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X Ltd. issues irredeemable preference shares at face value ₹10 plus premium ₹90, carrying 8% dividend payable only when X Ltd. declares an equity dividend. The instrument is classified as:
AWholly a financial liability, because the stated 8% dividend creates a payment obligation
BWholly a financial liability, because of the redemption right on liquidation
CWholly an equity instrument, because no contractual obligation exists to deliver cash
DA compound financial instrument, with liability and equity components
Answer & Solution
Correct answer: C. Wholly an equity instrument, because no contractual obligation exists to deliver cash
Equity classification requires no contractual obligation to deliver cash. Here (i) the share is irredeemable except on liquidation and (ii) dividend is contingent on a discretionary equity-dividend declaration — so X Ltd. has an UNCONDITIONAL right to avoid cash outflow on both legs. The entire instrument is therefore equity; there is no liability component to split.
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