Special purpose vehicle (spv)

Presentation of Special Purpose Vehicle (SPV)

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

2. O verview 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.