special purpose vehicle

SPECIAL PURPOSE VEHICLE : 

SPECIAL PURPOSE VEHICLE

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A special purpose entity (SPE)/Special purpose vehicle (SPV) is a legal entity created to fulfill narrow, specific or temporary objectives. SPE's are typically used by companies to isolate the firm from financial risk. A company will transfer assets to the SPE 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.

Uses : 

Risk sharing: Corporate may use SPEs to legally isolate a high risk project/asset from the parent company and to allow other investors to take a share of the risk. Securitization: SPEs are commonly used to securitise loans. For example, a bank may wish to issue a mortgage-backed security whose payments come from a pool of loans. However, to ensure that the holders of the mortgage-back securities have the first priority right to receive payments on the loans, these loans need to be legally separated from the other obligations of the bank. This is done by creating an SPE, and then transferring the loans from the bank to the SPE. Uses

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For competitive reasons: To prevent competitors accessing the technology through pre-existing licensing deals.

Key features desired in an ideal SPV : 

An SPV must be capable of acquiring, holding and disposing of assets. It would be an entity, which would undertake only the activity of asset securitization and no other activity. An SPV must be bankruptcy remote i.e. the bankruptcy of Originator should not affect the interests of holders of instruments issued by SPV. Key features desired in an ideal SPV

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An SPV must be bankruptcy proof. i.e. it should not be capable of being taken into bankruptcy in the event of any inability to service the securitized paper issued by it. An SPV must have an identity totally distinct from that of its promoters/ sponsors/constituents/ shareholders. Its creditors cannot obtain satisfaction from them. A SPV must be tax neutral i.e. there should be no additional tax liability or double taxation.

Instrument issued by the an SPV should have the following characteristics: : 

Be capable of being offered to the public or private placement. Permit free or restricted transferability. Be capable of being classified as senior / subordinate by differentiation in ranking of security or in receiving payments. Instrument issued by the an SPV should have the following characteristics:

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Represent the amounts invested and the undivided interest or share in the assets (and should not constitute debt of SPV or the Originator). May be issued in bearer form or registered in the holder’s name, may or may not be endorsable and may be issued in definitive form or book entry form.

Instruments that can be issued by the SPV : 

Shares Debentures Others Instruments that can be issued by the SPV