A special purpose vehicle Is an entity created by a parent company to carry out a special and specific activity. A SPV is created to perform that special activity because of its character of remoteness from the parent company (i.e.) the activities of a SPV does not affect the parent company and also does not reflect in the balance sheet of the parent company.

A special purpose vehicle is a separate legal entity which has all the attributes of a corporation such as owning assets, capacity to and get sued etc. It is also called as special purpose entity. SPV is a subsidiary company to the parent company while its liabilities or obligations does not affect the parent company.

A SPV is a separate legal entity which can be in form a company, limited liability company, partnership, limited liability partnership etc. Special Purpose Vehicles can be used for many purposes such as to isolate a new investment or project from the parent company, for asset reconstruction etc…

Characteristics of SPV

• It is a separate legal entity.
• It can own assets, can sue and can be sued.
• The SPV's financial records are remote from the balance sheet of the parent company.
• The SPV works like a subsidiary company and it is controlled by the parent company.
• Liabilities of the parent company does not affect the SPV.
• When the parent company becomes bankrupt the creditors cannot seize the assets of the SPV to recover their debts.

Uses of SPV

1. Securitization
2. Asset transfer
3. Risk management
4. Raise funds

Securitization
Banks lend money to its customers and recover it from the termly payments of the debtor and also profits from the interest levied on the debt, this is a usual process of loans. The bank has to wait for a long time to recover the debt and to make profits out of it, instead the banks clusters similar types of loans and sells it to a SPV which in this case is an Asset Reconstruction Company (ARC) with a discounted price. The bank also transfers the right to collect the debt and the interest of it to the ARC.

The ARC divides the loan securities into small units and sell these to qualified buyers in the market in exchange of security receipts to raise funds, with the raised fund the ARC will pay the bank. The ARC then recovers the debts and interest from the debtors and pays the investors who bought the securities issued by the ARC.

In this process of securitization, the bank gets a minimum profit and increased cash flow which helps it to give out more loans, the ARC collects the debts and interests from the debtors from which both the ARC and the investors obtain profits.

Asset Transfer
When a company needs to transfer a set of assets to a person or some other company it has to undergo several permits and processes for every asset to be transferred to simplify such difficulties a SPV can be formed with the assets to be transferred and the SPV can be sold as a whole, this reduces the legal compliances to be followed by a company while transferring their assets.

Risk Management
When the parent company is unstable it can create a SPV with some of its assets, if the parent company becomes bankrupt the creditors cannot seize the properties of the SPV. The SPV can also be used to invest in a new project idea which might be risky so that in event of loss or failure of the project the parent company will not be affected by the failure of SPV.

Raise Funds
When a parent company starts a new project in form of a SPV and avails loan from a bank, the bank will only look into the status of the SPV and does not concern about the parent company. It is a benefit for both the bank and the parent company as the bank need not worry about the activities of the parent company as it does not affect the SPV.

Illustration:
Company 'A' starts a new project in Chennai in form of a SPV. The total investment required for the project is 1 crore, the parent company invests 30 lakhs and for the remaining 70 lakhs it avails a loan from a bank.

If the Chennai project fails the parent company will lose only 30 lakhs.