Reserve Bank of India has liberalised opening of Escrow Accounts for Foreign Direct Investment transactions vide A. P. (DIR Series) Circular No. 58 dated 2 May 2011. Hitherto, opening of Escrow / Special Bank Account by Non-resident Corporate(s) for the purpose of acquisition/transfer of shares / convertible debentures of an Indian Company was permitted only in cases of Open Offers / Delisting / Exit Offers subject to compliance with Securities and Exchange Board of India (SEBI) Regulations.
Keeping in mind the time lag involved in the due diligence process and finalising of agreements, and facilitating operational flexibility, for fresh issue as well as transfer of shares from / to the Non-Residents, the Reserve Bank of India (RBI) has now permitted:
- All Category – I Authorised Dealer Banks (in India) to open and maintain Non-Interest Bearing Escrow Accounts in Indian Rupees on behalf of Residents and / or Non-Residents towards payment of Share Purchase Consideration.
- SEBI Authorised Depository Participants to open and maintain Escrow Account for the Securities.
The key conditions with respect to above liberalisation for Escrow Accounts are as under:
- The Account can be opened jointly and severally;
- The Securities kept / linked with such Accounts can be linked with the Demat Account with the SEBI Authorised Depository Participants;
- The Account should not be interest bearing;
- No fund or non fund-based facilities to be permitted against the balances in the account;
- Permitted credits to the Account would relate to foreign inward remittance towards consideration in case of Non-Resident Acquirers or rupee consideration in case of Resident Acquirers acquiring from Non-Resident Shareholders;
- Permitted debits to the Account would relate transfer into the bank account of the beneficiary (in India or overseas) or refund / remittance to the initial remitter in case of failure/nonmaterialisation of the transaction (including balance if any post completion of all formalities);
- The underlying transaction to be compliant with Foreign Exchange Management Act, 1999 (FEMA) / SEBI regulations;
- The Account to remain operational for a maximum period of six months from its date of opening and prior permission required from Reserve Bank for maintenance / operation beyond that period;
- Compliance with KYC guidelines issued by RBI / SEBI;
- The terms of the Account should form part of the Share purchase agreement and other documents;
- Repatriation / Refund of the entire amount shall be done at the prevailing exchange rate after fulfilment of all conditions.
Keeping in mind the importance of Escrow mechanism in Mergers and Acquisition transactions, this relaxation is a welcome initiative. This liberalisation eases the process for Mergers and Acquisition deals in India and adds a feather in India’s quest of becoming one of the world’s most favourite FDI destinations.