# Dividend on Preference and Equity Shares
## Section 43 of the Companies Act, 2013
Section 43 recognises two kinds of share capital: Equity and Preference. The manner of payment of dividend depends on the nature of shares.
## 1. Preference Shares
### Core Right
Preference shareholders are assured of a preferential dividend at a fixed rate during the life of the company. "Preferential" means they are paid before equity shareholders.
### Default Nature
Dividend is generally cumulative in nature and need not be paid every year in case of deficiency of profits.
### Types of Preference Shares (Based on Payment of Dividend)
#### (a) Cumulative Preference Shares
- Carries the right to a fixed amount of dividend or dividend at a fixed rate
- Dividend gets accumulated if not paid in a given year
- Arrears are payable from profits of later years if current year's profits are insufficient
- Rule: Until and unless dividend on cumulative preference shares is paid in full (including arrears), NO dividend is payable on equity shares
#### (b) Non-Cumulative Preference Shares
- Carries the right to a fixed dividend at a fixed rate
- If no dividend is declared in a year due to any reason, the right to receive that year's dividend expires
- Holder is NOT entitled to arrears of dividend in future
## 2. Equity Shares
### Definition
Equity shares are those shares which are not preference shares.
### Characteristics
- Do NOT enjoy any preferential rights in payment of dividend or repayment of capital
- Rate of dividend is recommended by the Board of Directors
- Rate may vary from year to year
- Dividend depends upon:
1. Dividend policy of the company, AND
2. Availability of profits after satisfying rights of preference shareholders
## Priority Order of Dividend Payment
```
Profits available
↓
1. Pay arrears on Cumulative Preference Shares
↓
2. Pay current year's Preference Dividend (Cum. + Non-Cum.)
↓
3. Recommend Equity Dividend (Board)
↓
4. Approve at AGM and pay equity shareholders
```
## Why This Matters
When examining dividend issues, the status of preference dividend arrears is often the deciding factor. A company sitting on accumulated preference arrears cannot leapfrog and pay equity dividend — this is a frequently tested point.
## Key Takeaway
- Cumulative = arrears carry forward; equity blocked until preference is paid in full
- Non-Cumulative = use it or lose it; one year's deficit means that year's dividend right is gone
- Equity = residual claimant only