Escrow Agreement in India: When You Need One and How to Draft It

A Pune founder sells 60% of her company to a strategic buyer. The share purchase agreement is signed, the buyer wires the consideration, and then the buyer discovers that two employee stock options were never properly approved. The buyer wants to hold back ₹1.2 crore until the position is fixed. The founder wants the money released because the sale has completed. Neither side trusts the other to hold the difference, and the transaction stalls for three months over a problem worth a fraction of the deal.

An escrow agreement exists to prevent exactly that stall. It puts the disputed money — or the shares, or the source code — in the hands of a neutral third party who releases it only when the conditions in the agreement are met. In India the device is used in share purchases, software licensing, real estate, franchise arrangements, export transactions and, increasingly, in payment flows regulated by the Reserve Bank. The drafting is not complicated, but the trigger and release mechanics decide whether the escrow works or becomes another dispute.

What an escrow agreement is

An escrow is a three-party arrangement. Two principals — usually a buyer and a seller, or a licensor and a licensee — appoint a third party, the escrow agent, to hold an asset until a defined event occurs. The asset can be money, shares, documents, source code, title deeds or domain names. The escrow agent holds the asset in a segregated capacity and deals with it only in accordance with the instructions in the agreement.

The legal structure in India is a contract of bailment or agency over the deposited asset, combined with a trust-like obligation to deal with it only for the stated purpose. The escrow agent is not a party to the underlying commercial transaction and takes no view on its merits. Its only duty is to follow the release instructions precisely. That narrow role is the source of both its value and its fragility: an escrow agent that interprets instructions loosely creates liability for itself, while one that interprets them strictly can leave the asset stranded.

When an Indian transaction actually needs an escrow

Escrow is not a default. It costs money, adds a third party to every release and slows completion. It is justified when three conditions are present: there is a gap between signing and completion, there is a specific risk that one party will not perform, and the cost of the escrow is small relative to the value at stake.

Mergers, acquisitions and share transfers

The classic use. Part of the consideration is held back against indemnity claims for a defined period — typically twelve to twenty-four months — and released when the period expires or when claims are settled. The escrow can also hold the seller's share transfer forms, board resolutions and resignations, to be released to the buyer on payment of the balance consideration.

Software and technology licensing

A customer licensing mission-critical software wants the source code and build instructions deposited with an escrow agent, released if the licensor becomes insolvent, stops supporting the product or is acquired by a competitor. The deposit is worthless unless the agreement specifies what is deposited, how often it is updated, and how the released code can actually be built — a code drop without the build environment, third-party dependencies and documentation is a box of unreadable files.

Real estate and construction

Under the Real Estate (Regulation and Development) Act 2016, a promoter must deposit a specified proportion of amounts realised from allottees in a separate escrow account with a scheduled bank, and may withdraw only in proportion to construction progress, supported by certification from an engineer, architect and chartered accountant. This is a statutory escrow, not a contractual one, and the project's RERA registration number should be quoted in every related document.

Outside RERA, escrow is used in resale transactions where the buyer wants the sale deed and the seller wants the balance payment released simultaneously, and in construction contracts where the employer holds retention in escrow rather than with itself.

Payment flows and regulated intermediaries

Reserve Bank directions for payment aggregators and payment gateways require merchant settlement funds to be held in an escrow account with a scheduled commercial bank, operated in a manner that keeps customer money separate from the entity's own funds. Similar structures appear in securities settlement, commodity exchanges and insurance broking. If your business collects money on behalf of third parties, the escrow requirement may be regulatory rather than optional.

Franchise, distribution and joint ventures

A franchisor may require the franchisee to place a performance deposit in escrow, released on achieving opening targets. A joint venture may hold the partners' capital contributions in escrow until conditions precedent — licences, land title, regulatory approvals — are satisfied. The common thread is a condition that must be verified before money moves.

Who should act as escrow agent in India

The escrow agent must be independent, solvent and capable of holding the asset in a segregated account. In Indian practice there are four options.

• A scheduled commercial bank. The default for cash escrows. Banks have standard escrow products, hold funds in a designated account and charge a fee that is usually a percentage of the amount plus a fixed annual charge. The bank will insist on its own standard terms, which often include a right to refuse release until both parties consent in writing.
• A trustee company or professional trustee. Used for larger transactions and for escrows that need to survive for years. More flexible than a bank on instruction mechanics, and more expensive.
• A law firm or chartered accountant. Common in smaller transactions. The advantage is familiarity with the deal; the disadvantage is that client money handling rules and professional indemnity limits may constrain the amount.
• The parties themselves under a tripartite arrangement with a neutral custodian. Rare, and weak. An escrow where one principal controls the asset is not an escrow.

Whoever is appointed, the agreement should confirm that the escrowed asset is held separately from the agent's own funds, that the agent has no right of set-off against it, and that the agent's liability is limited except for fraud, wilful misconduct or gross negligence. Indian banks will not accept unlimited liability, and a principal that insists on it will find itself without an agent.

The release mechanics: the heart of the agreement

Most escrow disputes are not about the asset. They are about whether the release condition has been satisfied. The agreement should therefore define four things with precision: the trigger event, the evidence that proves it, the instruction format and the timeline.

Defining the trigger event

A trigger should be an objective fact that can be verified from a document. "Completion of the sale" is not objective; "receipt by the escrow agent of a copy of the share transfer form stamped and registered with the company, together with the board resolution allotting the shares to the buyer" is. "Material breach" is not objective; "a written notice from the buyer stating that an indemnity claim has been accepted in writing by the seller, or an award or decree determining the claim" is.

Where the trigger depends on a third party's action — a regulatory approval, a court order, a certificate from an engineer — the agreement should name the issuer and the form of the document. Where the trigger is the passage of time, state the exact date and the time zone.

Joint instructions and unilateral instructions

There are two models. Under the joint instruction model, the agent releases only on instructions signed by both principals. It is safe but slow, and it fails whenever the parties are in dispute — which is precisely when the escrow is needed. Under the unilateral model, the agent releases on the instruction of one party supported by specified evidence, and the other party has a short window to object.

The workable compromise in Indian deals is a hybrid: joint instructions for the normal case, plus a defined unilateral route where the releasing party provides the evidence listed in the schedule and the other party fails to object within a stated period, typically five to ten working days. The objection then freezes the release until the dispute is resolved by agreement, arbitration or court order.

Timelines and the agent's obligations

Specify how quickly the agent must act after receiving a valid instruction — five working days is typical — and what happens if it does not. Specify the notice details for each party, including email addresses and bank account details for the release. An escrow release to the wrong account because the agreement did not fix the account details is a loss that will be litigated for years.

Interest, tax and accounting of escrowed funds

Money sitting in escrow for eighteen months earns interest, and the agreement must say who gets it. The usual position is that interest accrues for the account of the party ultimately entitled to the principal, and is released with it. Some agents instead sweep interest into their own fee; that should be resisted unless it is reflected in a lower fee.

Tax follows the beneficial owner. Interest earned on escrowed funds is generally taxable in the hands of the party entitled to it, and the payer of interest may have withholding obligations. Where the escrow holds shares, the voting rights and dividends during the escrow period should be dealt with expressly — silence usually means the seller keeps both, which may not be what the buyer intended.

For accounting purposes, the principals should confirm whether the escrowed amount is recognised as a receivable or as a contingent asset, and should obtain a statement from the agent at each period end. Auditors increasingly ask for escrow confirmations, and an agent that cannot produce a statement is a problem at year-end.

Stamp duty and registration

An escrow agreement is generally treated as an agreement not otherwise specifically provided for in the state stamp schedule, and attracts a fixed duty that varies by state. Where the escrow holds immovable property, or where the escrow arrangement is part of a conveyance, the instrument may attract duty at the conveyance rate on the value of the property — a materially different exposure. Where the escrow holds shares, some states treat the agreement as separate from the share transfer and charge a fixed duty, while others look through to the underlying transfer.

Registration is not normally required because an escrow agreement does not by itself create or transfer rights in immovable property. If the escrow is part of a transaction that does — a sale deed held in escrow pending payment — the sale deed itself must be registered within the time allowed under Section 23 of the Registration Act 1908, and holding it in escrow does not extend that period.

Because the treatment varies by state and by the nature of the asset, confirm the position with the sub-registrar before execution. Retain the stamp certificate and record the instrument in the company's contract register.

Common mistakes in Indian escrow agreements

• Vague release trigger. "On satisfactory completion" leaves the agent unable to act and the money frozen.
• No objection window. One party can block release indefinitely by refusing to sign.
• Agent given adjudication power. The agent is asked to decide whether a breach occurred, which turns a custodian into an unqualified arbitrator.
• No fee and expense mechanism. The agent's fee is deducted from the escrowed amount without agreement, reducing the beneficiary's recovery.
• No termination or long-stop date. The escrow has no end, so the asset stays locked after the deal has died.
• Source code deposit without build instructions. The released code cannot be compiled, which defeats the purpose.
• No account details fixed in the agreement. Release instructions are given by email to an account nobody verified.
• Interest and tax unallocated. A tax demand arrives and neither party accepts it.
• Escrow agent's insolvency ignored. Funds are commingled with the agent's own, and the principals become unsecured creditors.

Frequently asked questions

Is an escrow agreement legally valid in India?

Yes. Indian law recognises escrow arrangements as a species of conditional deposit, and the Indian Contract Act 1872 governs the underlying obligations. There is no single escrow statute for private commercial transactions; the arrangement is enforced as a contract, with the agent owing fiduciary-type duties over the deposited asset.

Certain escrows are created by regulation — RERA project accounts and RBI-mandated payment aggregator accounts are the main examples — and those have statutory rules that override whatever the parties agree.

Who can be an escrow agent in India?

There is no statutory licensing regime for private escrow agents. In practice banks, trustee companies, law firms and chartered accountants act as agents. For regulated payment flows, the agent must be a scheduled commercial bank. For large transactions, a professional trustee company is usually preferred because it has the systems to hold and account for the asset over years.

Whoever is chosen, check solvency, segregated custody arrangements and professional indemnity cover before appointing.

What happens if the parties disagree about whether the release condition is met?

The asset stays with the agent. A well-drafted agreement provides that on a disputed instruction the agent must hold the asset until it receives either joint written instructions or a final order from an arbitral tribunal or court. That is the correct outcome — the escrow is not meant to resolve disputes, only to hold value while they are resolved.

The agreement should also include a long-stop date, after which either party may apply to a court for directions. Without one, the asset can remain locked for years.

How much does an escrow cost in India?

Bank escrow charges are usually a percentage of the amount held, often in the range of a fraction of a percent, plus fixed annual charges and document fees. Trustee companies charge a setup fee and an annual fee based on the value and complexity. Law firm escrows are usually charged as an hourly or fixed professional fee.

The cost is negotiated and varies widely with the amount and duration. Compare at least two providers for a transaction of any size, and confirm who bears the agent's fees — usually the parties share them equally unless the agreement says otherwise.

Can escrow be used for software source code in India?

Yes, and it is common in enterprise licensing. The deposit should include the source code, build scripts, configuration files, database schema, third-party dependency list and technical documentation. The agreement should require periodic updates — quarterly or on each major release — and should provide for a verification test in which the agent or an independent expert confirms that the deposit builds.

Release triggers typically include the licensor's insolvency, discontinuation of the product, failure to provide support for a stated period, and change of control to a competitor. Each trigger should be objectively verifiable.

Does an escrow agreement need to be stamped?

Yes. An escrow agreement is an instrument and must be stamped under the applicable state stamp law, usually at a fixed amount for an agreement not otherwise provided for. Where the escrow relates to immovable property, a higher duty may apply, and the underlying conveyance must be separately stamped and registered.

Confirm the current rate with the sub-registrar or the state e-stamp portal, because rates differ between states and are revised periodically.

Drafting Support

Our drafting team prepares tripartite escrow agreements for Indian share purchases, software licences, real estate transactions and franchise arrangements, including release schedules and instruction forms.