Special escrow account
The account an acquirer opens with a SEBI-registered banker to an issue to hold the cash consideration payable to shareholders who tendered in an open offer, operated by the manager to the open offer.
In plain language
An open offer uses two escrow accounts for two different jobs. The ordinary escrow account is security: a deposit, created before the detailed public statement, proving the acquirer is good for the offer and forfeitable if it defaults. The special escrow account is payment: the account from which shareholders who actually tendered are paid.
The two are linked. Once acceptances are known, most of the security deposit can be moved into the payment account, and the acquirer tops it up to the full amount due.
How it works
Opening and funding (Chapter 7, "Payment of consideration"). The acquirer shall open a special escrow account with a SEBI-registered banker to an issue and deposit the amount of consideration in cash. The cash so deposited must make up the entire sum due and payable to shareholders as consideration under the open offer. The acquirer empowers the manager to the open offer to operate the account on its behalf.
Transfer from the ordinary escrow. Cash lying in the ordinary escrow account may be released for transfer of an amount not exceeding 90% of the escrow account to the special escrow account.
Paying shareholders. The acquirer must complete payment of consideration — in cash or by issue, exchange or transfer of securities — to all shareholders who tendered, within ten working days of the expiry of the tendering period.
What happens to what is left.
| Balance | Treatment |
|---|---|
| Ordinary escrow remaining after the transfer | Released to the acquirer 30 days after completion of payment, as certified by the manager |
| Unclaimed balances in the special escrow account | Transferred after seven years from deposit to the Investor Protection and Education Fund under the SEBI (Investor Protection and Education Fund) Regulations, 2009 |
| Amounts in the special escrow account on the acquirer's default | SEBI may direct the manager to forfeit them, in full or in part |
A worked example
Illustrative figures. An acquirer made an open offer for 2.6 crore shares at Rs 180 — Rs 468 crore at full acceptance — and deposited the minimum escrow in cash:
Escrow = 25% × Rs 468 crore = Rs 117 crore (the whole consideration is in the first Rs 500 crore slab)
Tendering closes with 2.1 crore shares validly tendered and accepted.
Consideration payable = 2.1 crore × Rs 180 = Rs 378.0 crore
Maximum transfer from escrow = 90% × Rs 117 crore = Rs 105.3 crore
Acquirer brings in fresh cash = Rs 378.0 − Rs 105.3 crore = Rs 272.7 crore
Special escrow account holds = Rs 378.0 crore
The manager pays all accepting shareholders within ten working days of the last tendering day.
Left in the ordinary escrow = Rs 117 − Rs 105.3 crore = Rs 11.7 crore
That Rs 11.7 crore goes back to the acquirer only 30 days after payment is completed, on the manager's certification.
Seven years later, Rs 14 lakh is still sitting in the special escrow account — payments to shareholders whose bank details failed and who never claimed. It goes to the Investor Protection and Education Fund.
Why NISM asks about it
Chapter 7 (Other Merchant Banking Activities – Mergers, Acquisitions & Takeovers), 15% of the paper, covers the special escrow account under "Payment of consideration" and in the rules for releasing the ordinary escrow.
The figures most likely to be tested are the 90% transfer ceiling, the ten working days for payment, the 30 days before release of the balance, and the seven years before unclaimed money goes to the IPEF.
Common exam traps
- Two accounts, two purposes. The escrow account is security, created before the detailed public statement; the special escrow account is for paying accepting shareholders.
- At most 90% of the escrow may be moved into the special escrow account — never the whole of it.
- The special escrow account must hold the entire consideration in cash, whatever form the security escrow took.
- It is opened with a SEBI-registered banker to an issue, and operated by the manager to the open offer.
- Ten working days from the end of tendering to pay; 30 days after payment before the leftover escrow is released.
- Seven years before unclaimed balances go to the Investor Protection and Education Fund.
- Forfeiture reaches the special escrow account too if the acquirer does not fulfil its obligations.
Check yourself
1.Which statement about the escrow and special escrow accounts in an open offer is correct?
- a)Up to 90% of the escrow account may be transferred to the special escrow account; the balance is released to the acquirer 30 days after payment of consideration is completed; and unclaimed special-escrow balances after seven years go to the Investor Protection and Education Fund
- b)The whole escrow is released to the acquirer as soon as the tendering period closes
- c)Unclaimed balances in the special escrow account are returned to the acquirer after three years
- d)The special escrow account may be opened with any bank and is operated only by the acquirer
Show the answer
Answer: (a) Up to 90% of the escrow account may be transferred to the special escrow account; the balance is released to the acquirer 30 days after payment of consideration is completed; and unclaimed special-escrow balances after seven years go to the Investor Protection and Education Fund
90% to special escrow, the balance after 30 days, unclaimed money to the IPEF after seven years. Cash in escrow is released for transfer of an amount not exceeding 90% of the escrow account, to the special escrow account, and to the acquirer, the balance of the escrow account after transfer of cash to the special escrow account, on the expiry of 30 days from the completion of payment of consideration... as certified by the manager to the open offer. The special escrow account is opened with a SEBI registered banker to an issue, and the manager is empowered to operate the special escrow account on behalf of the acquirer. Any unclaimed balances, lying to the credit of the special escrow account at the end of seven years from the date of deposit thereof, shall be transferred to the Investor Protection and Education Fund.
- Release at close of tendering — the manager shall not release the escrow account until the expiry of thirty days from the completion of payment of consideration, apart from the special-escrow transfer.
- Back to the acquirer after three years — wrong recipient and period.
- Any bank, acquirer-operated — it must be a SEBI-registered banker to an issue, and the manager operates it.
Where this is taught
Free preparation for NISM Series IXRelated terms
- Conditional offerAn open offer made subject to a minimum level of acceptance — if that level is not reached, the acquirer buys nothing under the offer and the underlying agreement is rescinded.
- Escrow accountThe 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.
- Manager to the open offerThe SEBI-registered merchant banker, not an associate of the acquirer, appointed before the public announcement to run an open offer and answer to SEBI for its funding, disclosures and escrow.
- Offer periodUnder the SAST Regulations, the period from the agreement or public announcement that triggers an open offer until consideration is paid to accepting shareholders, or the offer is withdrawn.
- TakeoverThe acquisition of substantial shares or voting rights in a company for the purpose of seeking management control — regulated for listed companies by the SEBI (SAST) Regulations, 2011.
- AcquirerUnder the SEBI takeover code, any person who acquires — or agrees to acquire — shares, voting rights or control over a target company, alone, through another, or with persons acting in concert.