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What is Orphan Special Purpose Vehicle/Orphan Structure?

Updated: Jan 31, 2019

Since 2014, Indian Government Has Proposed Many Schemes and Missions based on Special purpose Vehicle.Special Purpose Vehicle is an important concept in the economics .

Special Vehicle Entity [ SPV/ SPE]

A Special Purpose Vehicle (SPV) is a legal entity that is formed for a well-defined, sole and narrow purpose. It is generally a company formed to fulfil one or a group of narrow objectives by its promoters. SPVs are generally formed to isolate a company’s assets or activities. The activities or assets are distanced into the new entity, i.e., the SPV and so investors or lenders feel more comfortable. It is basically a means to separate the risk and free up capital. The SPVs and the sponsoring company (sometimes the parent company) are insured against the risk of bankruptcy.

A company may form SPVs/SPEs through limited partnerships, trusts, corporations, limited liability corporations or other entities. An SPV/SPE may be designed for independent ownership, management and funding of a company; as protection of a project from operational or insolvency issues; or for creating a synthetic lease that the company expenses on its income statement rather than recorded as a liability on the balance sheet. SPVs/SPEs help companies securitize assets, create joint ventures, isolate corporate assets or perform other financial transactions.

Examples: Solar Energy Corporation of India and National Skill Development Corporation, Smart city Scheme.

What is ORPHAN SPV ?

Orphan structure or Orphan SPV or orphaning are terms used in structured finance closely associated with SPVs ("Special Purpose Vehicles") for global securitisation transactions where the equity of the SPV is deliberately handed over to an unconnected 3rd party (i.e. it becomes an "orphan"). In an orphaned SPV, the equity is held by a 3rd party with no legal relationship to the two main parties engaging in the securitisation (the asset user(s), and the lender(s) financing the assets). While this 3rd party legally "owns" the equity of the SPV, the way in which their ownership is structured gives them no control over the SPV.

Why in NEWS?

Vodafone Plc is planning to raise $1.5 billion as a three-year loan facility from global banks to finance its India operations through a unique structure that’s likely to see the company pledge cash flows from the local business

Vodafone Plc has proposed an offshore orphan special purpose vehicle (SPV). It will have no corporate or shareholding linkage with Vodafone Plc, hence the term orphan.

Reference: Wiki, Financial Express, ET, Investopedia.

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