Escrow Arrangements in M&A and Their Post-Closing Disputes

Introduction : In a merger or acquisition, the closure of the transaction does not mean that the deal is finished. The representations and warranties may continue to remain valid, the possibility of making compensation claims might arise, the amount of purchase price may be adjustable, and liabilities related to the target’s pre-closing activities may arise long after that. One of the main contractual instruments that enables the parties to provide coverage of this residual risk is the use of an escrow arrangement. This paper discusses the reasons for using M&A escrows, market practices, the legislation in India, drafting of the arrangement, and disputes that arise after closing. The empirical data was mostly taken from the transactions in the U.S. and is only indicative of what can happen in Indian deals.

Purposes and Market Practice of M&A Escrows

An escrow puts cash, investments or other possessions into the care of a neutral third party, usually called an escrow agent, who will only give the assets to the parties when specific conditions mentioned in the deal are satisfied. Escrows can be used to ensure general indemnity obligations, one specific risk or different risks, and the number of chosen options is negotiable. There are three main reasons for the use of escrows: to make indemnification secure so that the buyer does not have to chase down the seller in court after a disagreement emerges; to ensure deferred or contingent payment to take place depending on governmental approvals, consents and similar events; and to make sure that adjustments of purchase price take place before all payments are completed. All the purposes are separate, as indemnity escrow serves to protect the buyer while deferred-consideration escrow is mainly meant to attract financing to the seller. Practices of representations and warranties insurance do not usually involve replacement of escrow, even though they can lead to a reduction of its size or time of existence.

The SRS Acquiom report of 2025 examined over 2,200 private acquisitions made between 2019 and 2024. The median overall indemnity escrow has been ten per cent of transaction value in the absence of insurance, while it is 0.5% with insurance.The year 2024 saw 75% of transactions with purchase price adjustments having separate adjustment escrows, with a median value of approximately 1% of transaction value. The concept of separation is justified because adjustments are normally completed within six months, while indemnity risks go on for much longer. Almost 30% of the transactions typically have a special escrow for specific issues such as pending litigation or taxes, while the report of 2026 indicates the increase in escrows as well. Almost 30% of the transactions typically have a special escrow for specific issues such as pending litigation or taxes, while the report of 2026 indicates the increase in escrows as well. The 2026 study is reported to show a marked increase in escrow size.

The Indian Legal and Regulatory Framework

There are no laws governing escrow accounts specific to private mergers and acquisitions in India. Laws in this area have their source in contracts, the Indian Contract Act of 1872, the Arbitration and Conciliation Act of 1996, if applicable, as well as foreign exchange regulation if relevant. The Contract Act deals with the concept of indemnity in sections 124 and 125 but is not exhaustive.

The Bombay High Court, in the case of Gajanan Moreshwar Parelkar, observed that an indemnity can be enforced once liability is fully crystallised in the view of the indemnified party, irrespective of whether the actual claim has been discharged. Indemnity concerns the share-purchase agreement (“SPA”), while escrow refers to the actual management of funds and hence concerns a different subject matter. In cases where a foreign party is involved, foreign exchange regulations apply. The limits imposed on foreign exchange laws in regard to escrow accounts appear in Rule 9(6) of the FEMA (Non-Debt Instruments) Rules of 2019, allowing deferment of as much as 25% of the total amounts payable for up to 18 months from the execution of the agreement.

Where a non-resident person is involved, international monetary law imposes restrictions. FEMA Rule 9(6) allows for deferral of up to 25% of the total payment for a period of up to 18 months from the date of the transfer contract. Commentary on the previous RBI framework from 2016 mentions that there is a provision for indemnification of up to 25%, where the period of escrow shall not exceed 18 months from the payment of the total price.There are two caveats. Deferred compensation and price adjustments are not specifically allowed for LLPs under the automatic route; Moreover, a recent commentary on the Master Direction of foreign-owned and controlled companies indicates that such restrictions relate to post-compensation indemnities in the absence of an escrow and holdback.The current legal position has to be checked in the light of the main RBI documents before structuring any transactions.

Drafting the Escrow: Documents, Release Mechanics and the Agent

The SPA contains the substantive rights: indemnities, warranties, and liability caps,” survival periods, governing law, and dispute resolution. The escrow agreement provides the mechanisms for holding and releasing the funds. The two must be in compliance. For instance, if the SPA allows for claims for eighteen months but the escrow terminates in twelve months, then the escrow is rendered ineffective in its purpose when it is needed most. The escrow agreement is mostly drafted separately and applies to different parties and different dispute clauses, and so is one of the major hindrances examined in part IV of the paper.

Release conditions and claim notices - Escrow agents prefer certainty, and since escrow releases should happen in a transaction where there is a joint instruction from both parties, the agreement should indicate the events constituting the trigger, the persons entitled to give a directive, form of instruction, partial releases, the last date of release, etc. The claim notice should also state the nature of the complaints and claims being made, the provisions and clauses section upon which the claim is founded, losses incurred, and the amount to be retained. Regular arrangements also indicate that if the case is disputed before the cut-off dates, the disputed property. 

The role of the escrow agent - The agent is a party to the deal but not a judge. They work to protect themselves through the use of the liability standard, the right to follow instructions that seem good enough, the process for indemnification and the steps to take when receiving conflicting instructions, such as depositing the money into the court.One should be cautious using language such as "release against valid claims" unless the agreement specifies who determines what “valid” means. It should also mention the investment of the funds, income, taxes, costs, resignation and replacement, and whether using escrow is the only option for the buyer; this is crucial as it means that the escrow is the limit on the seller's responsibility.

Price adjustment, set-off and interest -The adjustment escrow should include provisions on the accounting principles applicable to the escrow, the party who is most liable for preparing the closing statement, the objection period, independent experts involved, as well as the procedure of handling disputed amounts. Set-off has to be expressly framed: if the seller is entitled to the release but the buyer has some unresolved claims, the legal document has to specify if the buyer has the right to carry out the deduction without approval from the seller. The entitlement to the interest on the deposited amounts and the tax implications of that entitlement have to be resolved in advance since this unresolved issue may lead to another dispute.

Post-Closing Disputes and the Question of Forum

Disputes normally involve the question of liability, quantum, notice period or authenticity of the transaction itself. In a case involving accusations of fraud, the Supreme Court in Vidya Drolia held that allegations of this nature can still be subject to arbitration as long as it is civil in nature and does not affect the arbitration agreement itself.

The Bombay High Court's ruling in the case of Prabodh Jamnadas Kothari v. Vikram Jamnadas Kothari demonstrates the complex issues faced by the parties involved. The parties entered into an agreement to purchase the target, and the price was established at ₹59 crore, which was to be paid in three stages. An escrow agreement was signed to protect the second and third payments by the use of listed shares with Barclays representing the escrow agent. When disputes arose between the parties, the agent refused to act and froze the situation until an order was obtained from the court or an arbitrator. The buyers filed a case in court for a declaration of no further payment due under the SPA. The case was transferred to the arbitration process by the judge, who decided that whether the agent had fulfilled its contractual obligation and whether the instruments were valid depended on the tribunal. The judge converted the pending Section 9 application into one under Section 17 and maintained the situation unchanged. The case under Section 11 has been pending for about 3 years, and nothing has moved with respect to the shares kept in escrow custody.

In the case of Ratnam Sudesh Iyer vs. Jackie Kakubhai Shroff, which pertains to a deed of settlement and not an SPA, an example is found. An escrowed US$2 million was to be disbursed only as per the explicit direction of the arbitrator, and since this was decided against, the Supreme Court dismissed the appeal against this ruling in November 2021. The sums remained contested for nearly ten years.

A Drafting Matrix and Practical Recommendations

As a precautionary measure, prior to execution, a drafting matrix should be created detailing key terms throughout the SPA, escrow agreement, and disclosure schedules. This is a drafting suggestion, rather than a finding based on market data. Its function is to link the different elements, including:

• the function, sum and duration of every escrow with regard to SPA limitations, caps and restrictions;

• concepts like Losses, Claim, Final Determination;

• triggers for releases, including claims that are in process and partial releases;

• disclosure schedules against warranties;

• offsets, interest and contradicting instructions;

• choice of law, seat and venue, as well as whether the agent needs to abide by the arbitration clause;

• regulatory compliance as provided by FEMA or rules of the industry; and

• what document takes precedence among them.

Conclusion

An escrow is better viewed not merely as an account where part of the price is held, but as a method of managing risk. The evidence shows that escrows are widely used in private M&A; it has been found that indemnity escrows tend to make up around 10% of value in the absence of insurance. However, there is an increasing incidence of claims of greater magnitude and increased time for resolution. In India, this matter is also complicated by exchange control regulations – they limit both the amount that may be charged as consideration and the manner of conducting these commercial transactions.

Thus, the issues discussed above show that disputes do not emerge because the escrow is missing; they come up because the documents did not explain what was to happen in case of disagreement. This has been demonstrated in Kothari where the escrow for ₹10 crore of outstanding consideration resulted in long battles regarding tripartite disputes forum, level of agent’s involvement and SPA and escrow agreement relationship. The same happened in Albion where inconsistent forum clauses made it possible for one dispute to be dealt with in two different forums.

Practitioners must accordingly implement a total of five disciplines: separate pools for indemnity, adjustment of price and specific risk must be used; trigger dates and notices must be defined clearly; the escrow agent must be confirmed in its administrative role; the governing law, place and forum must be aligned in all documentation, and interim relief must be planned in advance. An escrow document should limit the disputes post-closing. It should preserve the disputed sum and liberate undisputed parts of the process.

Author: Dhanvi Choubey in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney

References

Cases

• Albion Energy Ltd. v. Energy Invs. Glob. BRL [2020] EWHC 301 (Comm) (Eng.).

• Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, A.I.R. 1942 Bom. 302 (India).

• Prabodh Jamnadas Kothari v. Vikram Jamnadas Kothari, Comm. Arb. Appl. No. 132 of 2022, 2025:BHC-OS:19908 (Bom. Nov. 3, 2025) (India).

• Ratnam Sudesh Iyer v. Jackie Kakubhai Shroff, Civil Appeal No. 6112 of 2021, 2021 INSC 712 (India Nov. 10, 2021).

• Vidya Drolia v. Durga Trading Corp., (2021) 2 S.C.C. 1 (India).

Statutes and Regulations

• Arbitration and Conciliation Act, 1996, No. 26 of 1996, India Code (1996).

• Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, S.O. 3732(E) (Oct. 17, 2019) (India).

• Foreign Exchange Management Act, 1999, No. 42 of 1999, India Code (1999).

• Indian Contract Act, 1872, No. 9 of 1872, India Code (1872).

• Reserve Bank of India, Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Amendment) Regulations, 2016 (May 20, 2016) (India).

• Reserve Bank of India, Master Direction – Foreign Investment in India, Master Direction No. 11/2017-18 (Jan. 4, 2018) (as updated) (India).