The Hindu Business Line : Escrow accounts yet to make mark in IT industry

AS a cautious investor, you always tried to ensure that your investments remain well protected against any future risk, be it while buying a car or property. So, should companies investing heavily in business critical software think any differently?

Globally, businesses have frequently opted for a risk mitigation clause that requires software vendors to store the source code in an `escrow account', enabling the client to obtain access to the all-important programming code in case the software licensor goes bankrupt or refuses to service the account.

Even Indian product companies serving overseas clients have entered into `escrow agreements' in a bid to enhance client confidence. So should the Indian IT user market - whose potential has been well documented - be any different?

Strangely, it is. Mr Sudhir Ravindran, Director, EscrowTech India, which claims to be the first software source code escrow agency in India, says: "Awareness among customers is rather low. Most software companies question the need for source code escrow services when their own clients don't seem to be aware of it."

Software escrow refers to the deposit of software source code (programming code) into an account held by a third party escrow agent.

The buyer typically requests for an escrow to ensure maintenance of the software. The software source code is released to the buyer if the seller files for bankruptcy or otherwise fails to maintain and update the software as promised in the software licence agreement.

Subex Systems, which sells telecom software solutions, feels that it is a good practice. "Escrow agreement is a common practice in matured markets such as Western Europe, US, and Canada. It increases the comfort level of the customer," says Mr Subash Menon, CEO and President.

Even though the practice is not widespread in India, early signs of the concept are seen in some contracts.

"We are seeing clauses where clients in India are not actually escrowing but protecting their right to escrow. This means, if at any point the customer demands an escrow, the vendor will have to permit it."

It acts as `insurance' for companies who prefer a new, marginal or small application provider but want to hedge against a future risk. Industry watchers say that in India, a contract does not have such provisions but there is always an informal understanding that the customer would get the source code when required.

The `informal' understanding between a buyer and a seller in the same country stems from the fact that the jurisdiction issues are clear to both of them. Also, the buyer is aware of the vendor's ability to stay above water. When they belong to different countries, says Mr Amar Chintopanth, Chief Financial Officer of 3i Infotech, "it is general practice to have an escrow agent in a neutral country so that both sides feel comfortableWe have followed this practice in deployments in Malaysia and Africa. The UK seems to be the favoured country for escrow accounts, as the legal system there is clear."

He adds: "As user companies go in for deployment by smaller foreign product players in future, the concept will see increasing acceptance."

Interestingly, IT users are not the only targets for software escrows. Mr Ravindran of EscrowTech says: "Venture capitalists could also benefit from software escrows. They invest quite a bit in product companies. When a company goes down, it need not take the work, already done, with it. The venture capitalist would have access to the software code through the escrow. He could use it in another of his investments or get someone to deploy it in the way he wants it done."

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