No RBI approval for cash and share escrow

The Reserve Bank of India (RBI) through a circular dated 2 May (circular 58) has made it possible for non-residents to open cash and/or share escrow accounts either independently or together with Indian residents and vice versa, without prior RBI approval.

Circular 58 permits AD category-I banks to open and maintain escrow accounts on behalf of residents and/or non-residents to keep shares, purchase consideration (in case of a share purchase), or subscription money (in case of subscription to shares) in an escrow for a maximum period of six months. An escrow for more than six months requires RBI approval. The cash accounts must be maintained in Indian rupees. So, for non-residents, the cash escrow accounts may be in the form of non-resident ordinary accounts.

Share escrow accounts can be opened with an AD category-I bank if the shares are in physical form. Escrow accounts where shares are in dematerialized form can be opened with a Securities and Exchange Board of India authorized depository participant. It is important to note that while circular 58 refers to securities and shares interchangeably, our view is that equity shares, compulsorily and mandatorily convertible preference shares and debentures should fall within the purview of securities dealt with by the circular.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.