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Comfort or Support Letter

A comfort letter is a form of support issued by an institution to assist a subsidiary in securing loans, particularly for public institutions that must obtain permission from the Minister of Finance before borrowing. These letters are typically provided when a parent company cannot issue a guarantee due to restrictions or company policy. Only entities affiliated with the Ministry of Finance or where the government holds shares can receive such letters, as outlined in the relevant financial management frameworks.

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46 views2 pages

Comfort or Support Letter

A comfort letter is a form of support issued by an institution to assist a subsidiary in securing loans, particularly for public institutions that must obtain permission from the Minister of Finance before borrowing. These letters are typically provided when a parent company cannot issue a guarantee due to restrictions or company policy. Only entities affiliated with the Ministry of Finance or where the government holds shares can receive such letters, as outlined in the relevant financial management frameworks.

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A BRIEF WRITEUP ON COMFORT LETTERS

A Letter of Support/ comfort letter is a form of parental support generally


issued by an institution in support of a subsidiary or fellow group member
(the borrower), that is borrowing money1.

A Letter of Support is normally given to all public institutions that intend to


borrow. These institutions are required under the Public Debt and other
Financial Liabilities Management Framework 2018/19 - 2022/23 to seek
permission from the Minister of Finance, Planning and Economic
Development before acquiring any loan. This permission will be through the
issuance of a Letter of Support for an entity that must have existed for at
least 5 years and the beneficiary institutions shall be public or publicly aided
and therefore Government of Uganda should be a full (State-owned
enterprises)/ part controller of the institution (majority or minority
shareholder)

A letter of comfort is given by a third party (usually the parent company or


promoter flagship), to help secure lending facilities for the borrower. 2 A case
in point is in United Breweries (Holdings) Ltd v Karnataka Industrial
Investment and Development Corporation Ltd 3, a letter of comfort had
been given on behalf of an associate company stating “that it is our normal
practice to see that all our associate companies meet their financial and
contractual obligations and [to] this end we will undertake all reasonable
steps to ensure that … conducts its operations efficiently to meet its
obligations in the usual course of business”. This means that the letter of
comfort is normally given to subsidiary institutions to secure funding

Comfort letters are often provided where the parent or holding company
of the borrower is unable to give a guarantee due to prohibitions in its
constitutional documents or negative pledges it has given to other lenders,

1
Public Debt and other Financial Liabilities Management Framework 2018/19 - 2022/23 at Page 6t Framework \
2
https://law.asia/letter-of-comfort/
3
M.F.A No. 4243 of 2007
or unwilling to give a guarantee where company policy limits the amount of
contingent liabilities that it can incur4

In the case of Tata International Ltd, Mumbai vs Addl Cit 7(3), Mumbai
on 29 January, 2020, it was stated that in a Letter of Comfort, the party
issues only a letter that a subsidiary or group company would comply term
of financial transaction.

Therefore based on the discussion above, only companies or institutions


affiliated to the Ministry of Finance or where Government has controlling
shares can be issued a letter of comfort form by the ministry

Therefore by the Guidelines for the Management of Contingent


Liabilities June 2020 and Public Debt and other Financial Liabilities
Management Framework FY2018/19-2022/23 guidelines by the Ministry
of finance, a private entity can only benefit where government has shares in
it be it majority or minority shares

4
https://www.lexisnexis.com/uk/lexispsl/bankingandfinance/document/391289/55KB-65S1-F185-X0H9-00000-
00/Comfort_letters_overview

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