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What is a special purpose vehicle?

What is a special purpose vehicle?
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What is a Special Purpose Vehicle. A legal entity created solely to serve a particular function, such as the facilitation of a financial arrangement...

A legal entity created solely to serve a particular function, such as the facilitation of a financial arrangement or creation of a financial instrument. In the financial realm, according to the Reserve Bank of India, securitisation offers higher quality assets to investors by virtue of the fact that the structures insulate investors from the bankruptcy risk of the originator.

In order to ensure that the assets actually achieve the bankruptcy remoteness, it is essential to move them out of the balance sheet of the Originator and park them with another independent entity. Typically an SPV is employed to purchase the assets from the originator and issue securities against these assets. Such a structure provides a comfort to the investors that they are investing in a pool of assets which is held on their behalf only by the SPV and which is not subject to any subsequent deterioration in the credit quality of the originator. The SPV is usually a thinly capitalised vehicle whose ownership and management are independent of the originator. The main objective of SPV is to distinguish the instrument from the originator.

Normally a company will transfer assets to the SPV for management or use the SPE to finance a large project thereby achieving a narrow set of goals without putting the entire firm at risk. SPVs are also commonly used in complex financings to separate different layers of equity infusion. Union Minister for Railways Suresh Prabhu has proposed that 'Special Purpose Vehicle' will be created to address infrastructural problems in the States. Odisha and Maharashtra have agreed to the Centre’s proposal.

"Some state or other always complains justice is not done to them in sanctioning railway projects. We have decided to have SPVs with each state to meet its specific requirements," he said. The Minister said each state will decide the priorities and send it to the Railways, which will execute projects under the SPV. "What surplus is generated will remain with the state for expansion of rail network and other works," he said.

Like a company, the SPV has to follow the rules of the Companies Act. It can sue and be sued in its name. 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.

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