Q.Select the correct answer and justify it: A company cannot issue ................. preference shares.

The correct option is Equity shareholders. Equity shareholders enjoy voting rights and, through them, control and take part in the management of the company.

Equity shareholders are the owners of the company and bear the ultimate risk. In return, they are given the right to vote at general meetings — one vote per share. Through this vote they elect the Board of Directors and decide important policy matters, thereby participating in the management of the company.

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The answer is Share Certificate — the legal document of title that proves ownership of shares.

When shares are allotted, the company issues a share certificate to each allottee within the prescribed period. It states the shareholder's name, the number and distinctive numbers of shares held, the amount paid up, and it bears the company's seal or authorised signatures.

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Bonus shares are the correct answer. Bonus shares are issued free of cost to existing equity shareholders by capitalising the company's reserves and profits.

When a company has large accumulated profits or free reserves, it may convert (capitalise) a part of them into share capital and distribute new shares to existing equity shareholders without asking for any payment. These are called bonus shares, and they are allotted in a fixed ratio to the shares already held.

Why the other options are wrong: …

Dividend is paid first to Preference shareholders. They enjoy a preferential (prior) right to receive dividend at a fixed rate before any dividend is paid to equity shareholders.

Preference shares carry two preferential rights: (1) a prior right to a fixed rate of dividend, and (2) a prior right to repayment of capital at the time of winding up. Because of the first right, whenever profit is distributed, preference shareholders are paid their fixed dividend first; only the remaining profit is available for equity shareholders.

Why the other options are wrong: …

The correct option is cumulative. Only cumulative preference shares are entitled to accumulated (arrears of) dividend.

Preference shares carry a fixed rate of dividend paid before equity shareholders. They are classified in several ways depending on their features.

• Cumulative preference shares carry the right to receive arrears of dividend. If the company cannot pay the dividend in a lean year, the unpaid amount accumulates and is paid in a later profitable year before any equity dividend. …