Key takeaways
    • COVID-19 has taken a toll on India’s economy. However, the country continues to attract investments both in the private and public space. A slew of mergers and acquisitions, large private equity investments and broader capital markets transactions suggests that the future holds promise for steady growth.
    • Escrows have not been used frequently in the domestic market, but this is fast changing owing to the increase in foreign investor participation in local infrastructure development and the increasing trend of digital disruption of mainstream business models.
    • Furthermore, new central bank regulations stipulating that escrows be used for a variety of situations that involve third party payments or multi-party lending, is leading to a rise in use cases for this product.
    • Another indication of the growing use of escrows is the regulator now considering escrows as a tool to protect retail investors’ funds and to monitor corporates with borrowings above a certain threshold.
    • A well-capitalised bank with both global and local knowledge can play a strategic part in the delivery of escrow services when it comes to foreign investment transactions.


    As with many major markets, India has not been spared from the negative effects of Covid-19. According to data released by the Indian government, the country’s GDP contracted by 23.9 per cent in the second quarter of 2020, fuelled by steep declines in construction, transport and manufacturing.1 Consequentially, India is projected to experience its sharpest recession since 1996. However, experts are confident that the country could bounce back quickly. Assuming the virus can be contained and oil prices remain low, the International Monetary Fund (IMF) anticipates India’s economy will rebound by 7.4 per cent in 2021.2 

    India continues to attract FDI across multiple sectors as investors see it as a large and growing domestic consuming market with long term potential.

    Sunil Shah, Managing Director and Head of Multinationals, South Asia

    FDI pivots into infrastructure and the digital economy

    Although global Foreign Direct Investment (FDI) flows are expected to collapse by 40 per cent in 2020, the United Nations Conference on Trade and Development (UNCTAD) stated inflows into India have risen by 13 per cent this year to a record USD 49.97 billion, versus USD 44.26 billion in 2018-2019.3 Vast amounts of this inward investment is being driven by a few factors: the government’s push into infrastructure, the availability of quality assets at subdued prices, the rise of e-commerce and related enablers like faster logistics. These drivers have generated interest among deep pocketed global private capital managers, comments Abhishek Agarwal, Head of Issuer Services for India at HSBC. Liberalising measures designed to encourage participation by investors like Family Offices, Sovereign Wealth Funds, Supranational institutions and Private Equity have also helped accelerate foreign inflows. “The government has made continuous efforts to facilitate entry into the Indian market and also provided greater avenues for global corporates to relocate their manufacturing facilities in the country, all of which has added to the positive sentiment,” explains Agarwal. Public-private partnership as a model for financing infrastructure projects has also become increasingly popular.

    “India continues to attract FDI across multiple sectors as investors see it as a large and growing domestic consuming market with long term potential. The government's focus on manufacturing to support the supply chains of global clients is expected to further boost the flow of capital into the country,” says Sunil Shah, Managing Director and Head of Multinationals, South Asia. The increasing participation of sophisticated institutional investors and multi-national corporations, using higher governance standards, necessitates the need for better control over the cash flows, which an escrow solution can provide.

    India’s digital and paperless economy continues to flourish. It has further accelerated on account of COVID-19 and the imperative to adopt digital payment methods. With USD 650 million worth of deal-making activity in India’s digital economy in Q1, it is expected that the burgeoning sector will recover from the pandemic much faster than many other industries.4 Payments and non-bank financial lending – in particular – are areas where digital transformation is in full swing in India. In fact, Facebook-owned WhatsApp chose India to trial its P2P payments platform before rolling it out to other markets. “Since the 2016 de-monetisation initiative, there has been a huge shift towards digital with more people now paying for goods and services through digital channels as opposed to in cash. This has led to a proliferation of fintechs creating a natural demand for escrow solutions to provide control and seamless processing of the cash flows,” says Ganesh Iyer, Global Product Manager for Escrows at HSBC.

    Leveraging escrows in India

    Escrows have traditionally been associated with M&A transactions in India. “Foreign entities investing in India are attuned to using escrows for acquisitions. Acquirers start off with completing due diligence on the target company, with the help of their legal counsel who regularly reach out to banks such as HSBC to seek input on the banking aspect of the transaction. Over the years, HSBC has built a market leading reputation with market participants who seek out HSBC for deals across the spectrum. The sheer number of transactions that HSBC has successfully handled, coupled with the quality and depth of the team, gives clients and partners continued comfort and confidence.”, explains Sridhar Narayan, Head of Global Markets, India.

    Since the 2016 de-monetisation initiative, there has been a huge shift towards digital. This has led to a proliferation of fintechs creating a natural demand for escrow solutions to provide control and seamless processing of the cash flows.

    Ganesh Iyer, Global Product Manager for Escrows

    Agarwal says escrows have been available to foreign institutions investing in Indian infrastructure for a long time, but were not as widely used in comparison to other prominent jurisdictions like Hong Kong and Singapore. This is partly due to the relatively smaller size of investments and because the market had not yet developed sophisticated funding models with multiple participants, public-private partnerships and more. However, demand for escrow services in India has jumped recently. “We are seeing growing investment demand in Indian infrastructure, in response to the domestic liberalisation measures which have been introduced. As a result, this has opened up new sectors to foreign investors as well as foreign institutions operating in a low interest rate environment and searching for yield, especially in North America and Europe. A lot of these investors are now increasing their allocations to alternative asset classes in emerging markets such as India, yet seeking safety via control over cash flows, which an escrow can provide,” says Agarwal.

    The spectacular and sudden rise of fintechs in India has also spurred enormous interest in exploring new range of escrow solutions. Agarwal explains the Reserve Bank of India (RBI) has since made it mandatory for providers of e-wallets to use digital escrows. “The rise of fintechs complemented by the government’s UPI interface has disintermediated the traditional business model in a number of sectors including payments. In the case of payments, the growing number of fintechs in the domestic market has resulted in the emergence of new intermediaries, who are often entrusted with holding substantial amounts of cash that does not belong to them. In response, regulators have increasingly started instructing these intermediary providers to implement structures – namely controlled accounts or escrows – when holding third party money,” says Iyer.

    Another transformation that has been taking place is in the small and medium enterprises space where such companies have been setting up multi-country presence across Asia. Moreover, even as supply chains have become complex over the past decades, Covid-19 as well as geopolitical tensions have pushed companies to consider sourcing and producing closer to their future demand bases. All of this has led to increased inbound investments into India, with its large consumption base. “With business transactions becoming more sophisticated and complex, our mid-tier clients require a partner that brings in the expertise, skill and flexibility to provide a one-stop shop for escrows and regulatory compliance support to manage inflows. While our strength lies in our global network, we also pride ourselves on local expertise. Our local business is well entrenched with a deep understanding of regulations, processes, strong engagement with market participants and a sharp focus on our clients’ business priorities, making us their preferred trusted partner for several of their M&A flows and resultant escrow requirements,” says Gaurav Sahgal, Managing Director, Corporate Banking & Country Head International Subsidiary Banking, India.

    Foreign entities investing in India are attuned to using escrows for acquisitions. Acquirers start off with completing due diligence on the target company, with the help of their legal counsel who regularly reach out to banks such as HSBC to seek input on the banking aspect of the transaction.

    Sridhar Narayan, Head of Global Markets, India.

    Case study 1
    HSBC India worked with a leading company to develop a digital, bespoke escrow to power its e-commerce platform. This will help the company grow its B2B segment by enabling inventory to be offloaded from large enterprises to smaller distributers with minimal intervention in the purchase and payment process. The deal involved setting up segregated escrow accounts for every buyer to facilitate oversight of the funds. At the same time, it gave sellers flexibility to automate debit instructions by connecting their technology infrastructure with buyers through a secure connection provided by HSBC.

    With business transactions becoming more sophisticated and complex, our mid-tier clients require a partner that brings in the expertise, skill and flexibility to provide a one-stop shop for escrows and regulatory compliance support to manage inflows.

    Gaurav Sahgal, Managing Director, Corporate Banking & Country Head International Subsidiary Banking, India.

    Case study 2
    An offshore handset manufacturer appointed an Indian subsidiary of an assembler to source Completely Knocked Down Units from their offshore and onshore suppliers and to provide finished goods to the Indian entity for onward sale. The manufacturer wanted to control the funds collected by the assembler and ensure that suppliers were paid in good time. HSBC provided a tailored solution whereby an account bank was opened at HSBC on behalf of the assembler but controlled by the manufacturer.
    On receipt of funds, purchase documents were submitted to HSBC’s trade team, who then provided go-ahead to Issuer Services. The manufacturer and assembler then gave joint instructions to release the funds to the suppliers. The clients were impressed by this solution and both have since awarded additional mandates to HSBC as a result.

    As a truly international banking group, HSBC is well positioned to provide tailored escrow solutions to clients. Covid-19 has ushered in a period of volatility not even witnessed during the peak of the financial crisis, and it is essential that clients work with well-capitalised and excellently risk managed financial counterparties. HSBC’s global footprint and deep rooted local market expertise have helped the bank to deliver a market leading escrow proposition for its clients. As one of the leading banks in India, HSBC is in an excellent position to support domestic and international market participants with their escrow requirements during this unprecedented period.

    We are seeing growing investment demand in Indian infrastructure. This has opened up new sectors to foreign investors and institutions operating in a low interest rate environment and searching for yield, especially in North America and Europe.

    Abhishek Agarwal, Head of Issuer Services India.

    Related articles:

    To find out more about HSBC Issuer Services:


    1 New York Times (August 31, 2020) India’s economy shrank nearly 24 per cent last quarter
    2 CNBC (April 20, 2020) IMF says India’s growth rate could top 7 per cent in 2021 if the Coronavirus outbreak is brought under control
    3 The Economic Times (June 17, 2020) India to remain most resilient in South Asia, continue to attract FDI even in Covid-19 crisis: UNCTAD
    4 The Economic Times (June 17, 2020) India to remain most resilient in South Asia, continue to attract FDI even in Covid-19 crisis: UNCTAD

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