In this connection it will be recalled that Essar Steel had continued their trialproduction of HR coils for eighteen months and interest and other losses during this period were capitalised.

Although RPL had announced the start of product despatch to public-sector oil companies like Indian Oil Corporation on August 3, 1999, but even so the date of commercial production has not yet been declared.

What will be the impact on Reliance Petroleum's bottomline if commercial production is not started this fiscal? In that case, the company will be able to capitalise a very large amount towards interest and pre-operative expenses on refining of several millions of tonnes of crude. That will result into increasing the value of RPL's assets, which has obvious uses. This will also facilitate charging higher depreciation on increased value of assets, which will boost the tax shelter. Companies are at liberty to charge all the expenses prior to commencement of commercial production as pre-operative expenses and there are no specific rules for trial production and commercial production. However, sucha distinction between trial and commercial productions does not exist in other countries, according to tax experts.

If the date of commercial production is not declared in this fiscal, profit and loss may not be expected for current fiscal becasuse all sales and related expenses of several millions of tonnes of refined products are likely to be accounted in pre-operative expenses. However,company officials said that there is no prohibition in the Companies Act to prepare a profit and loss account during trial period. The company report prepared by Indosuez W.I.Carr Securities and circulated by the RPL in support of buying recommondation also indicate that the first profit and loss account will be in the year 2001. However, RPL also has the leeway to declare commercial production within the remaining days of the financial year. In that event, what will be the effect on its bottomline?

If the company declares commercial production now, they will not be able to post healthy performance for the remaining daysof the current fiscal if the current fiscal continued to be ended on 31st March. That is because, given the short time left, the company can, at best, declare commercial production of more than 1.5 million tonnes against which they will have to show major fixed expenditure. However, if commercial production is declared wth retrospective effect, the performance will depend on the date of commercial production so declared.