Fact Box: ‘Letter of Comfort’

‘What is ‘Letter of Comfort’?

• A comfort letter is a document prepared by an accounting firm assuring the financial soundness or backing of a company.
• This letter is issued by a parent company to a lending institution in which it acknowledges its support of a subsidiary company’s attempt for financing.
• A letter of comfort does not imply that the parent company guarantees repayment of the loan being sought by the subsidiary company.
• It merely gives reassurance to the lending institution that the parent company is aware of the credit facility being sought by the subsidiary company, and supports its decision.
• As such, a letter of comfort creates a moral obligation for the parent company rather than a legal one.

News: The Finance Ministry has issues  “Letter of Comfort” sanctioning Rs 25,000 crore additional cash subsidy
To compensate the revenue loss incurred by the state-owned fuel retailers on selling auto and cooking fuel below cost this fiscal, the government has decided to pay them Rs 25,000 crore additional cash subsidy. The Finance Ministry has issued a “comfort letter” to Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) sanctioning Rs 25,000 crore for part of the revenue they lost on selling diesel, domestic LPG and kerosene below cost. Earlier, the government had shelled out Rs 30,000 crore in subsidy.
Losses incurred by Oil Companies: IOC, BPCL and HPCL lost Rs 39,268 crore in revenue on selling diesel, LPG and kerosene at government controlled rate in October-December quarter. Fuel retailers currently lose Rs 9.22 a litre on diesel, Rs 31.60 per litre on kerosene and Rs 481 on every 14.2-kg LPG cylinder. They lose Rs 443 crore per day of sale of the three fuels.
Cash subsidy is paid by the Finance Ministry to state oil retailers who sell crude oil and products like LPG products at a discount.

Month: Current Affairs - February, 2013