Presently Authorized Dealers Category- I bank (AD) is permitted to open Escrow account and Special account on behalf of non-resident corporates for acquisition / transfer of shares / convertible debentures of an Indian company through open offers / delisting / exit offers, subject to compliance with the relevant SEBI [Substantial Acquisition of Shares and Takeovers] Regulations, 1997 and other applicable SEBI regulations. In all other cases, opening / maintaining of Escrow accounts for FDI related transactions required prior approval from RBI.
RBI noted that escrow mechanism facilitates FDI transaction in cases where parties to the share purchase agreement desires to complete the due diligence process before they finalize the agreement and therefore there is a time lag between the payment of purchase consideration and receipt of the shares. To address this issue, RBI has announced relaxation vide A. P. (DIR Series) Circular No. 58 issued by the Reserve Bank of India dated 2 May 2011.
Opening of Escrow Account for FDI transactions
To provide operational flexibility and ease the procedure for FDI related transactions, RBI has decided to permit AD to open and maintain, without prior approval of RBI, non-interest bearing Escrow accounts in Indian Rupees in India on behalf of residents and / or non-residents, towards payment of share purchaseconsideration and / or provide Escrow facilities for keeping securities to facilitate FDI transactions subject to the terms and conditions. RBI has also decided to permit SEBI authorized Depository Participants, to open and maintain, without prior approval of RBI, Escrow accounts for securities subject to the terms and conditions.
In both cases, the Escrow agent shall necessarily be an AD or SEBI authorised Depository Participant (in case of securities’ accounts). These facilities wilbe applicable for both, issue of fresh shares to the nonresidents as well as transfer of shares from / to the non- residents.
Some of the terms and conditions for such Escrow account include the following:
1. The terms of the Escrow account shall be laid down in the Escrow agreement, Share purchase agreement, conditions of issue of shares, etc.
2. The underlying FDI transaction for which the Escrow account is opened should be compliant with extant FEMA provisions. For the purposes of FDI reporting, date of transfer of funds into the bank account of the issuer or transferor of shares, shall be the relevant date of remittance.
3. The Escrow account shall remain operational for a maximum period of 6 months only and the account shall be closed immediately after completing the requirements or on completion of 6 months from the date of opening of such account, whichever is earlier. In case the Escrow account is required to be maintained beyond 6 months, specific permission from RBI will be required.
4. The Escrow account shall be non-interest bearing.
5. The Escrow account in INR would be maintained only with an AD in India. The Escrow account may be opened jointly and severally. Further, securities kept / linked with such Escrow accounts may be linked with demat account maintained with SEBI authorised Depository Participants.
6. No fund or non-fund based facilities would be permitted against the balances in the Escrow account. 7. Balance in the Escrow account, if any, may be repatriated at the then prevailing exchange rate (i.e., the exchange rate risk will be borne by the person resident outside India acquiring the shares), after all the formalities in respect of an acquisition are completed. In cases, where proposed acquisition / transfer does not materialise, AD may allow repatriation / refund of the entire amount lying to the credit of the Escrow account on being satisfied with the bonafides of such remittances.
This relaxation will facilitate FDI and also ease out M & A transactions in India.