Your foreign buyer's escrow clause looks standard. FEMA caps how much of it is allowed

Rule 9(6) sets two separate limits on the same holdback, not more than 25% of the total price, and not for longer than 18 months from the date the transfer agreement is signed. A deal that keeps the escrowed amount comfortably under 25% can still fail on the time limit alone, since a representations-and-warranties escrow in a Western-style deal is often set at 18 to 36 months to cover a warranty claim window, longer than what this rule allows. The two limits are independent: passing one doesn't clear the other, and a term sheet drafted against a US or UK precedent, without anyone checking it against FEMA, is the most common way this gets missed.

This rule is about actual shares of the company changing hands between a resident and a non-resident, a genuine M&A transaction. It is a different transaction, and a different FEMA and tax regime, from selling the business itself as a going concern, a slump sale under Section 50B, where the company's assets and undertaking are sold rather than its shares. It also only reaches a secondary transfer, existing shares being sold, not a primary round where the company issues fresh shares to a new investor, deferred consideration in that scenario is a different question entirely.

A holdback that exceeds either limit isn't automatically off the table, but it isn't automatic-route FDI either. The practical routes: restructure the protection as representations-and-warranties insurance instead of a cash escrow, which sidesteps the cap entirely since no consideration is actually deferred; shorten the escrow period or reduce the amount to fit inside 25%/18 months, which may mean renegotiating the underlying commercial protection the buyer wanted; or apply to RBI for specific approval outside the automatic route, which is slower and not guaranteed. Which makes sense depends on how much the escrow term actually matters to closing the deal versus how much flexibility either side has left to renegotiate it.

The recurring pattern: the term sheet is negotiated and largely agreed on commercial grounds before anyone checks it against FEMA's pricing and deferred-consideration rules, since the deal lawyers on both sides are often more focused on the commercial protections than the exchange-control mechanics. It surfaces at the Form FC-TRS filing stage, when the bank or the AD category-I authorised dealer flags that the payment structure itself isn't automatic-route compliant, by which point the parties have already agreed commercial terms around an escrow structure that now needs reopening. Checking the deferred-consideration and escrow terms against Rule 9(6) at term-sheet stage, before it's signed, is far cheaper than renegotiating it after.