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CSEET · Business Laws and Management · Elements of Company Law

Sundaram Textiles Ltd issued shares carrying a preferential right to a fixed 9% dividend and to repayment of paid-up capital on winding up. The shares also give the holders a right to participate with equity shareholders in surplus assets remaining after all capital is repaid. How is this capital classified under Section 43?

The capital is preference share capital. Section 43 deems capital to be preference capital even if, in addition to its fixed dividend and preferential repayment rights, it participates fully or partly with other capital in dividends or in the surplus remaining after capital is repaid.

  1. AEquity share capital, because it participates in surplus
  2. BPreference share capital, despite the participation rightsCorrect
  3. CNeither, as a share cannot have both features
  4. DEquity share capital with differential voting rights

Explanation

Section 43(iii) says capital is deemed to be preference capital even if, besides the preferential rights, it can participate in dividends or in surplus after capital is repaid. The preferential rights decide the classification, so the participation does not make it equity.

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