A special purpose vehicle Is an entity created by a parent company
to carry out a special and specific activity. A SPV is created to perform that
special activity because of its character of remoteness from the parent company
(i.e.) the activities of a SPV does not affect the parent company and also does
not reflect in the balance sheet of the parent company.
A special purpose
vehicle is a separate legal entity which has all the attributes of a corporation
such as owning assets, capacity to and get sued etc. It is also called as
special purpose entity. SPV is a subsidiary company to the parent company while
its liabilities or obligations does not affect the parent company.
A SPV is a
separate legal entity which can be in form a company, limited liability company,
partnership, limited liability partnership etc. Special Purpose Vehicles can be
used for many purposes such as to isolate a new investment or project from the
parent company, for asset reconstruction etc…
Characteristics of SPV
Uses of SPV
- It is a separate legal entity.
- It can own assets, can sue and can be sued.
- The SPV's financial records are remote from the balance sheet of the
- The SPV works like a subsidiary company and it is controlled by the
- Liabilities of the parent company does not affect the SPV.
- When the parent company becomes bankrupt the creditors cannot seize the
assets of the SPV to recover their debts.
- Asset transfer
- Risk management
- Raise funds
Banks lend money to its customers and recover it from the termly
payments of the debtor and also profits from the interest levied on the debt,
this is a usual process of loans. The bank has to wait for a long time to
recover the debt and to make profits out of it, instead the banks clusters
similar types of loans and sells it to a SPV which in this case is an Asset
Reconstruction Company (ARC) with a discounted price. The bank also transfers
the right to collect the debt and the interest of it to the ARC.
The ARC divides the loan securities into small units and sell these
to qualified buyers in the market in exchange of security receipts to raise
funds, with the raised fund the ARC will pay the bank. The ARC then recovers the
debts and interest from the debtors and pays the investors who bought the
securities issued by the ARC.
In this process of securitization, the bank gets a minimum profit
and increased cash flow which helps it to give out more loans, the ARC collects
the debts and interests from the debtors from which both the ARC and the
investors obtain profits.
When a company needs to transfer a set of assets to a person or some
other company it has to undergo several permits and processes for every asset to
be transferred to simplify such difficulties a SPV can be formed with the assets
to be transferred and the SPV can be sold as a whole, this reduces the legal
compliances to be followed by a company while transferring their assets.
When the parent company is unstable it can create a SPV with some of
its assets, if the parent company becomes bankrupt the creditors cannot seize
the properties of the SPV. The SPV can also be used to invest in a new project
idea which might be risky so that in event of loss or failure of the project the
parent company will not be affected by the failure of SPV.
When a parent company starts a new project in form of a SPV and avails
loan from a bank, the bank will only look into the status of the SPV and does
not concern about the parent company. It is a benefit for both the bank and the
parent company as the bank need not worry about the activities of the parent
company as it does not affect the SPV.
Company 'A' starts a new project in Chennai in form of a SPV. The
total investment required for the project is 1 crore, the parent company invests
30 lakhs and for the remaining 70 lakhs it avails a loan from a bank.
If the Chennai project fails the parent company will lose only 30