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Beginner's guide to an escrow account
Almost everybody at some point in their financial lives requires the help of an escrow account. After all, the chances of doing at least one big transaction are pretty high and hence an escrow account is a natural choice. The requirement of this temporary pass-through account held by a third party during the process of a transaction between two parties has been around for ages. But at a very basic level, an escrow bank account is all about efficient risk management, simplification of complex transactions and facilitating custody of cash, securities and other collaterals as per the transaction type. Let us do a deep-dive into the world of the escrow account and find out more about this unique product.
Escrow accounts come with a few advantages over any other in the banking structure. Firstly, escrows are able to provide a safe and secure mode of routing cash flows for all parties. Secondly, an escrow account allows transactions to be customized to suit requirements of all the parties. Thirdly, top banks allow opening and operating multiple accounts for deals with waterfall mechanism. Fourthly, escrow banking comes with channel support. Dedicated escrow teams facilitate smooth operations in a big way. Lastly, with the emergence of the digital medium in a big way, an escrow bank account allows simplified documentation and online tracking.
Business as usual
An escrow account is a perfect fit for certain types of transactions. At their core, these transactions are structured in such a way that the money comes in at regular or irregular intervals but never in a lump sum. Typical transactions include revenue-sharing escrows for joint ventures, milestone escrows linked to performance and or any obligation, escrows for franchisor-franchisee and anchor-dealer model, e-tendering-linked escrows, and transactions that require a secure mode of settlement through escrow structure. All in all, these transactions are customary business events.
In the world of wholesale banking, there are always combinations happening. Many of these transactions are mergers and acquisitions or known as M&A. Given that these deals involve large sums of money at different junctures, an escrow bank account is more of a necessity. Be it share-purchase transaction-linked escrows, FDI-linked share-purchase escrows, open offer escrows, and escrows for indemnity obligations, banks are ready to fulfil any or all of these conditions. Nowadays, buyback offer escrows and delisting offer escrows have gained currency with promoters making offers to buyback shareholding from willing parties.
Investment and lending
When it comes to giving money, escrow accounts are worth their weight in gold. Please note escrow/TRA for project finance transactions is very popular. There are also lending-linked debt servicing, DSRA, and default escrows, which are used by discerning corporate entities. With global interest rates cheaper, many companies have been borrowing from outside. They will require external commercial borrowing-linked escrows. For companies involved in giving equipment on rent, it is important to collect money. These specialized requirements are met through lease rental discounting escrows. With many small and medium-sized firms facing a regular cash crunch, escrow bank accounts for receivables purchase and invoice discounting are gaining ground. Lastly, with many finance companies coming up with a retail public issue of debt instruments, servicing such obligations are met from escrows. These needs can be easily met with the help of bond/NCD servicing-linked escrow accounts.
E-commerce has gone a long way. Today, e-commerce is mainstream. So, these requirements have grown to attain global status as the business expands exponentially. Escrow accounts in India are today being used for e-commerce and payment facilitation. This is especially true when the payment is held over for certain period. Nodal accounts for payment and marketplace aggregators are commonplace. That apart, escrow accounts are used for prepaid instrument issuers.
So if you have any of the above requirements, connect with us at IDFC Bank today.