A Letter of Comfort (LoC) is a written assurance provided by a parent company, bank, or financial institution to support the obligations of a subsidiary or borrower. While it is not a legally binding guarantee, it expresses the issuerís intention to provide financial backing or moral support, thereby instilling confidence in lenders or investors about the borrowerís creditworthiness.

In financial and corporate contexts, a Letter of Comfort helps bridge trust between parties during large transactions, mergers, or credit arrangements. For instance, when a subsidiary seeks a loan, the parent company may issue an LoC to assure the lender that the subsidiary will fulfill its financial obligations. This can positively influence loan approvals or reduce perceived credit risk without the parent company taking on a direct legal liability.

However, unlike a Letter of Guarantee, the LoC does not create a legally enforceable obligation. It merely indicates the issuerís willingness to maintain the borrowerís financial stability. Therefore, while it improves confidence, lenders must evaluate the borrowerís fundamentals independently before extending credit.

From an accounting and regulatory perspective, a Letter of Comfort is considered a soft commitment. SEBI and RBI guidelines emphasize that such letters should not be misrepresented as guarantees to prevent misleading financial disclosures. Companies are encouraged to maintain transparency about the nature and scope of these assurances in their financial statements.

In summary, a Letter of Comfort serves as a goodwill instrument to reassure stakeholders and strengthen business relationships. It plays a vital role in corporate financing and risk management, provided that all parties clearly understand its non-binding nature and the associated limitations.