Central idea: The Finance Ministry has allowed central public sector firms (CPSUs) to issue letters of comfort with a condition that they should clearly state that the Government of India will not be liable for any consequences arising from such letters.

What is a Letter of Comfort?

• A letter of comfort is a support document issued to a borrower that adds some strength to the transaction when giving loans.
• Letter of comforts are usually issued by a third party or a stakeholder in the transaction.
• For instance, a holding company can give a letter of comfort on behalf of its subsidiary or a government can issue a letter of comfort for public sector enterprises.
• The letter of comfort can also be issued by banks, NBFCs and auditors.

Obligation status of LoCs

• The letter of comfort is not legally binding or an obligation by the holding company to repay the loans.
• It is just an assurance to the lender that the holding company is aware of the transaction, the policies of the subsidiary and its intentions in seeking a loan.
• This provides some comfort to the financial institution to lend money for short term or long term.
• One can say that the letter of comfort could become a moral obligation and not a legal one.

How is it different from letter of guarantee?

• A letter of comfort is different from a letter of guarantee.
• As spelled out in the name, the letter of guarantee acts as a commitment to the lender that the issuing company is taking responsibility for the repayment.
• It is also legally binding and the transaction becomes an obligation for the guarantor.
• Holding companies usually give letters of comfort when they are unable or unwilling to give letters of guarantees.

Try this MCQ-

Q. Which of the following statements is true about a Letter of Comfort?

A) It is a legally binding document that obligates the holding company to repay the loan.

B) It is issued only by banks and NBFCs.

C) It is an assurance provided by a third party to the lender that adds strength to the transaction when giving loans.

D) It is the same as a Letter of Guarantee in terms of its legal obligations.

 

Post your answers here.

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