06 May 2008
An Escrow Account refers to assets or revenue streams held in safe custody as safety against a contingent situation of non-fulfillment of a contract. In simpler words we may say that an escrow a/c is a third party arrangement to ensure performance of certain obligations between certain parties and operated in terms of an underlying agreement. The account will be a current a/c without cheque drawing facility or a Fixed Deposit account, as defined in the terms of the agreement.
Escrow a/c's are typically used for lending arrangements, project financing, Securitisations, M&A's, Buy-back of shares, take-overs, custody, litigations, purchase & sale of land, Source code (used in software) custody, etc. The following reasons enumerate why Escrow accounts are opened:
Provides greater security & comfort Trapping of identified cash flows Regulatory requirements Custody of cash / documents Ease of monitoring The funds in the Escrow a/c are held for the benefit of the Beneficiary of the a/c rather than person / company in whose name the a/c is opened. For e.g.. in a borrower lender arrangement, the a/c name is "Borrower - Escrow a/c" and the funds deposited are that of the borrower but the funds are held in the escrow a/c for the benefit of the Lender.
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