Introduction

The confidence of investors is the basis for successful capital markets. Public issues like Initial Public Offers (IPOs), Rights Issues, and Open Offers are vital sources of funds for companies but pose risks to investors as well. To avoid these risks, the Securities and Exchange Board of India (SEBI) has enforced stringent regulatory mechanisms, like the utilization of escrow accounts, to protect investors' interests.

Escrow mechanisms have become an indispensable part of capital market transactions, ensuring that funds are securely held and released only upon meeting predefined conditions. In this blog, we’ll explore how SEBI integrates escrow accounts into public offers and how Castlercode’s escrow platform supports regulatory compliance and financial security for issuers, investors, and intermediaries.

The Role of SEBI in Public Offers

SEBI, India’s capital market regulator, is entrusted with protecting investors, promoting market integrity, and facilitating transparent fundraising. Public offers allow companies to raise capital by issuing shares, but they must comply with SEBI’s strict disclosure norms, eligibility criteria, and financial safeguards.

Among these safeguards, SEBI mandates the use of escrow accounts to:

• Secure funds raised during IPOs, Rights Issues, or Buybacks.

• Ensure transparent fund disbursement upon offer completion.

• Shield investors from wrongful or premature access to funds.

• Increase overall confidence in the capital market system.

Escrow accounts are impartial financial facilitators, guaranteeing all parties to fulfill regulatory requirements prior to disbursement of funds.

SEBI-Regulated Escrow in Various Public Offers

Escrow mechanisms serve different functions for different types of public offers governed by  SEBI:

1. Initial Public Offerings (IPOs):

In IPOs, the funds gathered from investors while they are open for subscription are kept in escrow accounts by SEBI-approved banks. These funds are released to the issuing company only after allotment, listing approval, and other regulatory clearances to ensure investor protection.

2. Open Offers (Takeovers):

Acquirers issuing open offers to acquire listed company shares need to deposit money in an escrow account of the same amount as the total consideration. This ensures shareholders that there are sufficient funds available for the transaction, reducing counterparty risk.

3. Rights Issues and Preferential Allotments:

Existing shareholders' payments for new shares on issue are kept in escrow accounts until allotment procedure is done. This ensures transparency and safeguards subscribers' money.

4. Buybacks:

For share buybacks of companies, SEBI insists on escrow arrangements to make sure that the company possesses the funds required prior to launching the repurchase to protect shareholder interests.

In all these situations, escrow accounts facilitate adherence to rules, limit financial risks, and promote confidence among issuers, intermediaries, and investors.

Why Escrow Accounts Are Important for Investor Protection

Escrow mechanisms in public offers provide several advantages:

• Fund Security: Investor funds remain in regulated bank accounts, inaccessible to issuers until legal requirements are satisfied.

• Reduced Fraud Risks: Neutral third-party control prevents unauthorized fund movement, protecting investor capital.

• Regulatory Compliance: Escrow accounts help issuers and intermediaries meet SEBI’s guidelines for financial transparency.

• Market Confidence: Secure fund flows and transparent disbursements enhance public trust in capital markets.

• Dispute Minimization: Predefined release conditions reduce the risk of legal disputes between investors and issuers.

These are the building blocks for a healthy, investor-friendly capital market ecosystem.

How Castlercode Enables SEBI-Compliant Escrow Solutions

Castlercode provides an SEBI-compliant, technology-enabled escrow platform that streamlines fund management for public issues. Used by top financial institutions, Castlercode is a secure, real-time, auditable escrow solution customized for capital market needs.

Here's how Castlercode enables issuers, investors, and intermediaries:

• SEBI-Authorized Bank Integration: Castlercode collaborates with leading regulated banks to establish compliant escrow accounts for IPOs, buybacks, and open offers. 

• Programmed Milestone Disbursements: Payments are made only after SEBI-mandated conditions like allotment, regulatory clearances, and listing completion.

• Real-Time Visibility: Issuers, merchant bankers, and regulators can monitor fund flow through secure, digital dashboards.

• Strong Audit Trails: Each transaction in the escrow account is recorded, enabling transparent audits and regulatory reporting.

• Frictionless Investor Experience: Secure fund management enhances investor trust and smoothens public offer execution.

• Regulatory Alignment: Castlercode’s escrow processes are fully aligned with SEBI’s latest circulars and compliance norms, reducing legal risks.

Conclusion

In today’s dynamic financial landscape, protecting investor interests and ensuring regulatory compliance are critical for sustaining confidence in capital markets. SEBI’s mandated use of escrow accounts for public offers plays a vital role in safeguarding funds, enhancing transparency, and building market trust.