What is a special purpose vehicle?

Mar 21 2005, 00:00 IST
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In his Budget speech, finance minister P Chidambaram has proposed the setting up of a financial special purpose vehicle (SPV) to fund projects in the infrastructure sector. The proposed SPV is expected to lend funds, especially debt funds of longer maturity, directly to eligible projects to supplement loans from banks and financial institutions. The SPV, according to the proposal, will become a vehicle for channelising funds for projects in the roads, ports, airports, and tourism sectors.

SPV is also called special purpose entity (SPE) or special purpose corporation (SPC). In the recent past, it was the Enron debacle that popularised this word, though for the wrong reasons. The collapse of the Enron SPV notwithstanding, the term SPV continues to be a buzzword in the financial sector. FE takes a Closer Look at the concept of the SPV and its implications for the sponsoring company, investors and infrastructure:

What is an SPV?

The acronym stands for special purpose vehicle. The word vehicle can be interchanged with market entity. In the US, the term used is special purpose entity (SPE). 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. No SPV can be formed for an unlawful purpose, or for undertaking activities which are contrary to the provisions of law or public policy. An SPV is, primarily, a business association of persons or entities eligible to participate in the association. According to Joy Jain of PricewaterhouseCoopers, an SPV is mainly formed to raise funds by collateralising future receivables.

Is there a difference between a special purpose vehicle and a company?

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. The SPV has an existence of its own in the eyes of law. It can sue and be sued in its name. The SPV has to adhere to all the regulations laid down in the Companies Act. Members of an SPV are mostly the companies and individuals sponsoring the entity. An SPV can also be a partnership firm. This, however, is unusual.

The company, as

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