Escrow account
Also written SAST · Escrow account (SAST) · Open offer escrow · SAST escrow account
The security an acquirer must deposit before a takeover open offer — 25% of the first Rs 500 crore of consideration plus 10% of the balance — so that the money to pay tendering shareholders is ring-fenced.
In plain language
An open offer is a promise made in public to thousands of shareholders: tender your shares and I will pay you. The escrow account is what makes the promise collectable. Before the acquirer is allowed to make the detailed public statement, it has to put security for its own performance somewhere the manager to the open offer controls.
The rule is deliberately placed early in the timetable. The escrow must be created at least two working days prior to the date of the detailed public statement of the open offer — before the market is told anything, not after.
Note that the same word is used elsewhere in this paper for different accounts: a public issue has an escrow agreement with the bankers to the offer, and a share escrow account with the registrar into which selling shareholders transfer their offered shares before the red herring prospectus is filed. This entry is the SAST one — the takeover escrow.
How it works
How much. A two-slab scale on the consideration payable under the open offer:
| Consideration payable under the open offer | Escrow amount |
|---|---|
| On the first Rs 500 crore | 25% of the consideration |
| On the balance consideration | an additional 10% of the balance |
Where the open offer is made conditional upon a minimum level of acceptance, the deposit is 100% of the consideration payable in respect of that minimum level of acceptance, or 50% of the consideration payable under the open offer, whichever is higher — and that amount must be in cash.
On a revision. If the offer price or offer size is revised upwards, the escrow is recomputed on the revised consideration and the additional amount must be brought in before the revision is effected.
In what form. Three permitted forms: cash deposited with a scheduled commercial bank; a bank guarantee issued in favour of the manager to the open offer by a scheduled commercial bank; or a deposit of frequently traded and freely transferable equity shares or other freely transferable securities with appropriate margin. Securities are not permitted for indirect acquisitions where the public announcement is made under regulation 13(2)(e).
The cash floor. Where the escrow is created by bank guarantee or by deposit of securities, the acquirer must still keep at least 1% of the total consideration payable in cash with a scheduled commercial bank as part of the escrow.
Who controls it. On opening a cash account the acquirer must empower the manager to the open offer to instruct the bank to issue a banker's cheque or demand draft or make payment. A bank guarantee must be in favour of the manager and valid throughout the offer period and for a further thirty days after completion of payment. For a securities escrow the manager is empowered to realise the value by sale, and if there is a shortfall the manager to the open offer is liable to make it good — which is why merchant bankers dislike securities escrows.
When it is released. The manager shall not release the escrow until the expiry of thirty days from completion of payment of consideration, except for transfer to the special escrow account. Not more than 90% of the escrow may be transferred to the special escrow account. The balance returns to the acquirer after that thirty-day period, on the manager's certification. Where the acquirer fails to fulfil its SAST obligations, SEBI may direct the manager to forfeit the escrow, in full or in part, and the amount is released to the manager for distribution after deducting the expenses of registered intermediaries associated with the open offer.
Cash may earn. The cash component may be maintained in an interest-bearing account, provided the merchant banker ensures the funds are available when payment falls due.
A worked example
An acquirer triggers a mandatory open offer for 26% of a target that has 20 crore equity shares in issue, at Rs 315 a share.
Shares under the open offer = 26% × 20 crore = 5.20 crore
Consideration payable = 5.20 crore × Rs 315 = Rs 1,638 crore
The escrow, slab by slab:
| Slab | Base (Rs crore) | Rate | Escrow (Rs crore) |
|---|---|---|---|
| First Rs 500 crore | 500 | 25% | 125.00 |
| Balance | 1,138 | 10% | 113.80 |
| Total | 1,638 | 238.80 |
That Rs 238.80 crore must be in place at least two working days before the detailed public statement. Note what the slab structure does: the blended rate is 238.80 ÷ 1,638 = 14.6%, well below 25%, because only the first Rs 500 crore attracts the higher rate. A candidate who applies 25% to the whole consideration produces Rs 409.5 crore and loses the mark.
If it is given as a bank guarantee, the acquirer must still deposit 1% of Rs 1,638 crore = Rs 16.38 crore in cash, and the guarantee must stay valid through the offer period and for thirty days after payment completes.
On an upward revision to Rs 340:
Revised consideration = 5.20 crore × Rs 340 = Rs 1,768 crore
Revised escrow = 125 + 10% × 1,268 = Rs 251.80 crore
Additional deposit = 251.80 − 238.80 = Rs 13.00 crore
The Rs 13 crore must be in before the revision is effected, not alongside it.
If the offer had been conditional on a minimum acceptance of 3 crore shares, the cash test would apply instead: 100% of 3 crore × Rs 315 = Rs 945 crore, against 50% of Rs 1,638 crore = Rs 819 crore — the higher is Rs 945 crore, in cash. A conditional offer is an order of magnitude more expensive to secure.
On the way out: up to 90% of Rs 238.80 crore = Rs 214.92 crore may move to the special escrow account, and nothing is released to the acquirer until thirty days after payment is completed, on the manager's certification.
Why NISM asks about it
Chapter 7 (Other Merchant Banking Activities – Mergers, Acquisitions & Takeovers), in the open offer process, carries the "Provision of Escrow" rules in full. The merchant banker here is the manager to the open offer, and much of the machinery — the power to operate the account, the liability for a shortfall in a securities escrow, the certification on release — is an obligation on the merchant banker personally.
Expect a slab computation as a numerical question. Expect the 1% cash rule where a bank guarantee is used, the two working days before the detailed public statement, the 30 day hold after payment and the 90% transfer cap as factual questions.
Common exam traps
- The scale is marginal, not flat. 25% applies only to the first Rs 500 crore; 10% to everything above. Applying 25% throughout is the standard error.
- Two working days before the detailed public statement — before, not after, and not two days before the offer opens.
- A bank guarantee or securities escrow still needs 1% of the total consideration in cash. The cash floor is computed on the whole consideration, not on the escrow amount.
- A conditional offer is secured in cash on a different test entirely — the higher of 100% of the minimum acceptance consideration and 50% of the whole.
- On an upward revision the top-up goes in first. The revision cannot be effected until the escrow is made good.
- Only 90% may be transferred to the special escrow account, and the manager holds the rest for thirty days after payment completes.
- The manager to the open offer is personally liable for a shortfall in a securities escrow — a real reason merchant bankers push acquirers toward cash or a bank guarantee.
- Do not confuse it with the share escrow account in an IPO, into which selling shareholders transfer their offered shares before the red herring prospectus is filed, or with the escrow maintained for the one-year post-delisting exit offer.
Check yourself
1.At what shareholding must an acquirer make a public announcement of an open offer under the SAST Regulations?
- a)25% or more of the voting rights, read as 49% for a company listed on the Innovators Growth Platform
- b)10% or more of the voting rights
- c)26% or more of the voting rights
- d)51% or more of the voting rights
Show the answer
Answer: (a) 25% or more of the voting rights, read as 49% for a company listed on the Innovators Growth Platform
An acquirer shall not acquire shares or voting rights in a target company which entitle them (acquirer and persons acting in concert) to exercise 25% or more of the voting rights in the target company unless they have made a public announcement of an open offer for acquiring shares of such target company.
And the IGP variation: any reference to "twenty-five per cent" in case of listed entity which has listed its specified securities on Innovators Growth Platform shall be read as "forty-nine per cent". This has been made to make the platform more accessible to companies in view of the evolving start-ups ecosystem.
Option C confuses the trigger with the offer size. The open offer... shall be for at least 26% of total shares of the target company, as on 10th working day from the closure of the tendering period — 25% triggers, 26% is the size.
The second threshold is the creeping acquisition limit. An acquirer already at 25% or more... but less than the maximum permissible non-public shareholding may not acquire within any financial year additional shares or voting rights... entitling them to exercise more than 5% of the voting rights without an offer — counted on gross acquisitions alone.
And the third trigger has no threshold at all: unless the public announcement of an open offer for acquiring shares of the target company is made, no acquirer shall acquire directly or indirectly control over such target company.
Note that the thresholds bite individually too: acquisition of shares by any person, such that the individual shareholding of such person acquiring shares exceeds the stipulated thresholds, shall also be attracting the obligation... irrespective of whether there is a change in the aggregate shareholding with persons acting in concert.
One exemption from the ceiling on total holding: acquisition pursuant to a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code, 2016 — in such resolution cases, even if the thresholds mentioned in the SAST are exceeded..., no open offer obligation arises towards the minority shareholders.
2.A takeover is the acquisition of substantial ________ for the purpose of seeking management control of the company.
- a)Shares or voting rights
- b)Rights
- c)Debentures
- d)None of the above
Show the answer
Answer: (a) Shares or voting rights
'Takeover' is the acquisition of substantial shares or voting rights for the purpose of seeking management control of the company.
Shares or voting rights — the two are not the same thing, which is why the definition names both. Voting rights can be acquired without acquiring shares, through agreements and other arrangements.
Option C is wrong because debentures carry no voting rights and so cannot deliver management control, though convertible debt instruments feature in the offer price parameters: where the acquirer holds outstanding convertible instruments convertible into shares of the target company at a specific price, the price at which such instruments are to be converted into shares, shall also be considered as a parameter.
How a takeover is effected: if management of a prospective selling company is unwilling to negotiate a transaction with a prospective buyer, the buyer may make a direct bid to the seller's shareholders and purchase seller's shares from the market to acquire a controlling stake.
Or by agreement: takeover can be by merger of a solvent acquirer with a sick company for availing the tax benefits, or else it can be acquisition of shares through direct negotiations with one who owns controlling interest or through open offer or market purchase of requisite voting rights to change the management of the company.
And afterwards: the target company may be maintained as a subsidiary or division or dissolved or be merged.
The SAST Regulations pick up the same language. The 25% and 5% triggers are expressed in shares or voting rights, and a third trigger attaches to control alone: unless the public announcement of an open offer for acquiring shares of the target company is made, no acquirer shall acquire directly or indirectly control over such target company.
Note the distinction the workbook draws: takeovers involve change in management control of the target company while acquisitions usually result in change in control when majority stakes are acquired.
3.The escrow account opened for delisting may consist of cash deposited with a scheduled commercial bank, a bank guarantee in favour of the merchant banker, or a combination of both. True or false?
- a)True
- b)False — only cash is permitted
- c)False — only a bank guarantee is permitted
- d)False — securities may also be deposited
Show the answer
Answer: (a) True
The escrow account shall consist of either cash deposited with a scheduled commercial bank, or a bank guarantee in favour of the merchant banker, or a combination of both.
Two forms, or a mix of them.
Option D describes the SAST escrow, not the delisting one. Chapter 7 permits cash deposited with any scheduled commercial bank, bank guarantee issued in favour of the manager to the open offer, or deposit of frequently traded and freely transferable equity shares or other freely transferable securities with appropriate margin — that third form is absent here.
How much and when: before the public announcement, the acquirer or promoter shall open an escrow account and deposit therein the total estimated amount of consideration calculated on the basis of the floor price and the number of equity shares outstanding with public shareholders.
Floor price multiplied by public shares, and before the announcement — not after.
And the merchant banker operates the cash portion: where the escrow account consists of deposit with a scheduled commercial bank, the promoter shall, while opening the account, empower the merchant banker to instruct the bank to issue banker's cheques or demand drafts for the amount lying to the credit of the escrow account, for the purposes mentioned in these regulations, and the amount in such deposit, if any, remaining after full payment of consideration for equity shares tendered in the offer.
The rest of the delisting sequence. The merchant banker is appointed before making the public announcement; the letter of offer with the bidding form goes out not later than 2 working days from the date of the detailed public announcement; the price is determined by the promoter and the merchant banker taking into account certain factors as specified; the promoter shall not make a bid in the offer; and the outcome is announced within two working days of closure of the offer.
One cross-reference from Chapter 7: an acquirer whose shareholding exceeded the maximum permissible non-public shareholding after an open offer shall not be eligible to make a voluntary delisting offer... unless a period of 12 months has elapsed.
Where this is taught
Free preparation for NISM Series IXRelated terms
- Reverse book buildingThe bidding process by which the exit price in a voluntary delisting is discovered from public shareholders above a fixed floor price, instead of being set by the acquirer.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Frequently traded sharesShares whose traded turnover on any recognised stock exchange during the 240 trading days preceding the relevant date is at least ten percent of the total number of shares of that class.
- Manager to the open offerThe SEBI-registered merchant banker, not an associate of the acquirer, who must confirm the acquirer's ability and funding before the announcement, ensure all documents are true, fair and adequate, file the due…
- Special escrow accountAn account with a SEBI-registered banker to an issue holding the entire consideration payable in cash, operated by the manager on the acquirer's behalf, with unclaimed balances after seven years going to the Investor…
- TakeoverThe acquisition of substantial shares or voting rights for the purpose of seeking management control — which may be effected by direct negotiation, an open offer, or market purchases in the face of the target…