Escrow Mechanism


Escrow has basically originated   from a French expression “Escroue” which means a piece of paper connoting a deed that is held by a third party for the benefit of the underlying transaction. It might be viewed as a third party account.

 It is a bank wherein the asset value is held till the fulfillment of a specific condition related to the transaction. The holder of the escrow account must ensure that the sum saved with the escrow account is discharged on the fulfillment and completion of the predefined conditions identified with the transaction.

Thus, it is a pass through account in which the amount is kept by the party/parties and is kept intact till the specified conditions have been met. It is profoundly advantageous to both the parties underlying the transaction as it not just mitigates the risk factors related with the transaction, but also guarantees that the consistency of the conditions is completely met.

The third party account holder has a significant task to carry out in these sorts of transactions. In India, the escrow account service proceeds as per the guidelines of the Reserve Bank of India and is normally used in cases of Real Estate Transactions, Mortgage transactions, Mergers and Acquisitions, in online transactions and a host of other transactions.

 Escrow account is a type of account used by Bankers to control the underlying transactions associated with it. The amount deposited is withheld till all the specified conditions are met. Thus any party may open an Escrow account with any Bank for the fulfillment and successful execution of the transaction. 

How to Get an Escrow Account

Escrow account service is normally provided by all nationalized and private banks in India. This type of service is provided as per the policy and guidance of Reserve Bank of India. Any individual who wishes to have the services of an escrow record may avail the services of any such banks and open an escrow account.

In order to open an escrow account, both the client and the beneficiary should collectively submit a request letter, in this regard. The purpose, terms and objectives of transactions shall be mentioned in this letter.

The escrow service provider provides the service of an agent in return for a fee. It also carries out services of dispute resolution if required. In case an underlying transaction fails, both the parties may be given a chance to sort out the dispute by arbitration or any other manner as agreed. The final payment is released only after the resolution of the dispute.

Areas Where Escrow Account is Used

●       Real Estate:

Escrow accounts apply to land exchanges, real estate transactions. Placing the funds in escrow allows the purchaser to perform due determination on a potential acquisition. Escrow accounts additionally guarantee the seller that the buyer can close on the purchase. For instance, an escrow record can be utilized for the sale of a house.

 If there are conditions attached to the sale, such as the passing of an inspection, the buyer and seller may agree to the use of escrow. If case of real estate transactions the Mortgage lenders generally insist for the payments to be routed through as escrow account before the procedural formalities like home inspections, technical and legal compliance are completed.

The assets lying in the escrow account are transferred to the beneficiary only on completion of all the basic formalities. It allows the buyer to proceed with due diligence of the potential purchase. It also assures the seller that the buyer is indeed a serious buyer and hence an escrow account may be used for purchase price as well as in case of monthly payouts as well.

●      Escrow and Stock Market:

Stocks are often issued in escrow. In such a situation, while the shareholder is the real owner of the stock, the shareholder has limited rights with regards to removal of the stock. For instance, administrators who get stock as a bonus to their compensation often must wait for an escrow period to pass before they can sell the stock. Stock rewards are a strategy used to retain top executives.

●      Lease Based Escrow:

Similar procedure is being adapted in the case of long term lease based transactions, wherein voluminous loans are availed by the lessors or Property owners against every single future payments to be made in the escrow account by the Tenants/Lessees.

Thus providing a safeguard to the banks with regard to the safe repayment of the loans.  This additionally goes about as a two-way measure. This procedure not just encourages the landowners to limit the future rentals yet in addition guarantees the banks for the reimbursement of the loans failed

●      Online Transactions:

In case of High value online transactions also, Escrow accounts are utilized to avert any kind of dangers in getting the material in the wake of making the installments. Along these lines the provider dispatches the material just on getting the incentive in the record.

The online buyer likewise gets an opportunity to confirm the buy before making the installments. In this way, the escrow account goes about as a protection to limit the dangers.

●      Mergers and Acquisitions:

In case of mergers and acquisitions, escrow account services are every now and then frequently used over. These transactions are of extremely high value in general and may involve a lot of rules.

Hence the escrow account not just protects the purchasing party, who may not know about the inherent estimation of the other party, yet in addition permits an opportunity to get the due industriousness finished to the fullest fulfillment level, in this manner permitting the purchaser a vigorous arrangement.

●      Project Finance Transactions:

In case of project finance transactions, escrow account is used to cover performance guarantee through special purpose accounts.  These accounts are normally of the nature of long term projects, where the arrangement could be to payback from the cash flow, once the project becomes operational. Thus, these escrow accounts are loan repayments.

●      Transaction Involving Overseas Transaction:

Escrow accounts are additionally utilized as often as possible in the event of exchanges including overseas markets. Since overseas markets are unstable and include tremendous dangers, subsequently the seller is ensured of the cost before dispatch of the materials.

The buyer additionally would discharge the cost, when the individual is guaranteed that the goods have arrived at the port of destination.

How Escrow Works

The buyer and the seller or two parties agree to the set cost and the particulars of the transaction. The buyer completes the transaction and may pick the escrow account as the favored installment technique for every single future exchange.

The seller will deliver the goods/services to the buyer once the payment is verified. The escrow service provider will ensure that the buyer has received the product/item. Funds are released from the escrow account once both the gatherings are satisfied and no question has emerged.

Advantages of Using Escrow Account

For Sellers

  • Sellers are protected against chargebacks, non-enough funds, possibility of scams, risks of fraud etc
  • Useful for intangible services, and for transactions across the country/ overseas markets
  • Increased security for both the parties underlying the transaction. Mitigates the likelihood of dispute arising.

For Buyers

  • Buyers may inspect the deliverables before the payment is finalized
  • Buyers may get the due diligence completed to the fullest satisfaction.
  • Buyers reserve the right to return in case of unsatisfactory services/ products
  • Lessens the worry out of buying from unknown service providers/ sellers

Status of Escrow Account in India

Ordinarily in the majority of the cases in India, escrow accounts and linked to real estates, however they may extend to other financial transactions too. This is since Real estate transactions include a voluminous amount of money in addition to the involvement of risks, complexities. Further, it is easier to dupe people with limited means by the lobby of big builders.

In this way, Escrow account is essentially utilized across land/property related exchanges in India. Further in numerous cases guidelines have been passed by the Reserve Bank of India or the regulating authority that a transaction would move across only through an escrow account. Thus, government intervention may also lead to many transactions moving through an escrow account.


Along these lines, the third party account or the escrow account is a valuable way to move through a transaction between two or more parties without agonizing over the disturbances attached to the transaction. It is without a doubt a significant method adapted in the present situation, wherein a great deal of uncertainties are included.


  1. Key Insights of an Escrow Mechanism at

  • Escrow by Caroline Banton at

  • What is an Escrow Account and Who can Use it at

  • How Escrow Account is Proving to be a Boon for Home Buyers at


  1. How to acquire an Escrow Account?
  2. What are the areas where Escrow Account is used ?
  3. How does Escrow Account serve as a protection against dangers in online transactions?
  4. What are the advantages of Escrow Account for the buyers and the seller?
  5. What is the status of the mechanism of Escrow in India?

Leave a Reply

Your email address will not be published. Required fields are marked *