founders who are given a choice between a higher headline price with an earn-out versus a lower price with a clean escrow should model the scenarios carefully. Earn-outs are particularly difficult to enforce when the buyer controls the acquired company post-closing: the buyer’s post-closing operating decisions can affect the metrics that determine earn-out payouts, creating a structural conflict of interest.

Warranty and Indemnity insurance

Warranty and Indemnity (W&I) insurance allows the buyer to claim warranty breach losses from an insurer rather than from the seller. Where the buyer obtains a W&I policy, the escrow size can often be reduced or eliminated for general warranty risk, because the insurer backstops recovery. The seller receives full consideration at closing and carries limited post-closing exposure.

W&I adoption in India is accelerating for PE and growth-equity transactions above ₹100 crore, where premium costs as a percentage of deal value are manageable (typically 2.5% to 3% of the policy limit). Below that threshold, W&I remains uneconomical for most Indian startup transactions. The insurer will still typically require a retained escrow covering the deductible (the “retention”) under the policy, so W&I reduces but does not always eliminate the escrow.

Parent company guarantee

Where the seller is a corporate entity with a creditworthy parent, the buyer may accept a parent company guarantee in lieu of an escrow. The parent guarantees the seller’s indemnity obligations up to a defined amount for a defined period. This avoids the seller being required to ringfence cash in an escrow account, replacing it with a contingent guarantee from an entity the buyer regards as a reliable counterpart. Parent guarantees are common in PE fund exits where the fund entity itself has no remaining assets post-distribution but the fund manager has a creditworthy management company.

Common mistakes that cost founders and sellers money

Starting the FEMA clock from the wrong date. The 18-month period under Rule 9(6)(iii) of the NDI Rules runs from the date of the share transfer agreement, not from the closing date. On a deal with a four-month signing-to-closing gap, the effective indemnity window via escrow is 14 months. Founders who negotiate an 18-month escrow with a four-month closing timeline have inadvertently accepted a 14-month effective protection period for the buyer. The fix: negotiate the holdback duration as “18 months from the closing date” and add a separate 6-month signing-to-closing escrow for the regulatory approval bridge.

Treating the escrow as a settlement fund. An escrow is not an insurance fund. A buyer who makes a claim against the escrow must still demonstrate a valid breach of warranty or indemnity obligation under the SPA. Sellers sometimes treat any claim notice as automatically valid and do not dispute it within the required window, allowing the escrow to be drawn down on claims that would not have survived scrutiny. Read every claim notice carefully and engage legal counsel before any claim deadline passes.

Accepting a tipping basket that applies to the escrow release. If the SPA has a tipping basket (where once aggregate claims exceed the basket threshold, the buyer recovers from rupee one) and that basket applies to the escrow release condition, a single claim above the basket threshold can freeze the entire escrow pending resolution. For a holdback of ₹10 crore with a 1% basket, a ₹10 lakh claim (just above the ₹1 crore basket) can block the release of all ₹10 crore. Push for a provision that only the amount in dispute is held back, not the full escrow amount.

Not specifying the escrow bank’s AD Category I status in cross-border deals. For FDI transactions, the escrow account must be held with an AD Category I bank. Not all scheduled commercial banks have the foreign exchange desk experience to handle FC-TRS filings, FIRC issuance, and FEMA reporting in connection with cross-border escrow. Using a bank without an active FDI desk leads to delays in FEMA reporting, missed FC-TRS deadlines (which must be filed within 60 days of share transfer), and potential RBI penalties.

Leaving interest treatment undefined. If the escrow account earns interest and the agreement does not specify who receives it, a dispute at release time is predictable. The seller typically argues the interest was earned on their money; the buyer argues it accrues to the escrow. Specify in the agreement: interest (if any) accrues to the seller but is subject to TDS under Section 194A of the Income Tax Act 2025, and is released only when the principal is released.

Omitting a partial release schedule. An escrow that releases in full at the end of 18 months, with no intermediate releases, and ties up the seller’s money unnecessarily long. A tranched release structure, releasing 50% at 12 months (if no claims are pending) and 50% at 18 months, is commercially standard and reduces the seller’s cash exposure. Negotiate partial release schedules at the term sheet stage.

Treelife practitioner note

In the transaction agreements engagements we have run at Treelife, the escrow clause is one of the last to be negotiated and one of the most consequential for founders’ actual economics. The headline consideration number gets attention from both parties. The escrow percentage gets far less scrutiny than it deserves, particularly because the effective cash received by the seller at closing is the headline number minus the escrow, not the headline number.

The pattern we see most frequently in cross-border transactions at Series A and Series B is a seller who agrees to a 20% escrow for 18 months from signing, without realising that the FEMA 18-25 Rule makes this structure compliant only if the escrow is drawn exclusively on deferred consideration (Rule 9(6)(iii) of the NDI Rules). Where the buyer later attempts to draw the escrow for an indemnity claim, the FEMA framework becomes directly relevant to enforcement. A buyer whose escrow agreement is not FEMA-compliant may face RBI scrutiny on cross-border payments made from the account.

On the tax side, we consistently see sellers who file their original return including the full consideration amount (including escrowed amounts) without taking the contingency exclusion, then receive less from the escrow than expected due to buyer claims, and try to file a revised return. If the window for revising the return has closed, the seller has paid tax on consideration they never received. The solution is to take the contingency position in the original return, with a clear documentary record of the contingent release structure, relying on the ITAT and Bombay High Court precedent. This requires specific escrow drafting and advance planning, not a retrospective fix.

The most protective escrow structure for a founder-seller combines three elements: a clearly contingent release mechanism (the ITAT safe harbour), a partial release schedule with milestone-based unlocks, and a claim notice procedure that requires the buyer to state the specific SPA breach and quantify the loss before any escrow is frozen.

Frequently asked questions

Q: What is an escrow holdback in a share deal?
A: An escrow holdback is the portion of the purchase price withheld from the seller at closing and held by a neutral third party (the escrow agent) as security for the buyer’s post-closing indemnity claims. It is the seller’s money in principle, but the buyer can draw against it for defined warranty breach and indemnity claims during the holdback period. Standard holdback size in Indian deals ranges from 10% to 25% of consideration.

Q: What are the FEMA limits on escrow in a cross-border share deal?
A: Under Rule 9(6)(iii) of the NDI Rules 2019, the escrow or deferred consideration amount in any share transfer between a resident and a non-resident cannot exceed 25% of the total consideration, and the escrow period cannot exceed 18 months from the date of the share transfer agreement. The January 2025 RBI Master Direction extended these rules to FOCCs. There is no FEMA limit on the contractual indemnity itself, only on the pre-funded escrow mechanism.

Q: Does the SEBI Takeover Code require an escrow for a public company acquisition?
A: Yes. Regulation 17 of the SEBI (SAST) Regulations 2011 requires the acquirer to create an escrow account no later than two working days before the Detailed Public Statement. The minimum amount is 25% of total open offer consideration on the first ₹500 crore, plus 10% on the excess. This is a mandatory regulatory requirement, not a contractual one, and applies to all open offers regardless of deal structure.

Q: How is the escrow amount taxed in the seller’s hands?
A: This is unresolved in Indian law. The Income Tax Department takes the position that the full consideration, including escrowed amounts, is taxable in the year of transfer. The ITAT Delhi (Modi Rubber) and Bombay High Court (WMI Cranes) have held that where the seller’s right to the escrow amount is genuinely contingent on no indemnity claims arising, the amount is not taxable until actually received. The outcome depends on the escrow agreement’s drafting: clearly contingent release structures have the best chance of supporting the exclusion from Year 1 capital gains.

Q: What is the difference between a signing-to-closing escrow and an indemnity escrow?
A: A signing-to-closing escrow holds the consideration between signing and closing while regulatory approvals are obtained. It is released to the seller at closing. An indemnity escrow (holdback) is established at closing and held during the post-closing period as security for warranty breach and indemnity claims. The two are separate structures, often funded at different points and released on different triggers.

Q: Can the escrow period be longer than 18 months in a domestic (resident-to-resident) transaction?
A: Yes. The 18-month FEMA limit applies only to cross-border transactions (resident-non-resident). In a purely domestic share deal, the parties can contractually agree to any holdback period, subject only to the Limitation Act 1963. However, in practice, holdback periods beyond 24 months are uncommon because they impose a significant cash-flow burden on the seller without proportional risk reduction for the buyer.

Q: Who pays the escrow agent’s fees?
A: By market convention, the seller bears the escrow agent’s fee, since the holdback represents the seller’s deferred consideration. However, this is negotiable. In PE transactions where the buyer has a preferred bank relationship and proposes a specific escrow agent, the fee allocation is sometimes negotiated alongside the escrow terms.

Q: Can a bank guarantee replace a cash escrow?
A: For the Takeover Code Regulation 17 escrow in listed company deals, yes: a bank guarantee is a permitted form of escrow alongside cash. For private M&A indemnity escrow, parties can agree to a bank guarantee or parent company guarantee as an alternative to cash escrow, but cross-border transactions must comply with the FEMA framework for the guarantee structure, which requires RBI scrutiny in certain cases.

Q: What happens if a buyer makes an escrow claim after the holdback period expires?
A: Once the holdback period ends and the escrow is released to the seller, the escrow mechanism closes. The buyer’s contractual indemnity right under the SPA may survive beyond the escrow period (depending on the survival clause), but enforcement requires the buyer to pursue the seller directly, through court proceedings or arbitration, without the benefit of pre-funded security. A separate but more common situation is where a buyer files a claim notice in the final weeks of the holdback period and the dispute is unresolved when the period expires. In that case, three paths are available: (a) the parties agree by mutual amendment to extend the escrow for a defined period while the dispute is resolved. This is the most common commercial outcome and avoids litigation cost; (b) the disputed amount is segregated into a separate neutral bank account pending arbitration, while the undisputed balance is released to the seller on schedule; or (c) the buyer applies to the relevant High Court for an injunction restraining the escrow agent from releasing funds pending the arbitral award. Option (c) is rare and expensive, but is available where the claim amount is large and the buyer has no confidence in the seller’s solvency. Negotiate a dispute-segregation clause into the escrow agreement at the time of drafting . It removes the need for any of these escalations in most cases.

Q: Is an earn-out the same as a deferred escrow?
A: No. An earn-out is contingent future consideration based on post-closing performance milestones. The seller may never receive it if milestones are not met. An escrow is money already owed, withheld temporarily as security. The escrow amount belongs to the seller subject only to valid indemnity claims. Earn-out payments are earned prospectively. The two are legally and commercially distinct structures.

Q: Does W&I insurance eliminate the need for an escrow?
A: Not entirely. Where the buyer obtains a W&I policy, the escrow can often be reduced to the policy deductible (the “retention”), which is typically 0.5% to 1% of deal value. The insurance covers claims above the retention. This significantly reduces the seller’s cash tied up in escrow. However, the insurer’s own due diligence and underwriting requirements must be met, and the escrow covering the retention is still typically required.

Q: Can the escrowed amount be invested during the holdback period?
A: Most Indian escrow accounts are non-interest bearing. Where interest is earned, the escrow agreement must specify who receives it and address TDS obligations under Section 194A of the Income Tax Act 2025 (for domestic transactions). Attempting to invest escrow funds in instruments beyond a standard bank account requires explicit authorisation in the escrow agreement and may require RBI approval in cross-border transactions.

Q: What form does a valid escrow claim notice take?
A: The SPA and escrow agreement should specify the required form. A valid notice typically must be in writing, identify the specific SPA warranty or indemnity obligation breached, describe the facts giving rise to the breach, and quantify the loss claimed. A notice that merely references a “potential claim” without specifics is generally insufficient to freeze the escrow. Sellers should require specificity in the notice requirements. Vague notices do not satisfy the claim condition.

Q: How does the DVT threshold under the Competition Act 2023 interact with signing-to-closing escrow timing?
A: The Competition (Amendment) Act 2023 introduced a deal value threshold: transactions above ₹2,000 crore with the target having substantial business operations in India must be notified to the CCI. CCI clearance is a closing condition. The CCI can take up to 210 calendar days on complex filings. A signing-to-closing escrow must remain operational through the CCI process. The 6-month FEMA window for signing-to-closing escrows without prior RBI approval may be insufficient for deals requiring Form II CCI review. Sellers should negotiate for a longer signing-to-closing escrow window (with RBI prior approval) or a clearly defined long-stop date with escrow refund provisions if CCI clearance is not received.

Regulatory references:

• Foreign Exchange Management (Non-Debt Instruments) Rules, 2019: Rule 9(6)(iii). FEMA 18-25 Rule for deferred consideration and escrow in cross-border share transfers
• FEMA Notification No. FEMA.368/2016-RB dated 20 May 2016. Original introduction of deferred consideration and escrow regime
• RBI Master Direction on Foreign Investment in India, January 2025. Extension of deferred consideration and escrow rules to FOCCs
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011: Regulation 17. Mandatory escrow for open offers in listed company acquisitions
• SEBI (SAST) Third Amendment Regulations 2020, dated 01 July 2020. Expansion of permitted escrow forms to include equity securities