How to Review an Escrow Agreement in India

An escrow agreement is the contract that turns "trust me" into "trust the agent." Instead of a buyer paying a seller directly, or a licensor handing over its crown jewels outright, both sides route the asset through a neutral third party who releases it only when agreed conditions are met. (Adira, which publishes this guide, makes contract review and CLM software, so we have a commercial interest in you signing better contracts faster. This guide is written to be useful either way.) Here is how an Indian escrow agreement is actually built: what gets escrowed, who certifies release, what the agent owes you, how disputes get resolved, and the red flags in real drafts.

This guide covers the tri-party escrow agreement itself. For the underlying escrow clause that sits inside a bigger contract (an SPA, SSA or SaaS agreement), see escrow clauses explained.

Who is actually a party to this contract

A proper escrow agreement has three signatories, not two: the depositor (buyer, licensee, or whoever funds the escrow), the beneficiary (seller, licensor, or whoever eventually receives the asset), and the escrow agent. Some agreements are drafted as a two-party side letter that merely instructs a bank to hold funds, with the bank never signing at all, weaker. Section 148 of the Indian Contract Act, 1872 defines bailment as:

"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 arrangement is, functionally, a bailment for a specific purpose: the agent holds an asset and must dispose of it exactly as the depositor and beneficiary jointly directed at the outset, not as either party later demands alone. That is why the agent's own signature and stated duties matter; without it, you are relying on a bank's internal instruction letter, which the bank can interpret, delay, or dispute on its own terms.

What actually gets escrowed

The escrowed asset changes what the agreement needs to say. Cash (acquisition consideration, an M&A indemnity holdback, RERA project receipts) sits in a scheduled bank account, sometimes a no-lien account so the bank cannot set it off against the depositor's other liabilities. Shares or securities (open-offer takeovers, pre-IPO lock-ins, lending security) need the agreement to state whether voting rights and dividends stay with the depositor while they sit in escrow; silence usually means the beneficiary gets neither. Source code, used when a customer depends on a vendor's proprietary software and wants continuity if the vendor disappears, is the one category needing active management, not just storage, covered below. Documents, title deeds, signed-but-undated agreements, closing deliverables in an M&A gap, is often simplest, but "documents" still needs a schedule; a vague list invites a dispute over what was actually meant to be deposited.

Release conditions and who certifies them

This is the clause that decides whether escrow works at all. A release condition needs to be objective and checkable by the agent, who is not equipped to adjudicate a contested factual dispute. "Satisfactory completion of the audit" is not a release condition; "written joint instruction signed by both parties" or "a certificate from the appointed chartered accountant confirming X" is.

RERA is a useful model, even though it does not use the word "escrow." Section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, 2016 requires a promoter to deposit 70 percent of amounts realised from allottees in a "separate account" for land and construction cost only, and money leaves only in proportion to project completion, certified by an engineer, an architect, and a chartered accountant together. That three-professional certification, an objective trigger rather than either party's own say-so, is worth copying into any commercial escrow's release mechanic.

For M&A indemnity escrows, the usual pattern is: undisputed amounts release automatically on a fixed schedule, disputed amounts release only on a joint written instruction or a final arbitral award or court order. Build both paths into the same clause; an escrow agreement that only contemplates agreement between the parties has no answer for the one scenario it exists to handle, disagreement.

The agent's own job stays narrow throughout: hold the asset, check that a release instruction meets the stated conditions on its face, and act. It is not the agent's job to investigate the merits of the underlying dispute. Standard escrow terms disclaim liability except for gross negligence or wilful misconduct, and let the agent rely on a facially valid instruction without further inquiry, so it is not a backstop for a badly drafted release condition; an ambiguous trigger just leaves the asset stuck until the parties sort it out or go to court.

The contested-release mechanism

Every escrow agreement needs an explicit answer to what happens when the parties disagree that a release condition is met. Three common structures: joint instruction required (the agent releases only on both parties' signed instruction, simple but gives either side a veto); deemed release after notice (one party triggers release; the agent acts unless the other objects within a stated window, commonly 10 to 30 business days); and third-party determination (a named arbitrator decides, and the agent releases only against that binding ruling, slowest but removes deadlock risk). Name one explicitly; silence defaults to the agent holding the asset indefinitely, which in a real dispute can mean money or shares frozen for an entire arbitration.

The Supreme Court's judgment in Infrastructure Leasing & Financial Services Ltd v HDFC Bank Ltd & Anr (19 October 2023, 2023 INSC 929, Civil Appeal No. 4708 of 2022) shows why surplus-handling needs its own sentence. Rent receivables from IL&FS's leased properties were routed into an escrow account, with HDFC Bank as lender authorised to appropriate amounts against its facility. The Court held the arrangement was a valid assignment, not a pledge, and the lender's right over the receivables was limited to the principal and interest actually due; anything beyond that reverted to the borrower. State explicitly what happens to any surplus once the beneficiary's claim is satisfied, rather than leaving it to be inferred, that ambiguity is what produced years of litigation here.

Fees, interest, term and agent replacement

Indian law sets no default rule for who pays the agent's fees; the agreement must say, either an equal split or payment entirely by the depositor. Interest depends on the account: RBI-permitted FDI escrow accounts are typically non-interest-bearing by design, while a bank account that does earn interest should name who receives it, proportionate to the eventual split is common.

State a fixed term or an event that ends the escrow, final release, or a long-stop date after which unreleased funds automatically revert to the depositor, so it cannot sit open indefinitely once its purpose has passed, generating fees for no one's benefit.

Let the agent resign on notice, commonly 30 to 60 days, with the parties required to jointly appoint a successor within that window. Without this, an agent uncomfortable holding a contested asset has no clean exit. If the parties cannot agree on a successor, a sensible fallback is deposit into court, not indefinite limbo.

India notes: who operates the escrow, and the cross-border caps

For cash and share escrows, the agent is almost always a scheduled commercial bank, operating under its own standard terms layered on top of the deal-specific agreement. NBFCs are rarely the escrow agent itself, though they are often a party whose lending transaction needs escrow protection, as in the IL&FS case above.

Cross-border escrow carries its own regulatory cap. Under Regulation 10A of the FEMA Non-Debt Instruments Rules framework (RBI notification FEMA.368/2016-RB, 20 May 2016), deferred consideration in a cross-border share transfer, via escrow or indemnity, cannot exceed 25 percent of total consideration, and cannot run longer than 18 months from the transfer agreement date; beyond either limit needs specific RBI approval. Listed-company open offers carry a different scale: Regulation 17 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 requires escrow funding at 25 percent of consideration up to Rs 500 crore plus 10 percent above that, and 100 percent where the offer is conditional on minimum acceptance or arises from an indirect acquisition.

Source-code escrow needs one thing the other asset types do not: verification. An unchecked deposit can be stale or missing the build environment needed to compile it, so you discover it was worthless only during the crisis it was meant to solve. Build an independent technical verification obligation into the agreement itself. Release triggers typically include the vendor's insolvency, cessation of trading, or sustained material breach of the maintenance SLA, each a fact the agent can verify on paper, not a judgment call about whether "support has gotten bad enough."

Red flags

Normal	Red flag	Why it matters
Agent signs as a party with its own stated duties	Agent only referenced; a side letter informally instructs a bank	No contractual privity with the agent if something goes wrong
Release conditions are objective (a certificate, a joint instruction, a court order)	Release depends on subjective satisfaction ("reasonably satisfied")	Agent cannot act on it; asset gets stuck by design
A contested-release mechanism is named explicitly	Silent on what happens if the parties disagree	Default is indefinite hold with no resolution path
Fee-payer and amount stated	Silent on who pays the agent	Dispute delays release when fees go unpaid
Interest treatment and recipient stated	Silent on interest	Ambiguity over a real sum on a multi-year escrow
Fixed term or long-stop date, with automatic reversion	No end date	Escrow lingers open after its purpose is served
Agent resignation and successor-appointment mechanism included	No resignation clause	Agent stuck holding a contested asset with no exit
Source-code escrow includes a verification obligation	Deposit accepted with no technical check	Escrow opens during a crisis to find unusable code
Cross-border escrow checked against the FEMA 25 percent / 18-month cap	Structure assumed automatically compliant	Breach may need after-the-fact RBI approval
Surplus-handling stated for value above the beneficiary's actual claim	Silent on surplus once the claim is satisfied	Ends up litigated, as in IL&FS v HDFC Bank

Bad clause, better clause

Bad (typical of a boilerplate escrow schedule): "The Escrow Amount shall be held by the Escrow Agent and released to the Seller upon satisfactory completion of the conditions set out herein, or as otherwise agreed by the Parties. The Escrow Agent's fees shall be borne as mutually agreed. This Agreement shall continue until the Escrow Amount is fully released."

Better: "The Escrow Agent shall release the Escrow Amount to the Seller within five (5) business days of receiving either (a) a joint written instruction signed by both Parties, or (b) a final and binding arbitral award or court order determining the Seller's entitlement. Any portion of the Escrow Amount not the subject of a written dispute notice served under Clause [X] within twenty four (24) months of the Effective Date shall be released automatically to the Seller on the first business day following that date. The Escrow Agent's fees shall be borne equally by Buyer and Seller, invoiced quarterly, and neither Party's obligation to pay is contingent on any pending release. The Escrow Agent may resign on sixty (60) days' written notice, during which the Parties shall jointly appoint a successor escrow agent; absent agreement, either Party may apply to deposit the Escrow Amount into court."

What changed: "satisfactory completion" became a named, checkable release path with an arbitration fallback; the open-ended term became a hard 24-month automatic release; fees are fixed and de-linked from any dispute; and a resignation and successor mechanism replaces silence on the agent's exit.

How it interacts with related clauses

An escrow clause inside a bigger agreement almost always sits next to conditions precedent, since release from escrow is itself frequently drafted as a condition precedent to closing, final payment, or IP transfer. See conditions precedent explained for that gating mechanic and what happens when the condition is never satisfied. An escrowed indemnity holdback is also the practical enforcement mechanism behind an indemnity clause; without funds in escrow, an indemnity is only as good as the counterparty's solvency at claim time.

You can mark up an escrow schedule clause by clause, for free, in Weave, before you negotiate release mechanics with the other side.

Checklist

• Agent is a signing party with its own stated duties, not just referenced in a side letter
• Escrowed asset is specifically defined (amount, share class and count, source code version, or a documents schedule)
• Release conditions are objective, verifiable by the agent without judgment
• A contested-release mechanism is named: joint instruction, deemed release, or third-party determination
• Fee payer and amount are stated, not contingent on release
• Interest treatment and its recipient are stated
• A fixed term or long-stop date exists, with automatic reversion
• Agent resignation and successor-appointment process is included
• Source code: an independent verification obligation, not just deposit and storage
• Cross-border: checked against the FEMA caps (25 percent of consideration, 18 months)
• Surplus-handling is stated for value beyond what the beneficiary is owed

US and global contrast

US escrow practice looks similar on the surface, an agent, defined release conditions, but leans more on standardised forms from large title and financial escrow companies, and M&A indemnity escrows are often held not by a bank but by a specialist escrow agent under its own published terms. Source-code escrow is more mature in the US and UK, with established verification providers, still comparatively thin in India. Cross-border deals should expect the Indian side to insist on the FEMA caps regardless of how the US party's standard escrow agreement is worded, since RBI approval, not contractual agreement, decides whether a larger structure is permitted.

FAQ

Is an escrow agreement the same as an escrow clause? No. An escrow clause is a provision inside a larger contract that says an asset will be escrowed. The escrow agreement is the separate tri-party contract with the agent that implements it; the clause should cross-refer to it rather than restate its mechanics.

What happens if the escrow agent itself becomes insolvent? A real gap in many agreements. Ask whether the account is a no-lien, designated account ring-fenced from the bank's own assets; if not, the escrowed asset could be caught up in the agent's own insolvency proceedings. Get specific legal advice before signing a large cash escrow.

Does an escrow account earn interest, and who gets it? Depends on the account. FDI escrow accounts are typically non-interest-bearing by design; where a bank account does earn interest, the agreement should name the recipient.

How long can a cross-border escrow legally run in India? Under FEMA Regulation 10A, at most 18 months from the transfer agreement date, and the deferred amount cannot exceed 25 percent of total consideration. More than either needs specific RBI approval.

What is the single most common drafting failure in escrow agreements? A release condition that is not objectively checkable, phrases like "satisfactory completion." The agent cannot act on subjective language, so the asset gets stuck the moment the parties disagree, exactly the situation escrow was meant to handle cleanly.

This guide gets you to a working understanding of how an Indian escrow agreement should be structured and where the real risk sits. It does not tell you whether a specific release condition in your agreement is enforceable, or how a contested release would play out, that depends on the exact wording and the facts, and is not legal advice. Talk to a lawyer before you sign a large cash, share, or cross-border escrow.