22.18 ndian onom
the money parked will be released only under
equity linkeD sAving scheme fulfilment of certain conditions of a contract.
Equity linked savings schemes (ELSS) are open- The term escrow is derived from the French
ended, diversified equity schemes offered by term ‘escroue’ meaning a scrap of paper or roll of
mutual funds. They offer tax benefits under the parchment, an indicator of the deed that was held
new section 80C introduced in the Finance Bill by a third party till a transaction is completed.
2005–06. An escrow account is an arrangement for
Besides offering the tax benefits, the scheme safeguarding the ‘seller’ against its ‘buyer’ from
invests in shares of frontline companies and offers the payment risk for the goods or services sold by
long-term capital appreciation. This means unlike the former to the latter. This is done by removing
a guaranteed return by assured return schemes the control over cash flows from the hands of the
like Public Provident Fund or National Savings buyer to an independent agent. The independent
Certificate, the investor gets the benefit of the agent, i.e, the holder of the escrow account
upside (if any) in the equity markets. would ensure that the appropriation of cash
Unlike other mutual fund schemes, there is a flows is as per the agreed terms and conditions
three-year lock in period for investments made in between the transacting parties. Escrow account
these schemes. Investors planning to build wealth has become the standard in various transactions
over the long-term and save on tax can use these and business deals. In India escrow account is
schemes. widely used in public private partnership projects
in infrastructure. RBI has also permitted Banks
Returns in these schemes are linked to the
(Authorised Dealer Category I) to open escrow
fortunes of the stock market. Investors should
accounts on behalf of Non-Resident corporates
assess their respective risk appetites before
for acquisition / transfer of shares / convertible
investing. shares of an Indian company.
equity shAre esops
A security issued by a company to those who Employee Stock Option Plans (ESOPs) is a
contributed capital in its formation shows provision under which a foreign company (i.e.,
ownership in the company. The other terms for it MNC) offers shares to its employees overseas. Till
are ‘stock’ or ‘common stock’. February 2005 in the case of local firms, an MNC
Such shares might be issued via public issue, needed a permission from the RBI before allotting
bonus shares, convertible debentures, etc. and ESOPs, but since then, it does not need any
may be traded on the stock exchanges. permission provided the company has a minimum
Such shareholders have a claim on the earnings of 15 per cent holding in the Indian arm.
and assets of the company after all the claims have
been paid for. This is why such shareholders are exploDing Arms
also known as the residual owners.
A term associated with the mortgage business
escrow Account which became popular after the subprime crisis hit
the US financial system in mid-2007. Exploding
In simple terms, an ‘escrow account’ is a third arms are mortgages with initial low, fixed interest
party account. It is a separate bank account to rates which escalate to a high floating rate after a
hold money which belongs to others and where period of two to three years.