Escrow Clauses: Holding Money, Shares or Source Code Until Conditions Are Met

An escrow clause hands something, money, shares, source code, or documents, to a neutral third party who holds it and releases it only when a defined condition is met. It shows up in three common places: mergers and acquisitions (a slice of the purchase price held back to cover post-closing indemnity claims), software contracts (source code held by an agent and released to the customer if the vendor stops supporting the product), and real estate (buyer funds held until title and possession conditions clear). The one thing most people get wrong: they assume "escrow" itself is a legal safeguard. It is not. An escrow clause is only as good as its release conditions and its dispute mechanism. A vague trigger or a one-party-controlled release defeats the entire point of using a neutral holder. This guide is published by Adira, which makes contract management software, so we have a commercial interest in you understanding contracts well, but the explanation below stands on its own regardless of what you buy.

Plain meaning

Escrow is a three-way arrangement, not a two-way one. Party A (the depositor, buyer, or licensor) hands an asset to Party C (the escrow agent), who holds it on trust and hands it to Party B (the beneficiary) only when the agreed condition is satisfied, or returns it to Party A if the deal falls through. The agent does not take sides; its job is to verify the condition on paper, not judge whether the underlying deal was fair.

This solves a trust problem. In a straight two-party contract, one side has to hand over money, shares, or code before being sure the other will perform, or perform before being sure of payment. Escrow lets both sides commit without either holding the other's asset directly, but only if the release conditions are objective and the agent is genuinely independent. If either breaks down, escrow becomes a slower, costlier version of just trusting the other party outright.

Who it protects and what triggers it

In an M&A holdback, the buyer is protected: commonly 10 to 20 percent of deal value in Indian mid-market transactions sits in escrow for 12 to 24 months so the seller cannot disappear if a warranty turns out false or an indemnity claim arises later. In source-code escrow, the customer is protected: if the vendor collapses or breaches a defined support obligation, the customer gets the source code instead of unmaintainable software. In real estate, either the buyer (funds held until clear title) or the builder (funds released against milestones) can be the protected party.

The trigger is everything: a fixed date, satisfaction of a condition precedent (a certificate, a regulatory approval, a milestone), a default event (insolvency, missed support renewal, warranty breach), or joint written instruction. A clause that just says "released upon completion of the transaction," without saying who certifies completion and how, is not really a trigger at all.

What to look for

Five mechanics decide whether an escrow clause works when it is tested:

1. Who is the escrow agent, and are they neutral? A bank, an uninvolved law firm, or a dedicated escrow provider. An agent who also advises one side has a structural conflict even if nothing goes wrong.
2. What exactly releases the asset, and who certifies it? A specific document or verifiable event, not a vague standard like "satisfactory completion."
3. What happens if the parties disagree? Good clauses name a dispute path, joint instruction, arbitration, a named adjudicator, before the agent will act. Silent clauses leave the agent stuck indefinitely.
4. Who pays the agent's fees, and where does interest on cash go? Usually split or paid by the depositor; interest should be allocated explicitly.
5. What is the term, and what happens on expiry unresolved? A clause needs a default outcome: return to depositor, release to beneficiary, or extension.

The Indian position: no dedicated escrow statute, several overlapping ones

India has no single "Escrow Act." Escrow is contractual, built on ordinary contract principles, closest in structure to bailment under the Indian Contract Act, 1872. Section 148 defines bailment:

"A 'bailment' is the delivery of goods by one person to another, for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them." Source: Section 148, Indian Contract Act, 1872

An escrow agent holding physical documents, shares, or media fits this closely: goods delivered for a purpose, disposed of "according to the directions" set out in the escrow agreement once the purpose is accomplished. Cash in an escrow bank account is usually structured as a trust or specific-purpose account under banking rules instead, since money is not "goods" in the same sense. Either way, the escrow agreement itself, not a standalone statute, tells the agent what to do.

Three sector rules impose binding escrow requirements in India:

Real estate. Section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, 2016 requires:

"...seventy per cent. of the amounts realised for the real estate project from the allottees, from time to time, shall be deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction and the land cost and shall be used only for that purpose... the promoter shall withdraw the amounts from the separate account, to cover the cost of the project, in proportion to the percentage of completion of the project... certified by an engineer, an architect and a chartered accountant in practice." Source: Section 4, RERA, 2016

A statutory escrow, not a negotiated one: a builder cannot contract out of the 70 percent rule, and withdrawals need three professionals to certify completion first.

M&A open offers. Regulation 17 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 requires an acquirer making a public open offer to fund an escrow account before the detailed public statement goes out, on a tiered scale, broadly 25 percent of consideration up to Rs. 500 crore plus a lower percentage of the balance. See the consolidated SEBI (SAST) Regulations, 2011.

Cross-border share transactions. RBI's Master Direction on Foreign Investment in India permits deferred consideration, escrow, or seller indemnification, up to 25 percent of total consideration, for up to 18 months from the transfer agreement, in FDI share deals, through AD Category-I banks, without prior RBI approval. See RBI Master Direction, Foreign Investment in India. If a non-resident party is involved, FEMA, not just your contract, sets the outer limits.

A named Indian case: IL&FS v HDFC Bank

Infrastructure Leasing and Financial Services Ltd v HDFC Bank Ltd & Anr, decided by the Supreme Court on 19 October 2023 (2023 INSC 929, Civil Appeal No. 4708 of 2022), is not a source-code or M&A escrow case, it arose from a lending facility, but it answers a question that matters to every escrow clause: does the label "escrow" decide who owns the money inside, or does the underlying agreement decide?

IL&FS had assigned its rent receivables to HDFC Bank under a Master Facility Agreement and Assignment Agreement, routed through an escrow account with HDFC as escrow bank, to secure a loan facility. When IL&FS came under NCLAT restraint orders and argued the escrowed receivables were still its property, the Supreme Court held that the Assignment Agreement effected an absolute assignment of the receivables as an actionable claim, not a pledge, so no proprietary interest continued with IL&FS in that assigned portion, though any surplus beyond principal and interest could still revert to it. The word "escrow" was not decisive; the substance of the Assignment Agreement was.

Why this matters for your clause: courts look past the label. If your escrow agreement is really an assignment or security interest dressed up as "escrow," a dispute is decided on what the documents actually do, not the heading. Draft precisely, and state explicitly what happens to any surplus beyond what a claim consumes.

Red flags

Normal	Red flag	Why it matters
Release trigger is a specific, verifiable event (a certificate, a joint instruction, a fixed date)	Trigger is vague ("satisfactory completion," "at Buyer's discretion")	An agent cannot verify a subjective standard; a one-party trigger defeats the point of a neutral holder
Agent is a bank, law firm, or dedicated provider with no other stake in the deal	Agent is an affiliate, advisor, or employee of one party	A conflicted agent may release, or withhold, the asset to favour whoever it really answers to
Clause names a dispute path (joint instruction, arbitration, named adjudicator)	No dispute mechanism; agent told to "release upon Buyer's satisfaction"	Leaves the agent unable to act, and the asset frozen, the moment there is real disagreement
Interest on cash in escrow is expressly allocated	Clause is silent on interest	Becomes its own dispute on release day, especially on multi-year, multi-crore holdbacks
Agent's fees and who pays them are stated upfront	Fees unaddressed, or open-ended "as invoiced"	Can create leverage for the agent to delay release pending payment
Source-code escrow requires periodic deposit verification	Code deposited once, no verification or update obligation	A years-old, unverified deposit that does not compile or match production is worthless when needed
Term has a default outcome on expiry unresolved	Clause is silent on expiry	An indefinite standoff, or a windfall to whichever default position wins by inertia
Escrow is a defined legal structure (a scheduled account, a registered agent)	Escrow is just "held by [one party's lawyer] in trust," no separate account	Removes the independence that makes escrow meaningful in the first place

Bad clause vs better clause

Bad: "An amount equal to 10% of the Purchase Price shall be retained by Buyer and released to Seller upon satisfactory completion of the transition period, at Buyer's sole discretion."

What is wrong: no independent escrow agent, Buyer holds its own money and decides release itself, the standard is subjective, no dispute mechanism, no term, no provision for interest.

Better: "An amount equal to 10% of the Purchase Price (the 'Escrow Amount') shall be deposited within 5 business days of Closing into an escrow account with [Named Bank/Escrow Agent], governed by a separate escrow agreement in the agreed form. The Escrow Amount shall be released to Seller on the date 18 months after Closing (the 'Release Date'), less any amount subject to a bona fide indemnity claim notified in writing by Buyer to the Escrow Agent and Seller before the Release Date, specifying the claim amount and basis under Clause [Indemnity]. Amounts subject to an unresolved claim shall be released only upon (a) written joint instruction from both parties, or (b) a final arbitral award or court order determining the claim. Interest accrued on the Escrow Amount shall be paid to Seller on release, in proportion to the amount released. The Escrow Agent's fees shall be borne equally by both parties."

What changed: an independent agent replaces self-holding, the release date and claim mechanism are concrete and checkable, unresolved disputes get a defined path instead of a standoff, and interest and fees are addressed instead of left to fight about later.

How it interacts with related clauses

• Conditions precedent. Escrow release is usually itself a condition precedent, tied to the escrow agreement's release event. If your conditions-precedent clause and escrow clause describe the trigger differently, you have two competing versions of the same fact.
• Indemnity. In M&A, the escrow amount is often the practical ceiling on how an indemnity claim actually gets paid, regardless of the indemnity clause's stated cap. If the escrow term expires before a claim can be proven, the buyer's indemnity right may become uncollectable in practice even though it still exists on paper.
• Limitation of liability. Check whether the escrow amount counts toward, or sits outside, your overall liability cap. Silence creates the same ambiguity as with indemnity: two liability mechanisms never coordinated on paper.

You can map how an escrow release condition lines up against your indemnity and conditions-precedent clauses for free, directly in the document, using Weave. If you are tracking multiple escrow release dates across a portfolio of contracts, that is the kind of deadline Adira's contract management software is built to calendar and flag automatically.

US and global contrast

US and English-law escrow clauses run on broadly similar mechanics, a named agent, defined release conditions, a dispute path, because the underlying commercial problem is universal. The bigger difference is regulatory density. US real-estate escrow runs on state-level licensing rules for escrow and title companies. Indian real-estate escrow runs through the RERA 70 percent account, a national statutory floor regardless of deal size, with certification by an engineer, architect and chartered accountant built into the statute itself. On cross-border M&A, US escrow accounts face no equivalent to India's FEMA-driven cap and time limit on deferred consideration; an Indian party receiving foreign investment needs to check the RBI framework even where the commercial terms look standard.

FAQ

Is an escrow clause the same as an indemnity clause? No. Indemnity is a promise to cover a defined loss; escrow is a mechanism, a neutral third party holding an asset, often used to make an indemnity promise collectible in practice. Many M&A contracts use both: indemnity creates the right to be paid, escrow makes sure money exists to pay it.

Who pays the escrow agent's fees? There is no default rule under Indian law; the agreement must say. Common structures are an equal split, or payment by the depositor as the party asking for the safeguard.

Does money held in escrow earn interest, and who gets it? It depends on the account structure. RBI-permitted escrow accounts for FDI transactions are typically non-interest-bearing by design. Where a bank escrow account does earn interest, the agreement should say who receives it; proportionate to what each party ultimately gets is the most common approach.

What happens if the buyer and seller cannot agree the release condition is met? Only what the clause says. A well-drafted agreement names a path, joint instruction, arbitration, or a court order, before the agent acts on a disputed release. Without one, the agent typically holds the asset until the parties resolve the dispute elsewhere, which can take months.

Is source-code escrow enforceable if my vendor goes into insolvency in India? The agreement stays enforceable against the escrow agent, a separate party. But under the Insolvency and Bankruptcy Code, 2016, the moratorium under Section 14 restricts actions against the corporate debtor's assets, and whether source code with a third-party agent counts as such an asset can genuinely be disputed. Build vendor insolvency in as an explicit release trigger.

Do I need SEBI or RBI approval to open an escrow account in India? Not for a routine domestic commercial escrow between two Indian parties; banks offer standard escrow facilities without special approval. Two situations trigger specific rules: an open offer for listed shares, where SEBI (SAST) Regulation 17 mandates a scaled escrow deposit, and any transaction with a non-resident party, where RBI's FEMA framework sets the permitted structure, cap, and time limit.

This guide gets you to understanding what an escrow clause does, what Indian law requires in the sectors that regulate it, and what to check before you rely on one. It does not tell you whether a specific escrow structure in your contract is properly drafted or enforceable on your facts, that depends on the underlying deal documents and is not legal advice. Talk to a lawyer before you rely on, or walk away from, an escrow arrangement holding real money, shares, or code.