An escrow balance is not unrestricted treasury cash
Part II paragraph 8 of RBI’s Deposits and Accounts Master Direction addresses INR escrow accounts with an authorised dealer in India as escrow agent for resident or non-resident corporate/acquirers, subject to Schedule 5 of the Deposit Regulations. The accounts are non-interest bearing and no fund-based or non-fund-based facility is permitted against their balances. This guide checks the version updated 2 September 2026 on 27 October 2026. RBI Deposits and Accounts Master Direction: Part II paragraph 8.
Confirm the scheme and underlying transaction
Paragraph 8.2 requires compliance with the Non-Debt Instruments Rules, 2019 as amended and relevant SEBI regulations. A private contract calling money escrow does not establish the FEMA route, eligible parties or permitted flows. Obtain the authorised dealer’s confirmation of the actual scheme, current Schedule 5 conditions, underlying transaction and proposed credits and debits before relying on this account permission. RBI Deposits and Accounts Master Direction: Part II paragraph 8.
Read release terms separately from regulatory permission
Identify who supplies funds, the beneficiary, milestone documents, dispute mechanism and valid release authority. A commercial milestone is not a universal RBI condition. Conversely, satisfaction of a milestone does not cure an independently impermissible underlying transaction. The examples assume the bank has established that each described flow is permitted under the actual scheme and transaction. RBI Deposits and Accounts Master Direction: Part II paragraph 8.
Maintain source and beneficiary ledgers
Reconcile each inward credit to its funding party and each release or refund to the relevant instruction and bank debit. Retain failed-payment reversals separately. An internal allocation between deal parties does not itself move money out of the bank account, and a refund proposal is not an executed refund. Use unique transaction references to prevent counting a payment twice. RBI Deposits and Accounts Master Direction: Part II paragraph 8.
Do not forecast interest or borrow against the balance
The express non-interest condition means a treasury forecast should not accrue deposit interest merely because the funds remain for a period. Paragraph 8.4’s restriction covers both fund and non-fund facilities against the balance, so it is not limited to a cash overdraft. This does not decide whether a party can obtain an independently permissible, separately supported facility without using the escrow balance as security. RBI Deposits and Accounts Master Direction: Part II paragraph 8.
Close the bank and deal records together
Keep gross bank cash, contractually available release amounts, pending documents, refunds and disputed portions distinct. Verify the actual permitted closure and transfer process with the authorised dealer; this article asserts no universal escrow duration, release percentage or mandatory fee. Financial-statement restricted-cash classification and tax implications require their respective analyses and are not settled merely by the account label. RBI Deposits and Accounts Master Direction: Part II paragraph 8.
Applicable primary references
RBI Deposits and Accounts Master Direction: Part II paragraph 8
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Partial milestone release
A permitted INR escrow receives ₹10,00,000. A validly authorised ₹6,00,000 release is executed, leaving ₹4,00,000. The remaining amount is not automatically free cash available to the acquirer outside the escrow terms.
Illustrative example 2: Two funding parties
Verified permitted credits from two parties are ₹6,00,000 and ₹4,00,000, totalling ₹10,00,000. Preserve both funding references; an internal transfer between their working-paper columns is not a second bank credit.
Illustrative example 3: Release plus refund
Opening escrow cash is ₹10,00,000. Assume an authorised refund of ₹2,00,000 and release of ₹5,00,000 are both executed. Closing cash is ₹3,00,000. Each outflow must retain its own permitted basis.
Illustrative example 4: Non-interest forecast
A non-interest-bearing escrow retains ₹10,00,000. Deposit interest at the applicable zero rate is ₹0; the cash remains ₹10,00,000 before actual permitted movements and charges. Do not apply an unrelated savings-account rate.
Illustrative example 5: Internal reservation is not a bank debit
Cash is ₹5,00,000. The deal working reserves ₹2,00,000 for a disputed milestone and ₹3,00,000 for a later release. Those allocations total ₹5,00,000; the bank balance remains ₹5,00,000 until an actual debit.
Illustrative example 6: Failed release and reversal
A ₹2,00,000 release is debited from ₹7,00,000, fails and is fully reversed. Bank cash returns to ₹7,00,000. If a later valid retry executes ₹2,00,000, closing cash is ₹5,00,000, not ₹3,00,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the account scheme | Bank confirmation and Schedule 5 conditions |
| 2 | Identify parties and transaction | Corporate/acquirer and deal documents |
| 3 | Verify regulatory compatibility | NDI and applicable SEBI analysis |
| 4 | Read the escrow contract | Funding, release and dispute terms |
| 5 | Verify incoming amounts | Funding references and bank credits |
| 6 | Check release authority | Actual permitted instruction and evidence |
| 7 | Check refunds independently | Basis, beneficiary and executed debit |
| 8 | Exclude assumed interest or security capacity | Non-interest and no-facility controls |
| 9 | Match reversals and restricted allocations | Bank and deal ledgers |
| 10 | Verify final settlement or closure | Authorised dealer process and reconciliation |
Sixteen practitioner FAQs
1. Does any contract-labelled escrow qualify automatically?
No. Identify the actual FEMA scheme and satisfy its conditions.
2. What currency does paragraph 8.1 specify?
INR, with an authorised dealer in India as escrow agent.
3. Does the Master Direction replace Schedule 5?
No. Paragraph 8.1 expressly subjects the account to Schedule 5 conditions as amended.
4. What underlying transaction rules are referenced?
The Non-Debt Instruments Rules, 2019 as amended and relevant SEBI regulations.
5. Are all proposed credits and debits automatically allowed?
No. Obtain confirmation of the actual scheme and transaction permission.
6. Is the account interest bearing?
Paragraph 8.3 states that it is non-interest bearing.
7. Can a bank facility be granted against its balance?
Paragraph 8.4 prohibits fund-based and non-fund-based facilities against the balance.
8. Is that prohibition only about overdrafts?
No. It expressly includes non-fund-based facilities too.
9. Does this ban every separately permissible loan to a deal party?
No such general conclusion follows here; the stated restriction concerns facilities against escrow balances.
10. Does an internal deal allocation reduce bank cash?
No. An actual debit or other bank movement is needed.
11. Do milestone terms establish FEMA permission?
Not by themselves. Contract terms and regulatory permission are separate checks.
12. Should refunds share the original payment reference only?
Retain a linked but separately identifiable refund instruction and actual debit trail.
13. Can a proposed refund be treated as paid?
No. Distinguish proposed, authorised and executed status.
14. How should a failed debit be treated?
Match its reversal and keep any later successful retry distinct.
15. Does this guide prescribe a universal escrow tenure?
No. Verify applicable scheme and actual bank process rather than inventing a common duration.
16. What should the final reconciliation distinguish?
Bank cash, funding sources, releases, refunds, reversals, disputed allocations and remaining restrictions.
Conclusion
Review FEMA deal escrow accounts with an authorised dealer, separating permitted transaction conditions, non-interest balances, release evidence and restricted cash.