Issuance of LoCs based on own financial strength is a part of regular business practice. It enables these entities to raise resources at competitive rates for their capex or working capital needs as well as furthering the business interests of their joint ventures or subsidiaries or group companies
The Finance Ministry has asked central public sector undertakings (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. The Office Memorandum dated March 20, 2023, has been issued following a request from some CPSUs in the oil and power sector seeking relaxation with regard to the issuance of LoCs.
"In view of requirements, it has been decided that CPSUs may issue LoCs on its own financial strength and all such LoCs shall only be issued after specifically inserting the following clause--under no circumstances, the liability under this Letter of Comfort shall devolve on the Government of India," the memorandum said.
Under the provision of the fiscal responsibility law, the budget requires to provide details of guarantees given by the government. It further clarified that ministries and departments will not issue any letters of comfort as specified under the Office Memorandum dated March 31, 2022 on behalf of the Government of India.
Issuance of LoCs based on own financial strength is a part of regular business practice. It enables these entities to raise resources at competitive rates for their capex or working capital needs as well as furthering the business interests of their joint ventures or subsidiaries or group companies. It is to be noted that the finance ministry last year permitted state-owned NBFCs to issue 'Letter of Comfort (LOC)' to banks for fund tie-up for infra projects.