Finmin relaxes restrictions on CPSUs providing Letters of Comfort

The Finance Ministry has permitted central public sector undertakings (CPSUs) to issue letters of comfort on the condition that they explicitly state that the Government of India will not be held liable for any consequences resulting from such letters.

What exactly is a Letter of Comfort?

  • A letter of comfort is a support document given to a borrower that adds some heft to the loan transaction.
  • Typically, a letter of comfort is given by a third party or a stakeholder in the transaction.
  • A holding company, for example, can issue a letter of comfort on behalf of its subsidiary, or the government can issue a letter of comfort for public sector companies.
  • Banks, NBFCs, and auditors can also give letters of comfort.

LoCs’ obligation status

  • The letter of comfort imposes no legal obligation on the holding company to repay the loans.
  • It is simply an assurance to the lender that the holding company is aware of the transaction, the subsidiary’s policies, and its intentions to seek a loan.
  • This gives the financial institution some peace of mind when lending money for the short or long term.
  • One could argue that the letter of comfort may become a moral obligation rather than a legal one.

What distinguishes it from a letter of guarantee?

  • A letter of comfort is not the same as a letter of guarantee.
  • The letter of guarantee, as the name implies, serves as a commitment to the lender that the issuing company will be responsible for repayment.
  • It is also legally binding, and the transaction becomes the guarantor’s obligation.
  • When holding companies are unable or unwilling to provide letters of guarantee, they usually provide letters of comfort.
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