Joint Ventures vs Special Purpose Vehicles(SPV)

Sl. Category Joint venture Special Purpose Vehicle(SPV)

No.
1. Definition A JV may be defined as any A Special purpose vehicle, as the
arrangement whereby two or more name suggests, is formed for a
parties co-operate in order to run a special purpose: therefore its powers
business or to achieve a commercial are limited to what might be required
objective. to attain that purpose and its life is
destined to end when the purpose is
attained.
2. Types This co-operation may take various A broad categorization can be made
forms, such as equity-based or as On- Balance Sheet SPV and Off
contractual JVs. It may be on a long- Balance Sheet SPV. The operations
term basis involving the running of a are limited to the acquisition and
business in perpetuity or on a limited financing of specific assets. SPVs are
basis involving the realization of a generally a subsidiary company
particular project. It may involve an whose obligations are secured even
entirely new business, or an existing if the parent company goes bankrupt.
business that is expected to
significantly benefit from the
introduction of the new participant.
3. Purpose a symbiotic business alliance betweenA corporation sponsors an SPV for a
two or more companies whereby the particular purpose. It includes
complimentary resources of the isolation of an activity, asset or
partners are mutually shared and put to
operation from the rest of sponsor’s
use. It is an effective business strategy
business. The isolation is essential
for enhancing marketing, positioning for external investors as they are not
and client acquisition. affected by the generic risks of the
originating entity.
4. Documentation A JV can be a formal contractual An SPV can be in all possible forms
agreement or an informal of a business entity that is capable of
understanding between the parties. being formed. Accordingly the
For a Formal JV it requires a JV provisions of parent law for
Agreement, Shareholder agreement, incorporation of such entity, i.e., the
MoU, AoA and other necessary Companies Act, Trust Act, the
documents such as trade mark licenses Partnership Act, etc. will apply to
and technology transfers in case of JV formation of such SPVs.
is a company.
In case of LLP, LLP agreements and
other necessary documents such as
trade mark licenses and technology
transfers
In case of informal JV it can be a
partnership requires a Partnership
Agreement and other necessary
documents such as trade mark licenses
and technology transfers.
In case of Cooperation, Strategic
Alliance , Consortium it can be
cooperation agreement and and other
 necessary documents such as trade
mark licenses and technology transfers
5. FDI Foreign investment into a JV Company Foreign Companies also resort to
can be routed via the FDI scheme as SPV route by foreign companies to
prescribed under the FEMA. enter into areas of business in
India, which are prohibited for
them under Automatic route. The
foreign policy does not permit
foreign investors to invest in
certain business activities in India
without the approval from FIPB
6. Securities Compliance requirement varies The SPV is allowed to raise debt
depending upon the residency of the which will be backed by these
transferor and transferee of the shares. receivables and their future cash
In the JVA, any clauses dealing with flows. The difference between the
transfer of shares, should be made incomes received from these
subject to applicable laws. Further, the receivables and cost of servicing
time likely to be taken for obtaining the that debt will be profit/earning of
necessary approvals should also be the SPV. By securitization through
considered. In the event that shares are SPV the risk involved in this
being transferred or issued to a non-
activity is separated from the
resident, the pricing of the shares will
general business.
need to be in accordance with certain
pricing guidelines.
7. Taxation In case JV is a company, A corporate SPVs are often used to make a
tax rate of 30% is presently applicable transaction tax efficient by
to domestic Indian companies. A choosing the most favourable tax
dividend distribution tax (“DDT”) of residence for the vehicle. SPVs are
15%19 is payable on a gross basis method of financial engineering
upon distribution of dividends to the schemes which have as their main
shareholders. goal, the avoidance of tax or the
In case JV is Partnership, The rate of manipulation of financial
income tax for a partnership and an statements.
LLP are the same as for corporate
entities, that is, 30%. However, the
share of profit in a partnership firm
(including LLP) is exempt from tax in
the hands of the partners.
An unincorporated joint ventures may
have significant tax issues if not
structured properly as the Indian tax
authorities may qualify such
contractual arrangements as an
“association of persons”, a term not
defined under the ITA, and only
interpreted in case laws. If a
contractual arrangement qualifies as an
“association of persons”, then the
Indian tax authorities could tax such
association of persons at the maximum
 marginal rate, which could be as high
as 40% if any member of such
“association of persons” is a non-
resident.
7. Competition When an existing company is SPV prevents competitors
Law converted into JV either through accessing the technology through
acquisition of shares or through pre-existing license deals.
subscription of fresh shares a filing
will need to be made with the CCI in
the event that the prescribed thresholds
are breached.
However, where a new joint venture
entity is being set up, it would need to
be seen whether such a new entity
would be considered to be an
‘enterprise’ within the meaning of this
provision
8. Funding Indian banks are only allowed to have Long term investment in
limited exposure to capital markets, infrastructural and industrial
and to that extent they bank funding for projects based on the projected
purchase of shares may not always be cash flows of the project is project
forthcoming financing. A project financing
FDI in India is subject to sectoral caps structure involves a number of
and conditionality’s, and also subject equity investors and a syndicate of
to pricing norms in as much as no non- banks that provides loans to the
resident can subscribe to or purchase operation. The loans are commonly
Indian securities below the fair value
secured by the project assets and
of shares as per any internationally
paid entirely from future cash flow
accepted pricing methodology for
valuation of shares on an arm’s length generated from the project, rather
basis and no non-resident can sell than from the general assets or
Indian securities above the price creditworthiness of the project
worked out as per any internationally sponsors. The assets are shielded
accepted pricing methodology for by creating a special purpose entity
valuation of shares on an arm’s length for each project. The special
basis. Further, any purchase or purpose entity has no effects other
subscription to by a non-resident of the project.
Indian securities that are not in the
nature of equity, or instruments
compulsorily convertible into common
equity, shall qualify as external
commercial borrowings or “ECB”
7. Regulation Various regulations pertaining the A special purpose entity is
Income Tax, Securities, FDI, established often to overcome
Competition laws have to be looked regulatory transactions such as
upon and to be complied with to a regulations relating such as
smooth function of a JV. regulations relating to nationality
of ownership of specific assets.