An Explainer: Special-Purpose Vehicle

Terms like special-purpose vehicle (SPV) or special-purpose entity (SPE) became well-known financial jargons after the fraud at American energy giant Enron Corporation which came to light in 2001. As far as India is concerned, many of us hear it these days as the Centre is gearing up to implement its Smart Cities Mission. According to the government, the implementation of the mission at the city level will be done by an SPV incorporated under the Companies Act, 2013, and created exclusively for the purpose of developing the chosen cities as smart ones.

But what is an SPV and how does it function?

Also known as a bankruptcy remote entity, an SPV is actually an arm created by a company to implement large-scale projects without exposing the whole company to market risks. The operations of an SPV are legally limited to specific assets. This is why even if the parent company goes bankrupt, an SPV remains safe.
In India's smart city project, SPVs will be promoted jointly by a state or Union territory and urban-local bodies, with a 50:50 equity shareholding. While this shareholding pattern has to be maintained at all time, the government says the "private sector could also be considered for taking an equity stake in an SPV, provided the shares of the state and the urban local body remain equal and together they remain majority shareholders and controllers of the SPV".