Tuesday, April 12, 2011

SPV (Special Purpose Vehicle)

SPV is an entity which is formed for a single, well-defined and narrow purpose. An SPV can be formed for any lawful purpose & generally  to raise funds by collateralising future receivables.

SPV vis a vie Company

The company, as distinguished from an SPV, may be called a general purpose vehicle. A company may do many things which are mentioned in the  (MoA) memorandum of association or permitted by the Companies Act. An SPV may also do the same, but its scope of operation is limited and focused. If it is not so, the SPV had better be called a company. The MoA is quite narrow in the case of an SPV.
This is basically to provide comfort to lenders who are concerned about their investment.

Process of Establishment of SPV
Generally, a sponsoring corporation hives off 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

 


The above figure shows the general model of the structure of project finance. There may be a many variations to this basic model. For instance, bonds may not be issued in a project, and lenders may include international lending agencies such as the World Bank and Asian Development Bank. Further, each party may assume several roles.


Advantages of setting an SPV

Risk sharing: Corporate may use SPVs to legally isolate a high risk project/asset from the parent company and to allow other investors to take a share of the risk.

Securitization: SPVs are commonly used to securitize loans (or other receivables). For example, a bank may wish to issue a mortgage-backed security whose payments come from a pool of loans. However, these loans need to be legally separated from the other obligations of the bank. This is done by creating an SPV, and then transferring the loans from the bank to the SPV. 

For competitive reasons: For example, when Intel and Hewlett-Packard started developing IA-64 (Itanium) processor architecture, they created a special purpose entity which owned the intellectual technology behind the processor. This was done to prevent competitors like AMD accessing the technology through pre-existing licensing deals.

Financial engineering: SPVs are often used in complex financial engineering schemes which have, as their main goal, the avoidance of tax or the manipulation of financial statements.

Regulatory reasons: A special purpose entity can sometimes be set up within an orphan structure to circumvent regulatory restrictions, such as regulations relating to nationality of ownership of specific assets.

Property investing: Some countries have different tax rates for capital gains and gains from property sales. For tax reasons, letting each property be owned by a separate company can be a good thing. These companies can then be sold and bought instead of the actual properties, effectively converting property sale gains into capital gains for tax purposes.

For details about SPV in Indian highways & road projects please look at

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