Eight Types of Escrow and When Each Is Used

By Gradivus Corp · 26 October 2026 · Insights

The eight structures that cover most corporate and capital-markets uses of escrow in India are purchase and sale, settlement, transaction, debt servicing, demat, fractional shares, source code and document escrow. The idea behind all of them is the same: an independent party holds something of value and releases it only when agreed conditions are met. What differs is what is held (money, securities, code or documents) and what triggers release: closing a deal, settling a claim, a payment date, or an event such as insolvency.

1. Purchase and sale escrow

Used in acquisitions, asset sales and share purchases. The buyer deposits the consideration, or part of it, with the escrow agent, and it goes to the seller once the closing conditions are met. Part may also be held back for an agreed period to cover warranty claims or price adjustments. The holdback usually needs more careful drafting than the main release.

2. Settlement escrow

For settling disputes, claims or agreed adjustments. The money is held while the parties complete the steps of the settlement (claims withdrawn, documents delivered and so on) and is released once each step is evidenced.

3. Transaction escrow

The general-purpose form, for any single commercial transaction in which one party has to perform before the other. It closes the trust gap. The money is visibly committed, but it moves only when the counterparty performs.

4. Debt servicing escrow

Used in loans, NCDs and project finance. The borrower's collections are routed into an escrow account and applied in a pre-agreed order, the "waterfall". For example: taxes and statutory dues, then interest and principal, then reserves, and finally surplus to the borrower. Lenders see their repayment sources ring-fenced before the borrower can use them.

5. Demat escrow

Here the asset is securities in dematerialised form. Shares or other securities are held in a demat escrow account and transferred or released when conditions are met, for example in acquisitions, lock-in arrangements or pledge-like structures agreed between the parties.

6. Fractional shares escrow

Corporate actions such as mergers, consolidations and bonus issues can leave shareholders with fractional entitlements. These are pooled and administered under the scheme or on the company's instructions until they are consolidated. The proceeds are then distributed to the shareholders entitled to them.

7. Source code escrow

Used in software licences where the customer depends on the vendor. The vendor deposits the source code with the escrow agent, along with its updates. The licensee gets it only if an agreed trigger event occurs, such as the vendor's insolvency or a failure to support the software. Code deposited at signing and never refreshed may be of limited use by the time a trigger occurs.

8. Document escrow

Title deeds, original agreements and similar documents are held by the agent and handed over only when agreed conditions are satisfied, for example on full payment or once a registration is complete.

Regulated escrow arrangements

Some escrow-like arrangements are required by law rather than agreed between the parties. Under section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, 2016, for example, promoters deposit 70% of the amounts realised from allottees in a separate account with a scheduled bank, and withdrawals are linked to project progress. Where a statute prescribes the arrangement, its terms override general practice.

What every escrow needs, whatever the type

• Release conditions that can be tested. Each one should be a fact that can be evidenced, not a judgement.
• Clear instructions and authorities: who can instruct the agent, and how.
• A dispute mechanism setting out what the agent does if the parties disagree.
• Reconciliation and reporting, with regular statements of balances and movements.
• A complete audit trail, with every instruction and release recorded.

In practice the first gives the most trouble: "satisfactory completion" reads well in a draft but gives the agent nothing to verify.

Frequently asked questions

What is the most common type of escrow in corporate transactions? Purchase and sale escrow in acquisitions and debt servicing escrow in lending are among the most common.

What is a waterfall in a debt servicing escrow? It is the agreed order in which collections are applied: for example, statutory dues first, then interest and principal, then reserves, and any surplus released last.

When is source code released from escrow? Only on the trigger events defined in the escrow agreement, usually the vendor's insolvency, discontinuation of the product or failure to meet support obligations.

Can securities be held in escrow? Yes. They are held in a demat escrow account and released or transferred once the agreed conditions are met.

How Gradivus can help

Where appointed as escrow agent, Gradivus structures and administers all eight structures above: purchase and sale, settlement, transaction, debt servicing, demat, fractional shares, source code and document escrow. Our escrow and cash-flow monitoring systems let stakeholders see balances, movements and pending conditions. Explore our Escrow Services page or contact us for a consultation. Agency roles apply only where Gradivus is specifically appointed.

This article is general information, not legal, tax or investment advice.