Did you know that India is ranked 163 among the list of 193 countries when it comes to enforcing contracts? This ranking was part of the World Bank’s 2020 Doing Business Report. India had the same rank in the 2018 report as well. Enforcing contracts is one of the 10 criteria on the basis of which the ease of doing business rank is calculated, and this is where our country lags behind.
To resolve this problem, many people and institutions have made use of a mechanism, known as an escrow account.
What is an Escrow Account?
The term escrow comes from the French word “escroue,” which means a piece of paper, which is a deed, held by a third party. In simpler terms, an escrow account is a financial instrument, in which money or an asset is held by a third party on behalf of the two parties involved in the contract. Funds, securities, money and other assets can be held in such an account.
Why are These Accounts Used?
In a financial transaction, the buyer is generally concerned with the receipt of their goods in the condition that they were promised, and the seller is interested in getting the complete payment. An escrow account ensures just that. In an escrow transaction, the buyer places the funds with a third party, which is usually the bank. Until all the conditions of the contract are met, the third party does not release the funds to the seller. These accounts follow a step by step process, which removes any speculation regarding the process.
The movement of the funds and the progress of the agreements can be tracked by both the parties. To ensure the security of the funds, the process takes place under the supervision of trained and experienced professionals.
Such accounts have been used across the world for more than 150 years. But up until a few years ago, their use was restricted to large transactions, such as international deals, and mergers and acquisitions. This was because the setting up of such an account used to be an extremely complicated procedure. But with the recent advancements in technology and internet connectivity, all that has changed. Escrow payments have emerged as an option for secure and safe transactions for a large number of people.
Where are These Accounts Used?
These accounts can be used for a range of purposes:
- They are often used in the real estate sector. In real estate, escrow accounts can be used not only when buying property, but also in rental agreements.
- These accounts find use in case of shares as well. Escrow shares are used for mergers and acquisitions. These shares cannot be traded until certain conditions are met.
- Third-party escrow is also used to cover the performance guarantee in case of project financing transactions. In this, the payback is ensured from the cashflow, once the project becomes operational.
Apart from this, an escrow account can be used in case of online transactions as well. There are certain times when paying online might seem risky. These accounts come in handy in such situations.