Very informative

1. NEGOTIABLE INSTRUMENT ACT-1881

3. Negotiable Instruments
■ Anegotiable instrument (e.g., apersonal check) is asigned
document that promises asum of payment to aspecified
person or the assignee.
■ According to Section 13of the Negotiable Instruments
Act, 1881,anegotiable instrument means“promissory
note, bill of exchange, or cheque,payable eitherto
order or to bearer”.

4. Types of NegotiableInstruments
■ According to the Negotiable InstrumentsAct, 1881there arejust three types of
negotiable instruments i.e., promissory note, bill of exchangeand cheque.
■ However many other documents are also recognized asnegotiable instruments
on the basis of custom and usage, like hundis, treasury bills, share warrants,
etc., provided they possessthe features of negotiability.
■ In the following sections, we shall study about
1. Promissory Notes (popularlycalled pronotes)
2. Bills of Exchange(popularly called bills)
3. Cheques and Hundis (apopular indigenous document prevalent in India)

5. 1.Promissory Note
■ Supposeyou take aloan of RupeesFiveThousandfrom your friend Ramesh.
■ Youcan make adocument stating that you will pay the money to Ramesh or the
bearer on demand.Or you canmention in the document that you would like to pay
the amount after three months.
■ This document, oncesigned by you, duly stamped and handed over to Ramesh,
becomes anegotiableinstrument.
■ Now Rameshcanpersonally present it before you for payment or give this
document to someother person to collect money on his behalf.
■ Hecanendorse it in somebody else’s name who in turn canendorseit further till
the final payment is made by you to whosoever presents it before you.
■ This type of adocument is called aPromissory Note.

6. Promissory Note
■ Section 4 of the Negotiable InstrumentsAct, 1881defines apromissory
note as‘an instrument in writing (not being abank note or acurrency
note) containing anunconditional undertaking, signed by the maker, to
pay acertain sumof money only to or to the order of acertain person or
to the bearer of the instrument’

7. Specimen of a Promissory Note
Sd/ Sanjeev
Stamp
To , Ramesh
Address……..
On demand, I promise to payRamesh, s/o RamLal of Meerut or order a sum of
Rs 10,000/- (Rupees Ten Thousand only), for value received.
New Delhi
September 25,2002
Rs. 10,000/-

8. Parties to a Promissory Note
There areprimarily two parties involved in apromissory note.They are-
1.The Maker or Drawer – the person who makesthe note and promises to pay the
amount stated therein. In the above specimen,Sanjeevis the maker or drawer.
2.ThePayee – the person to whom the amount is payable. In the above specimen it
is Ramesh.
In courseof transfer of apromissory note by payeeand others, the parties involved
may be–
3.TheEndorser – the person who endorses the note in favour of another person.
4.TheEndorsee – the person in whose favour the note is negotiated by
endorsement.

9. Featuresof a promissory note
i.Apromissory note must be in writing, duly signed by its maker and
properly stamped asper Indian StampAct.
ii.It must contain an undertaking or promise to pay. Mere
acknowledgement of indebtedness is not enough. For example, if some
one writes ‘I owe Rs.5000/- to Satya Prakash’,it is not apromissory note.
iii.The promise to pay must not be conditional. For example, if it is written
‘I promise to pay Suresh Rs5,000/- after my sister’s marriage’, is not a
promissory note.

10. Features of a promissory note
iv.It must contain apromise to pay money only. For example, if someone writes ‘I
promise to give SureshaMaruti car’it is not apromissory note.
v.Theparties to apromissory note, i.e. the maker and the payee must be certain.
vi.Apromissory note may be payable on demand or after acertain date. For example, if
it is written ‘three months after date I promise to paySatinder or order asum of rupees
FiveThousandonly’it is apromissory note.
Vii. The sum payable mentioned must be certain or capable of being made certain. It
meansthat the sumpayable may be in figures or may be suchthat it canbe calculated

11. 2.Bill ofExchange
■ SupposeRajiv hasgiven aloan of RupeesTenThousand to Sameer,which
Sameer has to return.
■ Now, Rajiv also hasto give somemoney toTarun.In this case,Rajiv canmake a
document directing Sameer to make payment up to RupeesTenThousand to
Tarunon demand or after expiry of aspecified period.
■ This document is called aBill of Exchange,which canbe transferred to some
other person’s namebyTarun.
■ Section 5 oftheNegotiable InstrumentsAct, 1881 definesa billofexchangeas ‘an
instrument in writing containing an unconditional order
,signed by the maker
,
directinga certainperson topay a certainsum ofmoneyonly toortotheorderof
a certainperson,ortothebeareroftheinstrument’.

12. Rs. 10,000/- New Delhi
May 2, 2001
FivemonthsafterdatepayTarunor(tohis)orderthesumofRupeesTenThousand
only for value received.
Specimen of a Bill of Exchange

13. Parties to a Bill of Exchange
There arethree parties involved in abill of exchange.They are-
1. The Drawer –Theperson who makesthe order for making payment. In the above
specimen, Rajiv is thedrawer.
2.The Drawee –Theperson to whom the order to pay is made.He is generally adebtor
of the drawer. It isSameer in this case.
3.The Payee –Theperson to whom the payment is to be made. In this caseit isTarun.
■ Note: The drawer can also draw abill in his own name thereby he himself becomes
the payee. Here the words in the bill would be Pay tous ororder.In abill where atime
period is mentioned, just like the above specimen, is called a TimeBill. But abill may
be made payable on demand also.This is called aDemand Bill.

14. Features of a bill of exchange
i. A bill must be in
writing, dulysigned by
its drawer,accepted
by its drawee and
properly stamped as
per Indian StampAct.
ii. It must contain an
order to pay.Words
like ‘please pay Rs
5,000/- on demand
and oblige’ arenot
used.
iii.Theorder must be
unconditional.
iv.Theorder must be
topay money and
money alone.
v. The sum payable
mentioned must be
certain or capable of
being madecertain.
vi.The parties to abill
must becertain

15. 3.Cheques
■ Cheque is avery common form of negotiable instrument. If
you have asavings bank account or current account in abank,
you can issue acheque in your own name or in favor of others,
thereby directing the bank to pay the specified amount to
the person named in thecheque.
■ Therefore, acheque may be regarded asabill of exchange; the
only difference is that the bank is always the drawee in caseof a
cheque.
■ TheNegotiable InstrumentsAct, 1881defines acheque asabill
of exchange drawn on aspecified banker and not expressed to
be payable otherwise than on demand.
■ Actually, achequeis anorder by the account holder of the
bank directing his banker to pay on demand, the specified
amount, to or to the order of the person named therein or to
the bearer.

16. Rs. _________
Specimen of a Cheque
………......20.......
Pay……............................................................................................................
..
……....................................................................................................... or Bearer
Rupees………………………………………………
……………………………………………………
STATE BANK OF INDIA
Jawaharlal Nehru University, New Delhi – 110067
MSBL/97
6 5 3 0 0 3 1 1 0 0 0 2 0 5 6 1 0
Rs.

17. Features of acheque
i. Achequemust be in writing and duly signed by the drawer.
ii. Itcontains an unconditional order.
iii. It is issuedon aspecified banker only.
iv.Theamount specified is always certain and must be clearly mentioned both in
figures andwords.
v.The payee is alwayscertain.
vi.It is always payable on demand.
vii.Thechequemust bear adate otherwise it is invalid and shall not be honoured by
the bank

18. Types ofCheque
a)Open
cheque
b)
Crossed
cheque
c)Bearer
cheque
d)Order
cheque

19. Types ofCheque
■ Open cheque: A cheque is called ‘Open’ when it is possible to get cash over the
counter at the bank.The holder of anopen chequecando the following:
– Receive its payment over the counter at the bank,
– Deposit the chequein his own account
– Passit to someone else by signing on the backof acheque.
■ Crossed cheque: Since open cheque is subject to risk of theft, it is
dangerous to issue suchcheques.This risk canbe avoided by issuing
another types of chequecalled ‘Crossed cheque’.The payment of such
cheque is not made over the counter at the bank. It is only credited to the bank
account of the payee. A cheque can be crossed by drawing two transverse
parallel lines across the cheque, with or without the writing ‘Account payee’ or
‘Not Negotiable’.

20. Types ofCheque
■ Bearer cheque:Acheque which is payable to any person who
presents it for payment at the bank counter is called ‘Bearer
cheque’.Abearer cheque can be transferred by mere delivery
and requires noendorsement.
■ Order cheque:An order cheque is one which is payable to a
particular person. In such a cheque the word ‘bearer’ may be cut out
or cancelled and the word ‘order’ may be written. The payee can
transfer an order cheque to someone else by signing his or her
name on the back of it.

21. Hundis
AHundi is anegotiable instrument by usage.
It is often in the form of abill of exchangedrawn in any local language in
accordancewith the custom of the place.
Sometimes it canalso be in the form of apromissory note.Ahundi is the oldest
known instrument usedfor the purpose of transfer of money without its actual
physical movement.
Theprovisions of the Negotiable InstrumentsAct shall apply to hundis only
when there is no customary rule known to the people.

22. Hundi

24. Distinction between aPromissory
Note and a Bill of Exchange
Bills ofExchange Promissory Notes
1.Meaning Bills ofexchange are negotiable
instruments which demand
money from debtors within a
stipulated period oftime.
Promissory notes are also
negotiable instruments which
promise to pay acertain amount
within aparticular period of
time.
2.What it’s all
about?
Ordering to pay the money that
is due.
Promising to pay the money that
is due.
3. Issuedby Creditors. Debtors
4.Acceptance Bills of exchange need to be
accepted by the debtors to be
called asvalid.
There’s no suchnorm.

25. Distinction between aPromissory
Note and a Bill of Exchange
Bills of Exchange Promissory Notes
5. Parties
involved
There are three partiesinvolved
–drawer, drawee, andpayee.
Here, two parties are involved –
drawer andpayee.
6. Applicationof
copies
Bills of exchangecanbe drawn in
copies.
Promissory notes can’t bedrawn
in copies.
7.In caseof
dishonour
When the bill is dishonoured, a
notice is given to all parties that
areinvolved.
When apromissory note is
dishonoured, notice is not issued
tothe maker (debtor).

26. THANK YOU