SPECIAL PURPOSE

VEHICLE IN
PROJECT FINANCE
 SPV (Special Purpose Vehicle)
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.

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.
 Why is a SPV Created?
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.
 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.
Contd…
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.

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.

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).
Example:
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.
https://www.slideshare.net/dvip90/spv-59468811
https://infrastructure-projectfinance.blogspot.com/2011/04/spv-special-pu
rpose-vehicle.html