Welcome move on escrow and deferred consideration

The Reserve Bank of India (RBI), by a notification dated 20 May, eased restrictions on certain deal structuring tools, i.e. payment of consideration on a deferred basis, escrow and indemnity. To facilitate cross-border M&A, the notification amends the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000, to allow deferred consideration, escrow and indemnity arrangements under the automatic route in certain scenarios.

Historically, escrow arrangements in cross-border transactions between a resident and a non-resident, being in the nature of deposits, were not permitted unless specially approved by the RBI. Then, in 2011, the RBI permitted authorized dealer banks to open non-interest-bearing escrow accounts (in Indian rupees) for a maximum of six months, solely to facilitate implementation of foreign direct investment (FDI) transactions.

Escrow beyond six months still required prior RBI approval. Similarly, payment of consideration on a deferred basis in FDI transactions and indemnity payments required prior approval of the RBI. The grant of approvals was discretionary and dependent on specific factual matrices. The notification prescribes that so long as certain specific parameters in respect of such arrangements are met, they would not require specific approval of the RBI.

Luthra & Luthra is a full-service law firm with offices in New Delhi, Mumbai, Bengaluru and Hyderabad. Saurabh Tiwari is a partner and Saurav Bhaumik is an associate at the firm. This article is intended for general informational purposes only and is not a substitute for legal advice.