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In simple terms, an ‘escrow account’ is a third party account. It is a separate bank account to hold money which belongs to others and where the money parked will be released only under fulfilment of certain conditions of a contract. The term escrow is derived from the French term ‘escroue’ meaning a scrap of paper or roll of parchment, an indicator of the deed that was held by a third party till a transaction is completed.
An escrow account is an arrangement for safeguarding the ‘seller’ against its ‘buyer’ from the payment risk for the goods or services sold by the former to the latter. This is done by removing the control over cash flows from the hands of the buyer to an independent agent. The independent agent, i.e, the holder of the escrow account would ensure that the appropriation of cash flows is as per the agreed terms and conditions between the transacting parties. Escrow account has become the standard in various transactions and business deals. In India escrow account is widely used in public private partnership projects in infrastructure. RBI has also permitted Banks (Authorised Dealer Category I) to open escrow accounts on behalf of Non- Resident corporates for acquisition / transfer of shares / convertible shares of an Indian company.