An SPV is a separate legal entity created by a sponsoring firm to fulfill a temporary objective. SPVs are typically used to isolate financial and legal risk from the parent company. Common types of SPVs include those used for risk sharing, securitization of loans, asset transfers, and property sales for tax benefits. While SPVs provide benefits like isolated risk and tax savings, they also have disadvantages such as lower access to capital and potential regulatory and accounting issues. An example is Patna Highway Projects, an SPV created by Gammon India to construct a highway project while isolating risks from the parent company.

1. Special Purpose Vehicle
(SPV)
Topic No.06

2. Overview
What is SPV
Purpose of SPV
Type of SPV
Advantages of SPV
Disadvantages of SPV
Example

3. Special Purpose Vehicle or SPV
A special purpose vehicle (SPV) is a
financial entity created for the specific
purpose and limited purpose. It is separate
legal entity created by its sponsors or parent
company for fulfill a temporary objective of
the sponsoring firm. Its powers are very
restricted and its life is destined to end when
the purpose is attained.

4. Purpose of Creating SPV
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.

5. Types of SPV

6. Use of SPV
1. Risk sharing : A corporation’s project may entail significant risks. Creating an
SPV allows the corporation to legally isolate the risks of the project and then
share this risk with other investors.
2. Securitization : Securitization of loans is a common reason to create an SPV.
For example, when issuing mortgage-backed securities from a pool of
mortgages, a bank can separate the loans from its other obligations by
creating an SPV. The SPV allows investors in the mortgage-backed security
to receive payments for these loans before the other debtors of the bank.
3. Asset transfer : Certain types of assets can be hard to transfer. Thus, a
company may create an SPV to own these assets. When they want to
transfer the assets, they can simply sell the SPV as part of a mergers and
acquisitions (M&A) process.
4. Property sale : If the taxes on property sales are higher than that of the
capital gain, a company may create an SPV that will own the properties for
sale. It will allow them to sell the SPV instead of the properties and pay tax
on the capital gain instead of the property sales tax.

7. Web of contracts for SPV

8. Advantages of SPV
• Isolated financial risk
• Direct ownership of a specific asset
• Tax savings, if the vehicle is created in a
haven, such as the Cayman Islands
• Easy to create and set up the vehicle

9. Disadvantages of SPV
• Lower access to capital at the vehicle level
(since it doesn’t have the same credit as the
sponsor)
• Market to Market accounting rules could be
triggered if an asset is sold and thus impacts
the sponsor’s balance sheet
• Regulation changes could cause serious
problems for companies using these vehicles
• The optics surrounding SPVs is sometimes
negative

10. Example of SPV
Patna Highway Project Limited :
Patna Highway Projects is a special purpose
vehicle (SPV) formed by Gammon India Limited
for the construction of 4 Lanning Highway
Project in Patna State of Bihar for the National
Highway Authority of India.