Trust and retention account

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Querist : Anonymous

Querist : Anonymous (Querist)

21 May 2015 What is the Difference between a Trust & Retention Account and an Escrow Account?
Why the earlier is termed as a retention account.

CS Mitesh Mehta

CS Mitesh Mehta (Expert)
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22 May 2015 TRA mechanism has been a common feature in financing of infrastructure projects. It seeks to protect the project lenders against the credit risk (the risk of debt service default) by insulating the cash flows of the project company. This is done through shifting the control over future cash flows from the hands of the borrowers (project company) to an independent agent, called TRA agent, duly mandated by the lenders.

An Escrow Account is an arrangement for safeguarding the borrower against its customers from the payment risk for the goods or services sold by the former to the latter. This is achieved by removing the control over the cash flows from the hands of the customer to an independent agent, who in turn could ensure appropriation of cash flows as per the its mandate. The Escrow arrangement provides for directing a pre-determined payment stream from the customers of the borrower to a special account maintained with a designated agent. Payment / deposit by the user / buyer into such an account is assumed to be a valid discharge of his liability to the supplier of the goods / services. An Escrow arrangement involves parties different from the parties in a TRA mechanism. The Escrow arrangement would involve usually four parties: the lender, the borrower, the customers of the borrower and the Escrow Agent. The mandate to the Escrow Agent would normally be finalised by the lenders in consultation with the borrower and its customers.

Querist : Anonymous

Querist : Anonymous (Querist)

22 May 2015 Dear Sir,
I have already read that note in a RBI guideline. The query here is about the use of word retention. Kindly address the same.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Great question! Here’s a clear comparison between **Trust & Retention Account** and **Escrow Account**, and why the former is called a retention account:

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### 1. **Trust & Retention Account**

* **Purpose:**
Typically used in construction, infrastructure, or real estate projects. It holds money retained by the client or developer from payments due to contractors or suppliers. The retained amount acts as a **security** for satisfactory completion of work or to cover any defects/liabilities.

* **Nature:**
The account is controlled by a **trustee** or mutually agreed party, who manages the funds as per the terms of the contract or trust deed.

* **Why “Retention”?**
Because the client or principal **retains a portion of payment** as a security deposit until certain conditions are fulfilled (e.g., defect liability period ends). The money is “retained” to ensure performance and released later on meeting conditions.

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### 2. **Escrow Account**

* **Purpose:**
Used broadly in various commercial transactions to hold funds or assets on behalf of two or more parties until specific conditions or contractual obligations are fulfilled.

* **Nature:**
The escrow agent (often a bank or third party) holds the funds **neutral and independent**, disbursing them only when agreed conditions are met.

* **Examples:**
Property sale transactions, mergers and acquisitions, online payments, etc.

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### 3. **Key Differences**

| Feature | Trust & Retention Account | Escrow Account |
| ----------------------- | -------------------------------------------------- | ---------------------------------------------- |
| Purpose | Retain portion of payment as security in contracts | Hold funds/assets until conditions fulfilled |
| Control | Trustee or designated party | Neutral escrow agent (usually third party) |
| Common Usage | Construction, contracts with retention clauses | Various commercial, legal, real estate deals |
| Release Condition | After defect liability or contract conditions | On fulfillment of agreed terms between parties |
| Why called "Retention"? | Funds are *retained* from payments as security | Funds held in *escrow* to be released on event |

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### Summary

* **Trust & Retention Account** = Retained security amount held to ensure contract completion.
* **Escrow Account** = Neutral holding account for funds until contract conditions met.

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If you want, I can help you draft sample clauses or accounting treatment for either of these accounts. Would you like that?

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