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CS Executive · Capital Market and Securities Laws · Basics of Capital Market

Arjun holds 100 cumulative preference shares of Sundaram Pharma Ltd. The company skipped the dividend last year because of low profits. Which statement correctly describes his position?

The unpaid dividend accumulates as arrears on cumulative preference shares. When the company later has distributable profits, the arrears plus current dividend must be paid to preference holders before any dividend goes to equity shareholders. It is not lost, as it would be with non-cumulative shares.

  1. AThe unpaid dividend accumulates and must be paid before any equity dividend in a later yearCorrect
  2. BThe dividend is permanently lost since it was not declared
  3. CArjun becomes a creditor for the unpaid amount immediately
  4. DArjun must be given equity shares in lieu of the dividend

Explanation

Cumulative preference shares carry forward unpaid dividend as arrears, which must be cleared before equity shareholders receive dividend. Lapse of the dividend describes non-cumulative shares. Non-payment does not automatically convert him into a creditor or entitle him to equity shares.

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