Letter of Comfort

Letter of Comfort

Subject : Economy

Section: Monetary policy

Context: SEBI notes wrongful issuance of LoC by Subhash Chandra and Puneet Goenka

Key Points:

• What is a LoC:
  • A letter of comfort (also called letter of intent) is a financial document, indicating a willingness of a third party to meet its financial obligations of the borrowing party. This enhances the credit worthiness of the borrowing entity.
  • It is generally given by an entity (corporation) for its subsidiary.
  • It is considered a quasi bank guarantee instrument.The letter of comfort does not impose any legal obligations on the holding company to repay the loans.
  • It only serves as a reassurance to the lender, indicating that the holding company is aware of the transaction, familiar with the subsidiary’s policies, and has genuine intentions in seeking a loan.
  • This helps instill confidence in the financial institution to provide funding for both short-term and long-term purposes.
  • The letter of comfort may be seen as a moral commitment rather than a legally binding agreement.
• The Zee case:
  • Subhas Chandra as the chairman of ZEEL/Essel Group and Goenka as MD of ZEE, had issued a LoC (against Fixed Deposits worth Rs. 200 crore of ZEEL) towards credit facilities availed by certain group companies that were operated by family members.
  • When the payments due of the companies were not made, YES Bank adjusted the FDs, used for LoC.
  • SEBI has barred both from holding the position of director or key management personnel in any listed firm until further orders.
• Other measure taken in last few years:
  • In the aftermath of the PNB scam involving Neerav Modi and Mehul Chosi, RBI in 2018 barred all commercial banks from issuing quasi bank guarantee instruments such as the Letter of Undertaking (LoU) and Letter of Comfort (LoC)
  • RBI in 2022 barred the Credit Rating Agencies from using LoC as a factor in giving credit rating. This was done in view of the non legality of the LoC as a binding agreement.
  • In 2023 Finance Ministry has asked all CPSUs to issue letters of comfort (LoCs) on the basis of their own financial strength so that no liability devolves on the Government of India
  • Finance ministry in 2022 had permitted state-owned NBFCs to issue ‘Letter of Comfort (LOC)’ to banks for fund tie-up for infra projects.