SPV - Special Purpose Vehicle

SPV – Special Purpose Vehicle

 

Key Takeaways

ü  Separate legal entity

ü  To achieve specific objectives/goals

ü  Isolated from the firm

ü  Can leverage future earnings to raise funds

Salient features

·         Definition of SPV – A fenced organization having limited predefined purposes and a legal personality.

·          Also called as SPE – Special Purpose Entity (in USA) or SPC – Special Purpose Corporation or FVC – Financial Vehicle Corporation

·         A legal entity created to fulfil single, well defined and narrow objective/purpose.

·         Typically used by firms to isolate the firm from financial risk

·        ·          Primarily, a business association of persons or entities eligible to participate in the association.

·          Usually formed to raise funds from the market by collateralizing future receivables.

·         It is independent of members subscribing to the shares of SPV.

·         Concept: Usually, a sponsoring firm hives off or transfers its assets or activities from the rest of the company into an SPV. This isolation of assets is important for providing comfort to investors. The assets or activities are distanced from the parent company; hence the performance of the new entity will not be affected by the ups and downs of the originating entity. The SPV will be subject to fewer risks and thus provide greater comfort to the lenders.

·         Basically, a company can leverage future earnings to raise funds.

 

Advantages:

 

ü  Separating the risk.

ü  Protected against risks like insolvency.

ü  Best suited for Project financing.

 

 

Examples of SPVs in India

1.       NHSRC - National High Speed Rail Corporation. The Company has been modelled as ‘Special Purpose Vehicle’ in the joint sector with equity participation by Central Government through Ministry of Railways and two State Governments viz. Government of Gujarat and Government of Maharashtra.

2.       LTMRHL – Larsen & Toubro Metro Rail Hyderabad Limited (for Hyderabad Metro)

3.       IRSDC - Indian Railways Station Development Corporation ltd (by RLDA & IRCON)

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