Joint Venture And Special Purpose Vehicle
A joint venture with another company is an excellent opportunity to grow your own company without making an outright purchase of another company. Whereas A special purpose vehicle (SPV) is formed for a special purpose. SPVs are generally a subsidiary company whose obligations are secured even if the parent company goes bankrupt. This article focuses on the meaning of a Joint Venture and a Special purpose vehicle and the key difference between the both.
A joint venture is a temporary business association between two or more persons or organizations for profit without forming a permanent partnership, corporation, or other business entity. Members of the joint venture maintain their independence. It is an arrangement where two or more parties cooperate in order to run a business. There are various forms of this co-operation such as equity-based or contractual Joint Ventures. This may be on a long-term basis involving the running of the business in perpetuity or on a limited basis involving the realization of a particular project. It is considered to be a highly flexible concept. The nature of any particular Joint Venture will depend on the specific underlying facts and characteristics and on the resources and wishes of the involved parties. Joint Venture can be epitomized as a symbiotic business alliance between two or more companies where the complementary resources of the partners are mutually shared and put to use.
Under the Indian Law a Joint Venture is governed primarily by the Indian Contract Act. However, as a Joint Venture involves several aspects other corporate laws are also applicable.
Kinds of Joint Venture-
Joint Ventures are namely of two kinds:
- Equity Joint Venture
- Contractual Joint venture
- Equity Joint Venture
In Equity Joint Venture, a separate legal entity is created under which various parties provide for the required resources to fulfil their objectives. This type of venture is usually suited for long-term broad projects.
- Contractual Joint Venture
Contractual Joint Venture, on the other hand, doesn’t necessarily require for creating a separate entity, thus projects involved in it are of temporary in nature, formed only for limited period.
Features of Joint Venture
- Cooperation is a great way of reducing research as well as manufacturing cost without limiting exposure. This process reduces research and manufacturing costs while limiting exposure.
- There is a chance of risk reduction as the business activities of the Joint Venture can be expanded with smaller investment outlays independent.
- It is a mode of gaining good market access. Joint Venture agreements expand their business into other areas of the world as well as consumer segments and product markets
- There is the joint management of the risk associated with new ventures which Joint Ventures can offer. In Joint Venture when the liabilities and risks are shared the pressure on each individual partner is drastically reduced.
- There are many flexible business diversification opportunities to the partners. It provides full freedom to involve with the other company for a full merger or only for a part of the business. Companies can also choose Joint Ventures as a method to gradually dispersed a business from the rest of the organization and ultimately sell it further.
Special Purpose Vehicle
A special purpose vehicle, also called a special purpose entity (SPE), is a subsidiary created by a parent company to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt. A parent company creates an SPV to isolate or securitize assets in a separate company that is often kept off the balance sheet. It may be created in order to undertake a risky project while protecting the parent company from the most severe risks of its failure.In other cases, the SPV may be created solely to securitize debt so that investors can be assured of repayment.
Uses of Special Purpose Vehicles
- Creating an SPV enables the corporation to legally isolate the risks of the project and then share this risk with other investors.
- Securitization of loans is a common reason to create an SPV.
- Certain types of assets can be hard to transfer. Thus, a company may create an SPV to own these assets. When they want to transfer the assets, they can simply sell the SPV as part of a merger and acquisition (M&A) process.
- If the taxes on property sales are higher than the capital gain realized from the sale, a company may create an SPV that will own the properties for sale. It can then sell the SPV instead of the properties and pay tax on the capital gain from the sale instead of having to pay the property sales tax.
Difference between joint venture and special purpose vehicle
- Joint venture company is normally a business that is normally run by two parties or two individuals who decide to come together in order to form a single entity. The objective of this joint venture is to access a new market for instance emerging markets, to gain scale efficiencies which can be done by combining jointly assets and operations or to share risk for major investments. Special purpose vehicle is normally referred to as or can be used as a funding structure by means of making all the investors to come together into a single entity
- A Special purpose vehicle is created as a separate corporate entity to implement a particular project. Whereas a joint venture is an entity created through equity participation of multiple firms to do business in a particular area.
- A joint venture is a cooperative arrangement between two or more business entities, often for the purpose of starting a new business activity. A parent company creates an SPV to isolate or securitize assets in a separate company that is often kept off the balance sheet. It may be created in order to undertake a risky project while protecting the parent company from the most severe risks of its failure.
- In the case of closing the SPV, the company would have to take back the assets and this would mean huge substantial costs being involved. Whereas ending of joint venture is the easiest.
- The special purpose vehicle might have lesser access to capital and raising capital from the public at times because it does not have the same credibility in the market as the sponsor or parent company. A joint venture can raise more and more capital from public.
The joint venture and Special purpose vehicle both are different concepts though somewhere similar. A joint venture is basically a association of two or more entity made for some specific purpose whereas, a special purpose vehicle is a separate legal entity which is mostly created by the company for a single, well-defined and specific lawful purpose and also acts as the bankruptcy-remote for the main parent company. Both are made for specific project but for different motive.