The Hindu Business Line : Vehicle parked between Sonia and Spiders

"The SPV will lend funds, especially debt of longer term maturity, directly to the eligible projects to supplement other loans from banks and financial institutions," said Mr P. Chidambaram, proposing to fill the SPV's kitty with Rs 10,000 crore in its first year by letting it tap the domestic market for funds.

The day's news too talks of ICICI Venture's plan to create an SPV to hold the proposed investment of $56 million in Dr Reddy's and also receive the subsequent royalty payments.

To know the origins of this `uniquely engineered product' see the `product summary' on `asset swaps' from the Federal Reserve Bank of Chicago.

It informs us that Citicorp `originally developed' SPV in the early 1980s, and adds that other firms such as Goldman Sachs, and Morgan Stanley too have issued SPV deals. Merrill Lynch launched its version of SPV as STEERS (for STructured EnhancEd Return trustS) in 1990.

SPV (a.k.a. SPE, or special purpose entity) is "created to accomplish a narrow and well-defined objective (e.g. to effect a lease, research and development activities or a securitisation of financial asset)," defines the Institute of Chartered Accountants of India (ICAI), in what it proposes as revision to Schedule VI governing financial statement disclosures.

To know how SPEs backfired, read the 2002 `Report of investigation' from the `special investigative committee' of the Enron's board of directors. A Guidance Note of the ICAI on `securitisation' defines SPE as an entity that acquires financial assets under securitisation and normally holds them till maturity.

For the originator, SPE provides the means to "finance a large project without putting the entire firm at risk." Usefully, the Guidance Note also discusses accounting aspects of SPEs.

SPV is also referred to as a `bankruptcy-remote entity', according to www.investopedia.com. That's because the SPV, as a subsidiary company, can survive even if the parent company were to go bankrupt. Thus, the SPV infuses confidence in the minds of investors who are afraid of obligations vaporising.

Where SPV is "a subsidiary corporation designed to serve as a counterparty for swaps and other credit-sensitive derivative instruments," it is called `derivatives product company.'

SPV is defined as "a merger of a bond and a derivatives trade into a single contract," by the Derivatives Dictionary on www.margrabe.com, in an entry that is sandwiched between Sonia, or `Sterling Overnight Interbank Average', and Spiders, or `Standard & Poor's Depositary Receipts'.

An example of SPV that the dictionary provides is "a fixed rate bond plus a swap in which the owner of the bond pays fixed and receives floating."

On www.pwcglobal.com, you can catch up with the `common features' of SPE, such as `auto-pilot arrangements' to restrict decision-making, `thin capitalisation', and domicile in an offshore tax haven.

For the research-minded, papers not to be missed are Bala G. Dharan's piece on `financial engineering', and a recent NBER work by Gary Gorton and Nicholas S. Souleles on `securitisation', apart from the Financial Accounting Standards Board's pronouncements.

With SPVs getting a place in Budget documents, we should be hearing about them more often in the future.

ZeroBase@TheHindu.co.in

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