SPV Structuring for Private Equity & Real Estate

In Indian PE transactions, the SPV is most commonly structured as a private limited company incorporated under the Companies Act 2013, because it offers limited liability, ease of share transfer, and a well-understood regulatory framework for foreign investment under the Foreign Exchange Management (Non-Debt Instruments) Rules 2019. An LLP under the Limited Liability Partnership Act 2008 is sometimes preferred for real estate SPVs where partners want pass-through taxation under Section 10(2A) of the Income Tax Act 1961, avoiding dividend distribution tax. Trusts are used for InvIT and REIT structures under the SEBI (InvIT) Regulations 2014 and SEBI (REIT) Regulations 2014. The choice of form determines the stamp duty on transfer of interests, FDI eligibility, and exit tax implications under the Income Tax Act 1961.

A foreign PE fund investing into an Indian SPV must comply with the Foreign Exchange Management (Non-Debt Instruments) Rules 2019, which prescribe sectoral caps, entry routes (automatic or government), and pricing guidelines under the rules made under Section 47 of FEMA 1999. The issuance of shares to the foreign investor must be at a price not less than the fair market value determined by a SEBI-registered merchant banker or a CA under the internationally accepted pricing methodology as per Rule 21(7) of the NDI Rules 2019. The Indian SPV must file Form FC-GPR with the authorised dealer bank within 30 days of receipt of funds under Regulation 4 of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations 2019. Downstream investments by an SPV that is itself foreign-owned must comply with the downstream investment guidelines under Press Note 3 of 2020.

The General Anti-Avoidance Rules (GAAR) under Chapter X-A of the Income Tax Act 1961 (Sections 95 to 102) apply to arrangements entered into on or after April 1, 2017, where the main purpose or one of the main purposes is to obtain a tax benefit and the arrangement lacks commercial substance. A multi-layer SPV structure where the principal purpose is to route income through a treaty-protected jurisdiction to avoid Indian capital gains tax is susceptible to GAAR disallowance under Section 96. However, GAAR does not apply where the aggregate tax benefit to all parties in an arrangement is less than Rs 3 crore in a year per Rule 10U(1)(d) of the Income Tax Rules 1962. Taxpayers may seek a ruling from the Authority for Advance Rulings (now the Board for Advance Rulings) under Section 245Q before implementing a complex SPV structure.

Transfer of shares in an Indian private limited company SPV is subject to stamp duty under the Indian Stamp Act 1899 at the rate of 0.015% on the market value of shares as per the Finance Act 2019 amendment to Schedule I, Article 62A of the Indian Stamp Act, effective January 9, 2020. For transfers conducted off-market (i.e., not through a recognised stock exchange), the stamp duty is collected by the state where the registered office of the company is situated. Transfer of immovable property directly (rather than shares) attracts state-level stamp duty typically ranging from 4% to 8% of the market value, making share-level transfer of SPVs far more tax-efficient. However, where the SPV holds predominantly immovable property in certain states, the state may invoke anti-avoidance provisions to levy stamp duty on share transfers as if they were property transfers.

At exit, PE investors in an Indian SPV receive capital through sale of shares, redemption of preference shares, or buyback under Section 68 of the Companies Act 2013. Long-term capital gains (LTCG) on sale of unlisted shares held for more than 24 months are taxed at 12.5% under Section 112 of the Income Tax Act 1961 (without indexation as per the Finance Act 2024 amendment). Structured redemption of Compulsorily Convertible Preference Shares (CCPS) or Optionally Convertible Debentures (OCDs) at a premium can reclassify returns as interest (taxable in India, with withholding under Section 195), so the instrument design must align with the desired tax outcome. Treaty benefits (e.g., India-Singapore DTAA or India-Mauritius DTAA post-2016 amendments) may reduce or eliminate withholding tax on dividends or interest but are subject to the Limitation of Benefits clause and GAAR scrutiny under Sections 95-102 of the Income Tax Act 1961.