What are Special Purpose Vehicles in Stock Market?

You might have heard the term “Special Purpose Vehicles” or “SPVs” in the news, especially when large infrastructure projects or financial deals are discussed. It may sound like something high-tech or complex, but in the world of finance, an SPV is simply a tool used to manage financial risk and organise specific projects.

In this article, we will explain what SPVs are, why they’re created, and how they impact the Indian stock market. If you’re an investor trying to understand how big companies and governments handle large projects, this is something worth learning.

What Is a Special Purpose Vehicle?

A Special Purpose Vehicle (SPV) is a separate legal entity created for a specific and limited purpose. Businesses often set up SPVs to isolate financial risk and manage particular projects separately from the parent company.

Imagine a large company wants to build a new metro line in a city. Instead of taking on the project under its main brand, it sets up an SPV to manage everything related to that metro line, from raising funds to signing contracts. The main company still controls the SPV but keeps the financial and legal responsibilities separate.

SPVs can be companies, limited liability partnerships (LLPs), or trusts, depending on the requirements and structure chosen.

Why Are SPVs Created?

SPVs are not just legal creations — they’re practical tools. Here are some of the key reasons companies and governments use SPVs:

Risk management: This is one of the most common reasons. If the SPV faces losses, the parent company is not automatically dragged into financial or legal trouble. This is especially useful when handling large, risky, or long-term projects.
Project financing: Many infrastructure and real estate projects require huge sums of money. By forming an SPV, companies can make the project look independent and raise funds specifically for it, often with greater ease.
Simplified joint ventures: When multiple companies want to work together, forming an SPV makes it easier to divide ownership, profits, and responsibilities. It keeps the partnership clear and clean.
Asset transfer and ownership: Assets such as land, buildings, or patents can be transferred to SPVs. This helps businesses manage them more efficiently, especially if they plan to lease, sell, or develop those assets separately.
Regulatory or tax advantages: Sometimes, certain financial products or project models are only allowed under specific rules. An SPV allows companies to meet these regulatory or tax-related conditions without restructuring the entire business.

How Do SPVs Operate?

An SPV is a legal entity, that means it can borrow money, enter into contracts, own property, and be sued or sued independently of its parent company. Even though the parent company often manages or owns the SPV, the law treats the SPV as a separate organisation.

Let’s take an example. Suppose Larsen & Toubro (L&T) wants to build a highway in Maharashtra. Rather than using its main company to handle the project, it sets up “L&T Road Project SPV Pvt. Ltd.” This SPV will raise its own funds, sign agreements with the government, and collect toll income once the road is complete.

If this highway project doesn’t go as planned, the financial loss remains within the SPV. L&T’s main operations stay protected.

SPVs in the Indian Stock Market

SPVs are increasingly being used in Indian capital markets. Here’s how they connect to the stock market:

Infrastructure and REITs: Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) in India often comprise a group of SPVs. These SPVs hold properties like office spaces, malls, or highways. When you invest in a REIT or InvIT, you’re indirectly investing in those SPVs. This allows retail investors to participate in large-scale infrastructure projects without directly managing or owning any property.
Government monetisation programmes: Under schemes like the National Monetisation Pipeline, the government transfers public infrastructure assets — such as roads, pipelines, or railway stations — into SPVs. These SPVs are then leased to private companies or investment trusts, often through the stock market. This process allows the government to raise funds for new infrastructure while still maintaining long-term control.
Listed bonds and debentures: Many SPVs raise capital through debt instruments like non-convertible debentures (NCDs), which are listed on Indian stock exchanges. Investors can buy these bonds and earn fixed interest from projects handled by the SPVs. These instruments are often rated by credit rating agencies and come with clear terms, making them attractive to both retail and institutional investors.

Are SPVs Safe for Investors?

SPVs offer both benefits and risks. As an investor, it’s important to understand both sides.

Advantages

Focused business model: Since SPVs are built for one purpose, their operations and financials are easier to understand and analyse.
Risk containment: Losses in an SPV typically don’t spill over into the parent company.
Clear ownership: Assets within an SPV can be legally distinct, making rights and responsibilities more transparent.

Disadvantages

Limited history: Most SPVs are newly formed for a single project and may not have a track record.
Transparency issues: Not all SPVs are subject to the same disclosure norms as listed companies, especially if they’re private.
Recovery risks: If an SPV defaults, it may be hard for investors to recover their money due to its limited asset base and independence from the parent firm.

Therefore, it’s always wise to check the structure, asset quality, and backing of the parent company before investing in an SPV-related product.

Example: NHAI InvIT and Its SPVs

A practical example is the NHAI InvIT, which holds a portfolio of toll roads in India. Each of these roads is managed by a separate SPV set up under the trust. By buying units of the NHAI InvIT, investors receive a share of the toll income generated by these SPVs.

This structure helps the government raise funds while allowing investors to earn returns from infrastructure assets. Similar models are used by companies like IRB Infrastructure Developers and Brookfield India REIT.

Taxation of SPVs in India

In general, SPVs are taxed like any regular company in India under the Income Tax Act. They pay corporate tax on profits earned from operations. However, when SPVs are part of REITs or InvITs, there are certain exemptions. For example, dividend or interest income from SPVs may be passed on to investors without further tax deductions at the trust level.

The investor pays tax depending on the type of income: dividend, interest, or capital gain. It is important to consult a tax advisor when investing in SPV-linked instruments, as taxation can vary based on structure and income type.

Who Should Care About SPVs?

If you’re a retail investor interested in infrastructure, real estate, or public-private partnership projects, SPVs are worth understanding. They’re at the heart of many investment products now available in the Indian market.

Even mutual fund investors indirectly gain exposure to SPVs through holdings in REITs, InvITs, or debt instruments. Understanding how SPVs work can help you assess the risks and returns of your investments more accurately.

Conclusion

Special Purpose Vehicles are powerful tools in the world of finance. They allow businesses, governments, and investors to take on big projects, manage risks, and structure investments in a clear, focused way.

As the Indian stock market evolves and more REITs, InvITs, and infrastructure projects are launched, SPVs will continue to play a central role. For Indian investors, learning how SPVs work is not just useful — it’s essential for making informed choices in a complex financial world.