Share Escrow Account
Also written Share Escrow Agreement
The account a registrar opens for selling shareholders in an offer for sale, holding the shares to be sold before the issue opens — distinct from the cash escrow account for the public offer.
In plain language
A public issue that includes an offer for sale needs the shares that are going to be sold to actually be available before the offer opens. The Share Escrow Account is where they sit in the meantime.
This is not the same thing as the ordinary Escrow Account that holds the money coming in from applicants — that one is opened with the bankers to the offer. The Share Escrow Account holds shares, not cash, and it is opened with the Registrar, not a bank.
How it works
Where a Share Escrow Agreement applies, the R&T agent enters into it with the company, the selling shareholders and the book running lead managers (BRLMs). Before the Red Herring Prospectus is filed, the selling shareholders transfer their Offered Shares into the Share Escrow Account.
The Registrar then operates the account only on the instructions of the BRLMs, under the terms of the Share Escrow Account Agreement — it is not free to release the shares on its own judgement. This runs alongside, but separately from, the cash-side Escrow Agreement the Registrar also enters into with the company, the selling shareholders, the BRLMs and the bankers to the offer, under which the Registrar issues instructions to the bankers.
A worked example
An IPO of Kaveri Logistics Ltd combines a fresh issue of 40 lakh shares with an offer for sale of 15 lakh shares by two promoter-group sellers.
Before the RHP is filed, the two sellers transfer their 15 lakh shares into the Share Escrow Account opened with the Registrar. The Registrar holds these shares and will only release them for delivery to successful OFS applicants on the BRLM's instruction, once the basis of allotment is approved.
Separately, the application money collected from all applicants — for both the fresh issue and the OFS — flows into the cash Escrow Account held with the Bankers to the Offer, a completely different account with a different custodian.
Why NISM asks about it
Chapter 10, section 10.1 (Pre-Issue Work of the R&T agent). Expect a question distinguishing what the Share Escrow Account holds (shares, from selling shareholders) from what the ordinary Escrow Account holds (application money, from investors), and who operates each.
Common exam traps
- Shares, not cash. A Share Escrow Account is for the securities being sold in an offer for sale; do not confuse it with the cash escrow that holds application money.
- It sits with the Registrar, not a bank. The cash escrow sits with the Bankers to the Offer.
- The Registrar acts only on BRLM instructions for both types of escrow — it is a custodian carrying out instructions, not a decision-maker.
- This is not the same instrument as the SEBI (SAST) escrow account used in an open offer, which is a takeover-regulation concept, not a public-issue one.
Check yourself
1.In the primary market, the proceeds of shares sold normally go to the company and increase its share capital. What is the one exception the workbook names?
- a)A private placement to financial institutions, where the proceeds go to the lead manager
- b)A further public offer (FPO), where the proceeds go to existing shareholders
- c)A rights issue, where the proceeds go to the renouncees
- d)An offer for sale, where the proceeds go to the person(s) making the offer and not to the company
Show the answer
Answer: (d) An offer for sale, where the proceeds go to the person(s) making the offer and not to the company
"The proceeds of shares sold in the primary market go to the company and it increases the share capital of the company. The only exception to this is the offer for sale of shares in the primary market where the proceeds go to the person(s) making the offer and not to the company."
In an offer for sale, existing shares change hands — which is why Chapter 10 has selling shareholders placing their Offered Shares in a share escrow account.
Option A is wrong — a private placement is "an offer made to a select group of investors such as financial institutions, mutual funds, group companies". It is a primary issue, and the money goes to the company.
Option B is wrong — an FPO, like an IPO, is "an offer of shares to the public at large" by the company.
Option C is wrong — a rights issue raises money for the company.
In the secondary market, by contrast, "The proceeds of the transaction go to the selling investor and not to the issuing company."
Where this is taught
Free preparation for NISM Series II-ARelated terms
- Banker to an issueA scheduled bank or other SEBI-specified banking company that accepts application and allotment monies, refunds application money and pays dividend or interest warrants for an issue.
- Brokers to the issueStock exchange members appointed in a public issue to collect application forms and bids from investors, and paid a commission based on what they collect.
- Confirmation Allocation NoteThe intimation an anchor investor or a fixed-price applicant receives confirming the shares allotted to them in a public issue — the allotment counterpart to a refund order.
- Syndicate memberA SEBI-registered intermediary permitted to accept bids and applications in a public issue and to act as an underwriter for it — the regulatory role behind the general term "broker to the issue".