What Is an Escrow Arrangement?
An escrow arrangement places money, documents or security with a third party for release when specified contractual obligations are fulfilled. It helps coordinate payment and performance, particularly where the parties cannot complete every step simultaneously.
For example, in a proposed share acquisition, the parties may arrange for the purchase price to be held by a bank and released upon presentation of agreed completion documents, subject to applicable approvals.
Legal Recognition in Nepal
Section 14 of the Foreign Investment and Technology Transfer Act, 2075 (2019) expressly recognises escrow agreements. It permits a foreign investor to enter into a tripartite agreement with its partner investor or another foreign investor and a commercial bank or infrastructure development bank recognised by Nepal Rastra Bank.
The bank acts as the parties’ agent. The statutory arrangement covers money, documentary evidence or guarantees held as transaction security and released after contractual obligations are completed. The Foreign Investment and Technology Transfer Rules, 2077 also provide for recording escrow agreements.
What Should the Agreement Address?
An effective escrow agreement should clearly identify:
- The deposit: the amount, currency, documents or security to be held.
- Release conditions: the precise obligations and evidence required for payment.
- Instructions: who may authorise release and how the bank verifies instructions.
- Failure to complete: the deadline, refund conditions and treatment of disputed funds.
- Costs and responsibility: bank charges, interest, taxes and the bank’s duties.
- Disputes: the procedure for resolving conflicting claims or instructions.
The escrow terms should align with the share purchase, subscription or joint venture agreement. Vague release conditions can create delays at the very point when the parties expect completion.
Escrow and Regulatory Compliance
Escrow does not replace foreign investment approval, company formalities or foreign exchange requirements. Funding, release and any refund must follow the applicable banking procedures. Foreign investment brought into Nepal must also be properly recorded under Nepal Rastra Bank’s framework.
Frequently Asked Questions
Is escrow compulsory for every foreign investment transaction?
No. Section 14 permits escrow arrangements; it does not make them a general requirement for every foreign investment transaction.
Can documents be held in escrow?
Yes. The statutory definition extends beyond money to documentary evidence and guarantees.
Does depositing money in escrow transfer ownership of shares?
No. The parties must separately complete the applicable share transfer procedures. Escrow controls the release of payment according to agreed conditions.
What happens if the transaction does not complete?
The agreement should specify when funds are returned, which documents are required and how disputes affect release. A refund to an overseas investor must also satisfy applicable foreign exchange procedures.
Does the escrow bank guarantee the investment’s success?
Escrow is a mechanism for holding and releasing transaction security. Any additional guarantee or responsibility must be expressly agreed with the bank.
How Alpha Law Associates Can Assist
Alpha Law Associates assists investors with structuring escrow arrangements, drafting and reviewing tripartite agreements, coordinating transaction documents and assessing the applicable investment, banking and corporate requirements in Nepal.