Escrow Basics
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May 2, 2025
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6 MINS READ

Introduction
In the intricate environment of project and infrastructure financing, protecting stakeholder interests and maintaining financial prudence is essential. One of the central mechanisms that supports these goals is the Trust and Retention Account (TRA). TRAs are formalized finance arrangements that hold and regulate a project's cash flow, and they ensure money is spent as per agreed-upon priorities. This mechanism is particularly common in infrastructure projects, where it works to shield lenders from credit risk by buffering project cash flows from possible mismanagement.
TRAs have become increasingly important with the growing complexity and size of infrastructure projects, most notably in areas such as renewable energy, transportation, and urban development. Such projects tend to have multiple stakeholders, ranging from government agencies to private investors and financial institutions. Successful financial handling by TRAs minimizes the associated risks and maximizes the confidence of investors in such industries. In India, institutions such as the Indian Renewable Energy Development Agency (IREDA) have played a key role in fostering TRA agreements through collaborations and regulatory structures. With the changing financial environment, the incorporation of technology in TRA management has become imperative. Castler and similar platforms are leading to this change, providing digital platforms that automate TRA operations, improve compliance, and strengthen governance. Through the use of technology, these platforms solve the issues related to conventional TRA operations, making the process more efficient, secure, and transparent.
Understanding Trust and Retention Accounts
A Trust and Retention Account (TRA) is a specified bank account created under a contractual arrangement between the borrower, lender, and trustee or TRA agent.
Its main role is to control and direct the cash flows of a project so that funds are spent as per priority agreed in advance. This mechanism is particularly common in infrastructure projects, where it acts to safeguard lenders from credit risks by shielding project cash flows from mismanagement. Main Elements of a TRA are:
Waterfall Mechanism: This is the pre-specified waterfall of payments, which specifies the order of distribution of funds among different obligations like taxes, operational costs, debt service, and returns to equity holders.
Sub-Accounts: In the TRA, there can be more than one sub-account to separate funds for certain purposes to improve transparency and control.
Monitoring and Reporting: There is regular reporting and auditing that forms part of TRA operations to ensure stakeholders remain informed and that funds are used correctly.
The organized character of TRAs increases transparency because every transaction is documented and supervised by the trustee or TRA agent. This promotes accountability and credibility among parties to a project, advancing sound financial management throughout the duration of a project.
Legal Framework Governing TRAs in India
Contractual Foundations
The organization and operation of a TRA are controlled by an elaborate agreement defining the roles, responsibilities, and rights of each party. Such an agreement specifies the payment waterfall, which is commonly called the "waterfall mechanism," which prescribes the sequence of the allocation of funds to different obligations like taxes, operational costs, debt repayment, and return to equity holders.
Regulatory Oversight
Although there is no singular statute exclusively regulating TRAs in India, their functioning overlaps several legal and regulatory regimes:
Indian Trusts Act, 1882: Establishes the basic principles for trust structures, ensuring fiduciary duties are fulfilled.
Companies Act, 2013: Requires corporate governance norms affecting how companies participate in financial deals, including TRAs.
Reserve Bank of India (RBI) Guidelines: Provide instructions on banking operations, affecting how banks deal with and regulate TRAs.
Insolvency and Bankruptcy Code (IBC), 2016: In the event of financial stress, provisions of the IBC come into play, notably in relation to the rights of creditors and disposition of funds within TRAs.
Compliance and Governance Implications
Ensuring Financial Discipline
TRAs impose fiscal discipline by limiting the borrower's access to project revenues, and ensuring that the funds are applied strictly in accordance with the waterfall mechanism agreed. This not only protects lenders' interests but also encourages responsible financial management over the life of the project
Transparency and Accountability
The organized format of TRAs increases transparency since all transactions are documented and tracked by the trustee or TRA agent. Periodic reporting and auditing guarantee that stakeholders remain informed, building accountability and trust among parties.
Risk Mitigation
By concentrating and managing cash flows, TRAs reduce risks such as diversion of funds, payment defaults, and financial mismanagement. This is especially important in large projects involving several stakeholders and substantial capital.
Castler's Role in Strengthening TRA Compliance and Governance
Castler, a top digital and hard escrow service in India, provides cutting-edge solutions that simplify the administration of Trust and Retention Accounts. Through technology, Castler solves several issues related to conventional TRA operations:
Digital Automation
Castler automates the waterfall payment process, ensuring that payments are made in the right order and amount without human intervention. This minimizes errors, increases efficiency, and guarantees timely payments.
Real-Time Monitoring
The platform offers stakeholders real-time visibility into account activities for proactive monitoring and rapid decision-making. Such openness is crucial to uphold trust and compliance with contractual terms.
Regulatory Compliance
Castler's solutions are tailored for alignment with India's regulatory infrastructures, making sure that all functions under the TRA follow legal requirements. These cover compliance with RBI directions, the Companies Act, and other relevant rules.
Improved Security
By computerizing TRA operations, Castler reduces the risks involved in manual processes, including fraud and data breaches. The platform uses strong security features to safeguard sensitive financial data and transactions.
Conclusion
Trust and Retention Accounts are critical in maintaining financial discipline, transparency, and risk avoidance in project financing.
Their legal framework, though complicated, offers a strong framework that protects the interests of all parties.
Platforms such as Castler continue to improve the effectiveness of TRAs by developing digital platforms that automate tasks, improve compliance, and enhance governance. While infrastructure and renewable energy projects continue to expand in size and complexity, integrating technology-based solutions such as Castler will be key to managing the complexity of financial management and compliance.
Written By

Chhalak Pathak
Marketing Manager