The Central Bank of Nigeria (CBN) has issued guidelines to Development Finance Institutions (DFIs) on the establishment and operation of subsidiaries and Special Purpose Vehicles (SPVs).
This was contained in a letter signed by Tokunbo Martins, the Director, other Financial Institutions Supervision Department of the CBN, and addressed to all DFIs.
The CBN disclosed it had noted the spate of request from DFIs for special regulatory approvals to operate Special Purpose Vehicles in a move to expand operational activities. In this regard, the CBN stated that the DFIs are henceforth required to provide comprehensive disclosures on all subsidiaries and SPV operations.
According to CBN letter : “DFIs are required to submit returns on all SPVs including details of ownership, corporate governance structure, statements of assets and liabilities, income and expenditures, project(s) status, possible risk exposure and mitigants, along with own regulatory returns.
“Report on the financial soundness indicators / prudential ratios of the DFl calculated on a solo and consolidated basis.
“Present for approval, its audited accounts along with that of the SPVs on a consolidated basis.
“Meet a consolidated leverage ratio of at least 10% [Common Equity: Total Assets (On and off-Balance Sheet inclusive)] at all times.”
Meanwhile, the CBN disclosed that while the same regulatory standards that apply to the parent DFI will also apply to the subsidiaries, the approval of new SPVs depends on the successful performance of the earlier approved SPVs.
“Finally, DFls are required to note that approval of new SPVs shall depend on the successful performance of earlier approved ones and the meeting of the consolidated prudential ratios, leverage ratio and business objectives at all times.
“A consolidated risk-based examination of all subsidiaries and/or SPVs will be conducted on a periodic basis.”
In the meantime, the CBN noted that failure to comply with these requirements would be viewed as a violation of the provisions of the DFls’ Guidelines, and would be appropriately sanctioned.
A Special Purpose Vehicle is a legal and business entity created to fulfil narrow, limited, specific or normally temporary purpose. SPVs are usually limited liability companies and in rare cases, they can be limited liability partnerships.
Basically, they are like subsidiaries but are quite narrower in purpose and approach. They can be formed for any narrow lawful purpose. In Nigeria, an SPV is usually registered as a separate business entity (company) under the Companies and Allied Matters Act.
While they are not illegal entities, they are used to isolate risks from its promoting entity by transferring some of its liabilities and keeping debt from investors making the company look like it has no liability.