Wednesday 10 June 2015

Special Purpose Vehicles

Why in news?
It is found in news articles almost every single day. Today, it found mention with reference to steel projects in India. Posco and SAIL are working out to jointly set up a steel project through SPVs in addition to the South Korean firm’s proposed Rs 52,000 crore plant at Jagatsinghpur, Odisha.

Source: ET

So, what is an SPV?

SPV, a Special Purpose Vehicle, is an entity formed for a lawful, single, well-defined and narrow purpose. An SPV is mainly formed to raise funds by collateralising future receivables. 

How is it different from a Company?

SPV is a company, comes under the purview of Companies Act, and has all the attributes of a Legal person. It can take form of a limited partnership, limited liability company, trust, corporation, etc.

A company on the other hand can be seen as a GENERAL purpose vehicle as it can do many things mentioned in the Memorandum of Association (MoA) or permitted by the Companies Act

An SPV may also do the same things, but its scope of operation is more limited and focused. Had it not been so, the SPV would have been called simply 'a company'. In other words, the MoA is quite narrow in the case of an SPV. 

How is an SPV established?
To establish an SPV, there are sponsors and promoters. The sponsoring/parent company keeps the 'assets and activities' separate from its own activities. 
Hence the performance of the new entity will not be affected by the ups and downs of the originating entity - so, fewer risks, more security to investors. 
For example, in the Steel Industry of India, government is promoting SPVs in greenfield steel projects. In this arrangement, SPV will be will have Centre and states as stakeholders:
  • Central PSUs: >51% equity
  • State mining corporations: rest of the equity + 
    • State governments to provide land, water and regulatory clearances 

What are the benefits over other modes?

  • Since the purpose of SPV is very focused, it provides comfort to lenders who are concerned about their investment.
  • Availability of long-term funds for infrastructure sector projects
  • SAIL chairman CS Verma is a vocal supporter of this mechanism, which he argues would work well on the ground. “We have adequate land to set up projects based on the SPV model. Secondly we have trained personnel and requisite expertise in setting them up. Most importantly, the state governments would be on the board right from the beginning and would gladly facilitate them,” Verma argues.
Seeing the advantages of this method, other industries like Railways, are also joining the league.


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