Special Purpose Vehicles

Special Purpose Vehicle is an important concept in the economics segment of the UPSC civil services exam. It is a term frequently seen in the newspapers. It is important for UPSC aspirants to familiarise themselves with the terms commonly seen in the newspapers.

It helps to understand the concept behind the news and additionally, helps in the UPSC prelims as well. This article will provide details about the concept.

What is a Special Purpose Vehicle?

A Special Purpose Vehicle (SPV) is a legal object formed for a specifically-defined singular purpose. Its formation is done usually to fulfil aims as stated by its creators such as isolating a companies assets and/or projects. The activities and/0r assets are made to come under the jurisdiction of the vehicle in order to make investors feel more secure about their investment. The SPV basically helps in mitigating risks and freeing up capital. Thus. the SPV and the company it is created by are protected against the risk of bankruptcy.

SPV’s are also used to provide security for loans or any other receivable. SPV’s other uses include working around specific legal limitations, protecting the confidentiality of intellectual property, helping in investments in countries with different forms of taxation and varying degrees of tax rates for property sale and capital gains

To know more about Taxation in India, visit the linked article.

 Uses of Special Purpose Vehicles

1. Providing Protection: Banks create SPVs generally to protect loans and other liabilities.
2. Risk-Isolation: In creating SPVs it allows for a greater chance of legally isolating risks of a project.
3. Helps in Property Sale: A company can establish an SPV with ownership granted for property the company owns. That way the company can sell the SPV instead of the properties and pay the tax on the capital gain instead of the property sales tax. This way it can mitigate any risks that may arise out of sales are higher than capital gains.
4. Asset Ownership: The company can sell the SPV of assets that are hard to transfer. That way they can also sell the SPVs as a part fo mergers and acquisitions process.

Special Purpose Vehicles Benefits

1. Direct ownership of a specific asset
2. Isolated financial risk
3. Easy to create

If the SPV is incorporated in a tax haven such as the Cayman Islands, tax savings can be had

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Relevant Questions Regarding Special Purpose Vehicles

What is the purpose of an SPV?

A special purpose vehicle, also called a special purpose entity (SPE), is a subsidiary created by a parent company to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt.

How do special purpose vehicles work?

A Special Purpose Vehicle (SPV) is a legal entity created for a specific purpose. In the context of raising capital, an SPV (usually structured as LLC) can be used as a funding structure, by which all investors (or investors under a given investment threshold) are pooled together into a single entity.

The above details would be of help to candidates preparing for UPSC exams this year. You can know more about the topics asked in the exam by visiting the UPSC Syllabus page and also refer to the links given below for more articles. 

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