Escrow accounts: The basics

We present an overview of escrow accounts and the list of documents needed to open them.

The business world is a complex entity, made up of both straightforward transactions and highly complicated ones. The underlying theme of business, that of accruing revenues for both short term and long term purposes, remains unchanged whatever the nature of the company’s work or its scale of operations. This theme is worked upon in different ways, from the mortgage of assets to raising cash, to the simultaneous dealing with two or more entities at the same time.

This last is often seen even in dealings between individuals, when two or more parties are engaged in reaching a financial settlement over an asset, product or service. The payment terms may be set out prominently in such cases, however the actual channels of receipt of revenue can pose a problem. How can monies change hands when there are multiple parties involved? Escrow accounts are set up for such eventualities.

What are escrow accounts?

Take the example of two or more parties involved in the sale (on one side) and the purchase (on the other side) of a piece of real estate. The land is an owned one and there may be two partners who are sellers while the third is the buyer. The transaction cannot take place in one day, and the payments for the same are set up in stages.

Ordinarily, the payments would be sent directly from the buyer to the seller, but in this case, a third account is set up that holds these monies till the transaction is complete. This account is known as the escrow account in India, and it is a bank account that all parties mutually agree to open. The bank manages the funds therein on behalf of all parties concerned. Normally, the bank will also impose certain restrictions on the use of the account. 

The escrow account is opened for operation over a period of months or years, and only when the seller is convinced that the buyer has the capability to stand up to their end of the transaction till the end. It can be used for everything from real estate dealings, to holding payments for shipments and goods. 

How to open an escrow account

Reputed banks in India open escrow accounts for their esteemed customers and offer this account as part of their range of services for wholesale banking. Broadly, the following documents are required to open an escrow account in India:

• Request letter from all parties to open the account with the bank
• Signed copy of MoU entered into between all parties
• List of items under the transaction. These can include items for export and import, or sale details of assets at market value, etc.
• In case of account being created between a domestic party and a foreign one, an NOC from the central banking authority of the foreign country. 
• The companies’ documents proving place of operations, assets, annual income, IT returns, etc.
• Application form from the bank