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But why they are called special purpose vehicle there are lot of companies involved in providing specific infrastructure.
I read this term for the first time while reading the SC ruling for POSCO plant
the State of Odisha [is] to be associated with Special Purpose Vehicle in order to ensure implementation of proper schemes for the development of the tribal area
why an SPV only why not a state govt dept of scheme for the tribal development?
Special Purpose Vehicle is a special investment instrument. When an existing company/entity wanted to open a new Firm/Project, they open it mostly via debt/loans. In case of failure of the new Project the liability to return money of debtors remains with the parent firm. There are many cases where failure of a new expensive project has caused the whole Parent Firm to fail. For example if Airtel which bought giant African telecom company, and if somehow the african project failed it might have caused bankruptcy of whole of Airtel.
New projects are generally risky, especially the big ones.
Had they raised the money with equity there is no such liability, hence if the project fails equity investor simply lose his money. There is no liability on the Parent Firm.
Here comes the SPV in picture. Its the new entity or simple terms can be called a new Company, whose sole aim is to raise funds for the firm which can be a mixture of debt and equity. Now in a way the Parent company has firewalled itself from the risk on new projects, it just owns certain share of SPV and shares only limited amount of risk.
These days govt. has started using this approach for new initiatives in public sector. So that the failure of such initiatives is not born completely by the govt. By way of SPV they also ensure private investment into new projects.
P.s. - Fortunately Airtel did the whole deal via SPV route.
It is a multistakeholder company floated for a specific pupose like developing an infrastructure etc., The liability cannot be fixed on the independent stakeholder. If somebody wants to file a case, wants to appropriate a sum of money or pay etc and in every such way it is a special company which will be responsible for the specific purpose. :-)
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Comments
I read this term for the first time while reading the SC ruling for POSCO plant why an SPV only why not a state govt dept of scheme for the tribal development?
When an existing company/entity wanted to open a new Firm/Project, they open it mostly via debt/loans. In case of failure of the new Project the liability to return money of debtors remains with the parent firm.
There are many cases where failure of a new expensive project has caused the whole Parent Firm to fail. For example if Airtel which bought giant African telecom company, and if somehow the african project failed it might have caused bankruptcy of whole of Airtel.
New projects are generally risky, especially the big ones.
Had they raised the money with equity there is no such liability, hence if the project fails equity investor simply lose his money. There is no liability on the Parent Firm.
Here comes the SPV in picture. Its the new entity or simple terms can be called a new Company, whose sole aim is to raise funds for the firm which can be a mixture of debt and equity. Now in a way the Parent company has firewalled itself from the risk on new projects, it just owns certain share of SPV and shares only limited amount of risk.
These days govt. has started using this approach for new initiatives in public sector. So that the failure of such initiatives is not born completely by the govt. By way of SPV they also ensure private investment into new projects.
P.s. - Fortunately Airtel did the whole deal via SPV route.