Special Purpose Vehicle (SPV)

By Shreya Pandey | Updated March 2026

What Is a Special Purpose Vehicle (SPV)?

A Special Purpose Vehicle (SPV) — also known as a Special Purpose Entity (SPE) — is a legally independent entity created for a defined, limited purpose. In India, SPVs are used to isolate financial risk, hold specific assets, facilitate securitisation transactions, serve as investment vehicles under InvIT and REIT structures, and channel foreign direct investment into specific projects. The SPV is typically structured as a private limited company or a limited liability partnership (LLP), and its activities are restricted to the objects stated in its memorandum of association.

Legal Basis

There is no single "SPV Act" in India. SPVs derive their legal existence from multiple statutes depending on the purpose:

• Companies Act, 2013 — Most SPVs are incorporated as private limited companies under the Companies Act, governed by the same provisions as any other company (Sections 3-22 for incorporation, Section 186 for inter-corporate investments, Section 2(87) for subsidiary classification).
• SEBI (Infrastructure Investment Trusts) Regulations, 2014 — Defines SPVs within the InvIT structure. An InvIT must hold at least 50% of the equity share capital or interest in each SPV (except in PPP projects where this is restricted by the concession agreement). The SPV holds the infrastructure asset.
• SEBI (Real Estate Investment Trusts) Regulations, 2014 — Similarly defines SPVs within REIT structures. A REIT or its holding company must hold at least 50% equity in each SPV that holds the real estate asset.
• Section 115UA, Income Tax Act, 1961 — Provides the pass-through taxation framework for business trusts (InvITs and REITs). Income received by the trust from SPVs — including interest, dividends, and rental income — passes through to unit holders and is taxed in their hands, not at the trust level.
• SARFAESI Act, 2002 and RBI Securitisation Guidelines — Govern SPVs used in securitisation transactions. The SPV (usually a trust) acquires pooled financial assets (home loans, auto loans) from the originator and issues pass-through certificates to investors.
• SEBI (Alternative Investment Funds) Regulations, 2012 — Category I and II AIFs often use SPV structures for co-investment or direct investment into portfolio companies.
• Section 94B, Income Tax Act, 1961 — The thin capitalisation rule limits interest deductions to 30% of EBITDA on debt from associated enterprises, directly affecting SPVs funded by foreign parent debt.

Types of SPVs in India

SPVs in India are deployed across multiple sectors and structures. Each type has distinct regulatory requirements, tax treatment, and compliance obligations.

Ring-Fencing: How SPVs Isolate Risk

The core purpose of an SPV is ring-fencing — legally separating the assets and liabilities of a specific project or investment from those of the parent entity. This means:

• If the SPV's project fails, creditors can only claim against the SPV's assets — not the parent company's balance sheet
• If the parent company faces financial distress or insolvency, the SPV's assets are not available to the parent's creditors (provided the SPV is a genuinely independent entity and not merely an alter ego)
• Lenders to the SPV can take security over specific project assets without competing with the parent's other creditors
• Each SPV can have its own capital structure, debt covenants, and operating agreements tailored to the specific project

Conditions for Effective Ring-Fencing

Indian courts have recognised the separate legal identity of SPVs, but may "pierce the corporate veil" if the SPV lacks genuine independence. To maintain effective ring-fencing:

• The SPV must have its own board of directors, separate bank accounts, and independent financial statements
• The SPV must not commingle funds with the parent
• Arm's length pricing must be maintained for all transactions between the SPV and related parties (transfer pricing compliance)
• The SPV should have its own registered office and operational identity

Section 94B: Thin Capitalisation and SPVs

Foreign investors frequently fund Indian SPVs through a combination of equity and shareholder debt. Section 94B of the Income Tax Act limits the tax-deductible interest on debt from associated enterprises:

• Applicability: Applies to any Indian company or permanent establishment of a foreign company paying interest to a non-resident associated enterprise
• Interest cap: Deductible interest is limited to 30% of EBITDA (earnings before interest, taxes, depreciation, and amortisation) or the actual interest paid to associated enterprises, whichever is lower
• Threshold: The rule applies only when interest payable to associated enterprises exceeds INR 1 crore in a financial year
• Deemed associated enterprise: Even if the lender is not a direct associated enterprise, the debt is deemed to be from an associated enterprise if the non-resident provides an implicit or explicit guarantee or deposits matching funds with the lender
• Carry-forward: Disallowed interest can be carried forward for up to eight assessment years

For SPVs in project finance, where debt-to-equity ratios of 3:1 or 4:1 are common, Section 94B can significantly limit the tax benefit of debt funding from foreign parents.

InvIT and REIT SPV Structures

Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) must hold their assets through SPVs. The structure typically follows this pattern:

Trust (InvIT/REIT) → Holding Company (optional) → SPV → Infrastructure/Real Estate Asset

Tax Pass-Through Under Section 115UA

Section 115UA provides a pass-through taxation framework for business trusts:

• Interest income received by the trust from SPVs: exempt at trust level, taxable in hands of unit holders at applicable slab rates
• Dividend income received by the trust from SPVs: exempt at trust level, taxable in hands of unit holders at applicable slab rates (post Finance Act 2025 amendment)
• Rental income received by the trust from SPVs: exempt at trust level, taxable in hands of unit holders at applicable slab rates
• Capital gains on disposal of SPV shares by the trust: taxed at trust level under normal capital gains provisions

This pass-through structure eliminates the double taxation that would otherwise apply if the SPV paid corporate tax and the trust paid tax again on distributions.

How This Affects Foreign Investors

SPVs are central to how foreign investors structure their India operations:

• FDI structuring: A foreign parent may set up an Indian SPV (private limited company) to hold a specific asset or operate in a specific sector, keeping it separate from other Indian operations. Each SPV can comply with different FEMA sectoral caps independently.
• InvIT/REIT participation: Foreign portfolio investors and sovereign wealth funds invest in InvIT and REIT units listed on Indian exchanges. The pass-through structure under Section 115UA means income is taxed at the investor's applicable rate, with DTAA benefits available on the underlying income streams.
• Securitisation investment: Foreign investors (particularly through the GIFT City IFSC route) invest in pass-through certificates issued by securitisation SPVs, accessing Indian loan portfolios with defined risk profiles.
• Press Note 3 considerations: Each SPV receiving FDI from land-bordering countries requires separate government approval. A multi-SPV structure means multiple approval applications.
• Thin capitalisation impact: Section 94B applies independently to each SPV. A foreign parent funding multiple SPVs through debt must calculate the 30% EBITDA cap separately for each entity.

Common Mistakes

• Treating the SPV as a mere extension of the parent company. If the SPV lacks independent governance — no separate board meetings, no independent financial statements, commingled funds — courts may pierce the corporate veil and hold the parent liable for the SPV's debts. This defeats the entire purpose of the ring-fencing structure.
• Ignoring Section 94B when funding SPVs with foreign parent debt. If an SPV has INR 5 crore in annual interest payable to its foreign parent and its EBITDA is INR 10 crore, only INR 3 crore (30% of EBITDA) is deductible. The remaining INR 2 crore is disallowed as a deduction, increasing the SPV's effective tax rate substantially.
• Exceeding the two-layer subsidiary restriction under Section 186(7). A holding company that creates SPVs through multiple intermediary investment companies may violate the two-layer limit. Structure the SPV as a direct subsidiary or ensure it falls within the wholly-owned subsidiary exemption.
• Not completing SEBI registration before deploying funds through InvIT or REIT SPVs. The trust must be registered with SEBI before acquiring assets through SPVs. Acquiring assets first and registering later creates regulatory risk and may attract penalties.
• Failing to maintain arm's length pricing for inter-company transactions. Management fees, interest payments, and cost-sharing arrangements between the parent and SPV must comply with transfer pricing rules. The tax department routinely scrutinises SPV transactions with related parties.

Practical Example

Sarah Mitchell, a British investor, wants to invest GBP 2 million (approximately INR 21 crore) in a commercial office building in Hyderabad. Instead of purchasing the property directly through her existing Indian subsidiary (which operates a software business), Sarah sets up a new SPV — Meridian Realty Pvt Ltd — specifically to acquire and hold the property.

The SPV structure provides several benefits: (a) the software company's creditors cannot claim the commercial property, and vice versa; (b) if Sarah wants to sell the property in the future, she can transfer shares of the SPV rather than the underlying property, potentially saving stamp duty (which ranges from 5-7% in Telangana versus 0.015% for a share transfer); (c) the SPV can take separate project finance secured against the property without affecting the software company's borrowing capacity.

Sarah funds the SPV with INR 7 crore in equity and INR 14 crore in shareholder debt from her UK holding company at 9% interest. Annual interest payable to the UK parent is INR 1.26 crore. The SPV's EBITDA from rental income is INR 2.5 crore. Under Section 94B, the deductible interest is limited to 30% of EBITDA = INR 75 lakh. The remaining INR 51 lakh is disallowed as a deduction and can be carried forward for up to eight years. Sarah's tax advisor recommends rebalancing to a 1.5:1 debt-to-equity ratio to keep interest within the 30% EBITDA cap.

Key Takeaways

• An SPV is a legally independent entity created for a specific purpose — project finance, asset holding, securitisation, or investment structuring — designed to ring-fence risk from the parent's balance sheet
• India has no single SPV law; SPVs are governed by the Companies Act, SEBI regulations (InvIT, REIT, AIF), SARFAESI Act, RBI guidelines, and the Income Tax Act
• InvIT and REIT SPVs enjoy pass-through taxation under Section 115UA — income is taxed at the unit holder level, not the trust or SPV level
• Section 94B limits interest deductions on debt from associated enterprises to 30% of EBITDA, directly impacting debt-funded SPVs
• Effective ring-fencing requires genuine SPV independence — separate board, bank accounts, financial statements, and arm's length transactions
• Foreign investors must comply with FEMA downstream investment rules, Press Note 3 (if applicable), and transfer pricing norms for each SPV independently

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