Special Purpose

Vehicle(SPV)

Professor & Lawyer

Puttu Guru Prasad
Senior faculty for
Management Studies-VVIT
Special Purpose Vehicle(SPV)
The name SPV is given to an entity which
is formed for a single, well-defined and
narrow purpose. An SPV can be formed for
any lawful purpose.
 SPVs are mostly formed to raise funds
from the market. Technically, an SPV is a
company. It has to follow the rules of
formation of a company laid down in the
Companies Act. Like a company, the SPV
is an artificial person. It has all the
attributes of a legal person. It is
independent of members subscribing to
the shares of the SPV.

Special Purpose Vehicle(SPV)

SPV
A special purpose vehicle (SPV) is a
financial entity created for the purpose of
fulfilling a very specific and limited use. It is
separated from the sponsoring or parent
company for legal and tax reasons, and
may be controlled by several companies
working together.
 Web Of contracts for an SPV
Construction
Contractor
Building
Contract
Equity Finance
Sponsors
Contract
Enforcement
Debt Finance Special Procuring
Lenders Authority
Purpose Sevice Fees
Vehicle & subsidies
Insurance Debt Insurance
Companies

Rating Debt Rating User Fees

Agencies Users of the
Service infrastructure
Contract Service and and service
O&M quality delivered
Contractor
 SPV is usually created to isolate the
parent company from risk. In
addition to isolating risks, it is itself
isolated from financial risks at the
parent company such as bankruptcy,
and it is sometimes called a
bankruptcy remote entity for this
reason.

Why is a SPV Created?

Ratnagiri Gas and Power Pvt
Ltd (RGPPL) is a special
purpose vehicle (SPV)
formed by GAIL (India) and
NTPC to revive the 2,184
MW Dabhol power plant.
The SPV will have an equity
of Rs 1,500 crore.
The Registrar of Companies
has allotted the name to the
SPV and the documents
pertaining to incorporation
have been filed. The new
company will own and
operate the assets of the
erstwhile Dabhol Power
Company.
The company would also complete the
remaining works of the LNG terminal,
which is 75 per cent complete, and
also operate the terminal.

As promoters, GAIL would source the

LNG required to run the power plant
while NTPC would operate the plant
and negotiate the power purchase
agreement with Maharashtra state
electricity utilities.
The Dabhol plant has
been lying idle for over
four years after the
MSEB stopped drawing
power owing to payment
disputes with the then
main promoter Enron.
SPV

A special purpose vehicle (SPV),

as the name suggests, is formed
for a special purpose. Therefore,
its powers are limited to what
might be required to attain that
purpose and its life is destined to
end when the purpose is attained.
 SPVs are also referred to as a
"bankruptcy-remote entity" whose
operations are limited to the acquisition
and financing of specific assets. The
SPV is usually a subsidiary company
with an asset/liability structure and
legal status that makes its obligations
secure even if the parent company
goes bankrupt.

SPV
SPV
When a corporation, call it the
sponsor of the SPV, wants to achieve
a particular purpose, for example,
funding, by isolating an activity, asset
or operation from the rest of the
sponsor's business, it hives off such
an asset, activity or operation into
the vehicle by forming it as a special
purpose vehicle.
 This isolation is important for
external investors whose interest
is backed by such hived-off
assets, etc, but who are not
affected by the generic business
risks of the entity of the
originating entity.

SPV
SPV
Thus SPVs are housing devices - they house
the assets transferred by the originating
entity in a legal outfit, which is legally
distanced from the originator, and yet self-
sustained as not to be treated as the baby of
the originator.
An SPV is a firm, which embodies a financial
contract. SPVs are originally used to isolate
financial risk. A special purpose vehicle is
being set up to finance a large project
without putting the entire firm at
risk.(Non/Limited Recourse)
The importance of infrastructure for rapid
economic development cannot be overstated.
The most glaring deficit in India is the
infrastructure deficit. However, there are many
infrastructure projects that are financially
viable but, in the current situation, face
difficulties in raising resources. Therefore, it is
imperative that such projects may be funded
through a financial SPV, as proposed by the
finance ministry.
When large infrastructure projects are
implemented, the foreign exchange
resources could be drawn for financing
necessary imports. Accordingly, the
finance ministry proposed to establish
an SPV to finance infrastructure
projects in specified sectors during the
Budget. Roads, ports, airports and
tourism would be sectors that can
benefit most from the SPV.
The projects are to be appraised
by an inter-institutional group of
banks and financial institutions.
The SPV will lend funds, especially
debt of longer term maturity,
directly to the eligible projects to
supplement other loans from
banks and financial institutions.