special purpose vehicle

1. Special Purpose Vehicle(SPV)
• 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.

2. 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.

3. Web Of contracts for an SPV
Construction
Contractor
Building
Contract
Special
Purpose
Vehicle
Insurance
Companies
Rating
Agencies
Service
Contract
O & M
Contractor
Procuring
Authority
Users of the
infrastructure
and serviceService and
quality delivered
User Fees
Contract
Enforcement
Sevice Fees
& subsidies
Sponsors
Lenders
Equity Finance
Debt Finance
Debt Insurance
Debt Rating

4. 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.

5. 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.

6. 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.

7. • 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.

8. • 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.

9. • 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)

10. The importance of infrastructure for rapid economic development cannot
be overstated. The most glaring deficit in India is the infrastructure deficit.
However, there are many infrastructure projects that are financially viable
but, in the current situation, face difficulties in raising resources. Therefore,
it is imperative that such projects may be funded through a financial SPV, as
proposed by the finance ministry.
When large infrastructure projects are implemented, the foreign exchange
resources could be drawn for financing necessary imports. Accordingly, the
finance ministry proposed to establish an SPV to finance infrastructure
projects in specified sectors during the Budget. Roads, ports, airports and
tourism would be sectors that can benefit most from the SPV.
The projects are to be appraised by an inter-institutional group of banks
and financial institutions. The SPV will lend funds, especially debt of longer
term maturity, directly to the eligible projects to supplement other loans
from banks and financial institutions.