Special Purpose Vehicle (SPV) - Overview, Examples, Types, Uses, Benefits, Limitations And More

A Special Purpose Vehicle (SPV) is a legal entity established for a specific, well-defined purpose. It is frequently founded to meet the authors’ objectives, such as isolating a company’s assets and/or projects. The assets are brought under its authority to give investors more confidence in their investments. The SPV is primarily used to reduce risk and free up capital. As a result, both the SPV and the company that created it are safe from bankruptcy. Loans or any other sort of receivable can also be secured using SPVs. 

Special Purpose Vehicle is one of the most important topics for the UPSC IAS Examination. The topic falls under the Economy Section of the General Studies Paper 3 Syllabus. This will also be very useful for aspirants in the UPSC Prelims Exam.

In this article on Special Purpose Vehicle, we shall discuss its meaning, objectives, significance and a few other details. Also, study about the Five Year Plans in India from the linked article.

What is Special Purpose Vehicle?

A Special Purpose Vehicle (SPV) is a separate legal entity. It is created for a specific purpose or activity. SPVs are commonly used to isolate assets or risks from the parent company. They are also used to structure complex financial transactions.

Overview of the Special Purpose Vehicle

A special purpose vehicle (SPV) is a legal entity created for a specific purpose. This may include financing a project or holding assets. SPVs are often used to isolate risk or to raise capital. 

• SPVs can be structured in a variety of ways. They typically have the following characteristics:
  • They are separate legal entities from their sponsors.
  • They have their own assets and liabilities.
  • A third party manages them.
  • It is frequently referred to as a bankruptcy-remote entity.
• SPVs are often used to finance large projects, such as power plants or oil pipelines. This is because SPVs can isolate the risk of the project from the sponsor. This makes it easier to raise capital. 
• If accounting loopholes are abused, these vehicles can become a financially disastrous tool. 
  • Example: Enron crisis in 2001.

Special Purpose Vehicle Examples 

• An SPV can be used to securitize assets, such as mortgages or auto loans. 
• SPVs are also commonly used in joint ventures between two or more companies. 
• SPVs are also used in property deals, such as buying and selling buildings or developing land.
• SPVs can also be used to isolate assets or risks from the parent company. For example, a company may create an SPV to hold all of its hazardous waste.

Study about the Navratna Companies here.

Special Purpose Vehicle in India

• In India, SPVs are commonly used for infrastructure development projects, such as roads, bridges, power plants, etc.
• SPVs have been widely utilized in India's major infrastructure initiatives. This includes smart cities, metro rail projects, and renewable energy ventures.
• The Government of India often establishes SPVs to drive and oversee the implementation of key national projects.
• The use of SPVs helps streamline project execution and mitigate risks.

Know more about the Financial Action Task Force for UPSC!

Types of Special Purpose Vehicles (SPVs)

There are many different types of SPVs, but some of the most common include:

Asset-backed securitization SPVs

These SPVs are used to securitize assets, such as mortgages, auto loans, and credit card receivables. This involves transferring the assets to the SPV. It then issues securities backed by the assets. This allows investors to buy into the assets without having to take on the full risk of the underlying loans.

Project finance SPVs 

These SPVs are used to finance large infrastructure projects. This includes power plants, roads, and bridges. The SPVs are typically structured as non-recourse projects. This means that the lenders have limited recourse to the project sponsors.

Joint venture SPVs

These SPVs are used to create joint ventures between two or more companies. This allows the companies to pool their resources and expertise for a specific project without merging their businesses.

Real estate SPVs

These SPVs are used to acquire, develop, and manage real estate assets. This can be used to isolate the risks of real estate investments from the rest of the business.

Investment SPVs

These SPVs are used to invest in a variety of assets, such as stocks, bonds, and private equity. This can be used to diversify the investment portfolio or to invest in assets that are not suitable for direct investment.

Know more about Wholly Owned Subsidiaries for UPSC!

How can SPV be formed?

• An SPV can be formed in several ways, such as a limited partnership, a trust, a corporation, or a limited liability corporation.
• It might be designed to be self-managed, funded, and owned.
• SPVs assist enterprises with asset securitization, joint venture formation, corporate asset isolation, and other financial processes.

Know more about the management of a joint stock company for UPSC!

Major Uses and Benefits of Special Purpose Vehicles (SPVs)

SPVs offer many benefits, including:

• SPVs can be used to isolate assets from the parent company. This can protect the assets from the parent company's creditors or from liability in the event of a lawsuit.
• SPVs can be used to manage risk. For example, a company may create an SPV to hold all of its hazardous waste. This would help to protect the company from the liability of any accidents or environmental damage.
• SPVs can be used to achieve tax efficiency. For example, a company may create an SPV to invest in foreign markets. This can help to reduce the company's tax liability.
• SPVs can be structured to meet the specific needs of the transaction. This makes them a very flexible financial instrument.

Study about the difference between winding up and dissolution of a company here.

Limitations of SPVs

SPVs also have some limitations, including:

• Creating and maintaining an SPV can be expensive. There are legal and accounting fees associated with setting up the SPV. There are ongoing costs for administrative and compliance purposes.
• SPVs can be complex financial instruments. It is important to have a clear understanding of how they work before using one.
• SPVs are often used for complex financial transactions. The details of these transactions may not be publicly disclosed. This can make it difficult to understand the risks associated with investing in an SPV.

Special Purpose Vehicle (UPSC Economy): Download PDF Here!

We hope that all your doubts regarding the Special Purpose Vehicle will be cleared after going through this article. You can download the Testbook App now to check out various other topics relevant to the UPSC IAS Exam.

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