Negotiable instruments act 1881,calicut university study material

1. DCMS
SAFI INSTITUTE OF ADVANCED STUDY ,VAZHAYOOR
NOUSHAD K,

2. NEGOTIABLE
INSTRUMENTS ACT , 1881
In India only three kinds of instruments are
recognized as negotiable instruments viz.,
promissory notes, bills of exchange and cheques.

3. Negotiable Instruments
 Documents of a certain type, used in
commercial transactions and monetary
dealings, are called Negotiable instruments.
 “Negotiable” means transferable by delivery
and “instrument” means a written document
by which a right is created in favour of some
person.
 Thus, negotiable instrument means “ a
document transferable by delivery”

4. Negotiable Instruments
Definition:
Negotiable Instruments Act , 1881 states that,
“ A negotiable instrument means a promissory
note, bill of exchange or cheque payable
either to order or to bearer”.
---Sec. 13(1)

5. What is Negotiation?
 When a Promissory note, Bill of exchange or
cheque is transferred to any person, to make
that person the owner of the negotiable
instruments, then the instrument is said to be
negotiated.

6. Characteristics of the
Negotiability
 An instrument is negotiable by virtue of the
following features,
 1. Transferable by delivery
 2. Entitled to receive money
 3. Filing a suit

7. Characteristics of the Negotiable
Instruments
 Freely transferable
 Negotiability
 In writing
 Un conditional order or promise
 Payment of a certain sum of money
 Time of payment
 The payee must be a certain person
 A negotiable instrument must bear the
signature of its maker

8. Cont…..
 Delivery of instrument is essential
 Stamping of bill of exchange and promissory
notes is mandatory

9. Types of negotiable instruments
 1. Promissory note
 2. Bill of Exchange
 3. Cheque

10. What is Promissory note?
 A Promissory note is the simplest and earliest
kind of credit instrument.
 “It is an unconditional written promise by
one person to another in which the maker
(payer) promise to pay on demand or at a
fixed or determinable date in the future, a
stated sum of money to or to the order of a
specified person or the bearer of the
instrument”.

11. Promissory Note
(Pro-Note or Hand-Note)
Definition:
“ A promissory note is an instrument in writing (not
being a bank note or currency note) containing an
unconditional undertaking signed by the maker, to
pay a certain sum of money only to , or to order of a
certain person, or to the bearer of the instrument.”
-------Sec. 4
The person who makes the promise to pay is called
the Maker. He is the debtor and must sign the
instrument.
The person who will get the money (the creditor) is
called Payee.

12. Essential Elements of a
Promissory Note
1. The instrument must be in writing.
2. It must be signed by the maker of it. The signature or mark may be
placed anywhere on the instrument, not necessarily at the bottoms. It
may be at the top or at the back of the instrument.
3. It must contain a promise to pay. It must be expressed not implied or
inferred.
e.g. “Mr. Sen I.O.U. Rs. 1000”. Here I.O.U. stands for “ I owe you.” This is
only an admission of indebtedness and not a promise to pay. So it’s
not a promissory note.
4. The promise to pay must be unconditional. If it is coupled with a
condition , it is not a promissory note.
e.g. “ I promise to pay B Rs.300 on D’s death provided D leaves me
enough to pay this sum.”
Promise to pay at a specified time or at a specified place or after
the occurrence of an event which is certain to occur or payment
after calculating interest at a certain rate
---------are not regarded as conditions.

13. 5. The maker of must be certain and definite.
6. It must be stamped according to the Indian Stamp Act.
7. The sum of money to be paid must be certain.
e.g. “ I promise to pay some money on the occasion of his marriage”
8. The payment must be in the legal tender money of India and
certain quantity of goods or foreign money.
9. The money must be payable to a definite person or according to his
order i.e. payee is indicated by his official designation.
10. It must be payable on demand or after a certain definite period of
time.
11. The Reserve Bank Act prohibits the creation of a promissory note
payable on demand to the bearer of the note, except by the Reserve
Bank or the Government of India.
Essential Elements for a
Promissory Note

14. Specimens of Promissory Notes
 “ One year after date I promise to pay B or order Rs.
500.” ---- Sd/X.Y.
Date…………
 “ On demand I promise to pay A.B of No.37, College
Street or order Rs1000(Rupees one thousand only)
with interest at 8 percent per annum, for value
received in cash.” Sd/X.Y
Date…………………
Address……………….
 “ I acknowledge myself to be indebted to B in Rs.
1000 to be paid on demand, for value received.”
Sd/X.Y

15. Specimen of a Promissory Note
Rs 1,000 New Delhi, 25 Aug’11
One month after date I promise to pay to Mr.
A.K.Jha or order the sum of rupees one
thousand only, for value received.
Sd/X.Y.
Revenue
Stamp

16. Bill of Exchange
 A bill of exchange is playing an important part
in the commercial life of the country. The
need for it arises where the buyer of goods
needs a period of credit before paying it.
 It is drawn by the creditors and is accepted by
debtor.

17. Bill of Exchange
Definition:
“ A Bill of Exchange is an instrument in writing containing
an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to, or
to the order of a certain person or to the bearer of the
instrument.”
----Sec. 5
e.g. To A.B.
“ Six months after date pay P.Q. or order Rs. 1000”
Sd/X.Y.
Date………………..
Stamp…………………

18.  The maker of a bill of exchange is called the Drawer.
The person who is directed to pay is called the
Drawee. The person who will receive the money is
called the Payee.
 When the payee has custody of the bill, he is called
the Holder. It is the holder’s duty to present the bill to
the drawee for acceptance. The drawee becomes the
Acceptor after signing on the bill.
 Sometimes the name of another person is mentioned
as the person who will accept the bill if the original
drawee does not accept it. Such a person is called
the Drawee in case of Need.
Bill of Exchange

19. Essential Elements of a Bill of
Exchange
A Bill of Exchange to be valid must fulfill the following
requirements:
1. The instrument must be in writing.
2. It must be signed by the drawer.
3. It must contain an order to pay, which is express and
unconditional.
4. The drawer, drawee and the payee must be certain and definite
individuals.
5. The amount of money to be paid must be certain.
6. The payment must be in the legal tender money of India.
7. The money must be payable to a definite person or according to
his order.
8. It must be properly stamped.

20. 9. The bill may be payable on demand or after a definite period of
time. But no one except the Reserve Bank and the
Government of India can draw a bill payable on demand to the
bearer of the bill.
If any of the requirements mentioned above is not fulfilled, the
document is not a bill of exchange.
e.g. “ Please let the bearer have Rs. 1000 and oblige.”
“ We hereby authorize you to pay on our account to the order
of X, Rs 6000.”
Essential Elements of a Bill of
Exchange

21. Classification of BOE
 Periods
 1- Demand bill
 2-Term bill
 Purpose
 1-Trade bill
 2-Accomodation bill-help party financially
 Inland bills
 Foreign bills

22. Specimen of a Bill of Exchange
Rs 1,000 New Delhi, 25 Aug’11
One month after date pay to Mr. A.K.Jha or
order the sum of rupees one thousand only,
for value received.
To
Satyender
12 miles
MIM, Ranchi Sd/Ritesh.
Revenue
Stamp
Accepted
Sd/-Satyender

23. Difference between promissory note and
bill of exchange
1. Two parties
2. Unconditional promise to
pay
3. Maker of a note is the dr.
& he himself undertakes to
pay
4. Liability of maker is
primary.
5. A pro-note cannot be made
payable to the maker
himself.
6. A note requires no
acceptance
1. Three parties
2. Unconditional order to pay
3. The drawer of a bill is the
creditor who directs the
drawee (his dr.) to pay
4. Liability of maker or
drawer is secondary.
5. Drawer and payee may be
same.
6. It must be accepted by
drawee

24. CHEQUES
What is a Cheque?
 A cheque may be defined as written order of
a depositor upon a bank to pay to or to the
order of a designated party or to the bearer, a
specified sum of money on demand.
 The person who draws the check is called
drawer, the bank on which the check is drawn
is called drawee, and the person to whom
payment is to be made is called Payee.
 Cheque is always drawn on a specified
banker and it is always payable on demand.

25. Cheque
Definition:
“ A cheque is a bill of exchange drawn upon a
specified banker and payable on demand.”
----Sec. 6
Specimen of a cheque
Cheques are usually printed in the form shown below.
e.g.
Date……………
Pay A.B. or order (or bearer) the sum of Rupees Five Hundred
only Rs. 500/-
To
X.Y. Bank Sd/C.D.

26. Essentials of a Cheque
 It must be unconditional order
1. It must be in writing
2. It must be drawn on a specified banker
3. it must be signed by the drawer
4. The order must be for the payment of a certain
sum of money only
5. Drawer, drawee and payee must be certain
6. The amount must be payable on demand
7. The signature must tally with the specimen
signature of the drawer kept in the bank.

27.  A cheque must be dated.
 A cheque drawn with a future date is valid but it is payable on and
after the date specified. Such cheques are called post-dated
cheques.
Essential Features of Cheque

28. Difference between bill of exchange and
cheque
Bill of Exchange
1. A bill of exchange may
be drawn on any person
2. A bill must be accepted
by the drawee before
making payment upon it
3. A bill is entitled to 3
days of grace
Cheque
1. But a cheque is always
drawn on a bank
2. But a cheque does not
require acceptance
3. A cheque is not entitled
to any days of grace

29. cont
4. A bill may be payable
on demand or after the
expiry of a certain
period
5. No need to crossed
6. A bill must be stamped
7. A payment of a bill
cannot be
countermanded
4. But a cheque is always
payable on demand.
5. A cheque may be
crossed
6. A cheque does not
require any stamp
7. Payment may be
countermanded by the
drawer

30. Types of Check
 We have two types of checks;
 Open Check
 Crossed check

31. What is open check?
Open Check:
 Open checks are those checks which are
paid across the counter of the bank.
 Open checks has further two types
 Bearer check
 Order check

32. Types of Open check
 Bearer check:
 If a drawer orders the bank to pay a stated sum of money to
the bearer, it is called a bearer check.
 Any person who lawfully possesses a bearer check is
entitled to receive payment of that check.
 Name of the payee need not be written
 Bank shall take signature of the bearer
 Order check:
 If the check is to the order of a person in whose favour the
check is drawn, it is called order check.
 The order check is paid by the bank only when the bank is
satisfied about the identity of the payee.
 Name of the payee should be mentioned
 Cannot be transferred by mere delivery. Requires
endorsement.

33. M.I.C.R Cheque(Magnetic Ink
Character Recognition)
 speed up the cheque clearing process
 Special quality paper and printing
specifications
 Code line at the bottom of the MICR cheque
first six numbers indicate the cheque number
next three – city code
next three – bank code
next three - branch code

34. Truncated cheque
 Cheque truncation means that the physical
cheque is scanned at the bank of first deposit
(presenting bank) and thereafter the
electronic image of the cheque is sent to the
clearing house.

35. Electronic cheque
 Electronic version of a paper cheque
 Using email or other transport methods
 Exact mirror image of a paper cheque
 Digital signature

36. Steps to create electronic cheque
 Prepare physical paper cheque. it should be
signed by drawer
 Create electronic image
 Add digital signature
 Addition to biometric signatures – only
optional

37. Crossed cheque
 If a cheque is crossed by drawing two
parallel lines across the face of the check,
with or with out the words & Co or A/c
payee only, it is called a Crossed check.
 The crossed check cannot be paid on the
counter of the drawee bank. It will be
deposited in the account of a person in
whose order or favor it is drawn.

38. Objectives of Crossing
 The check is crossed to achieve the
following objectives;
 It prevent the payment of the check to a wrongful
holder
 It ensure safe payment to the concerned receiver
 It facilitate in tracing the recipient of the payment if
the check is wrongfully crossed
 Further it is a guard against any cheating or theft.

39. Kinds of Crossing
 Legally there are two kinds of crossing;
 General crossing
 Special crossing

40. Kinds of Crossing
General crossing:
 The drawing up of two parallel lines on the
face of the check at the top left hand corner
with or without the words & Co not negotiable
or Account payee only is known as a General
Crossing.
 The effect of general crossing is that the
crossed check cannot be paid at the counter
of the bank.
 Its payment can only be deposited into the
payee’s account only.

42. Kinds of Crossing
Special crossing:
 A check is deemed to be crossed specially
when it bears across its face the name of the
banker either with or without the words not
negotiable.
 In case of special crossing the payment can
only be made to the bank named therein the
check.
 A special crossing makes a cheque safer
than general

44. Not negotiable crossing
The cheque must contain the words ‘not
negotiable’. The cheque must be crossed
generally or specially. The effect of the
words ‘not negotiable’ on a crossed
cheque is that when such a cheque is
endorsed, the endorsee cannot get a
better title than that of the endorser.
Not negotiable does not mean not
transferable

45. Restrictive Crossing or account
payee crossing
It has been adopted by commercial and
banking usage.
In this type , the words a/c payee are added
to the general or specific crossing.
It warns the collective banker that the
proceeds are to be credited only to the
account of the payee.
Further protection

46. Double crossing
 Crossing a cheque specially to more than one
banker
 A cheque cannot have Double crossing –
first crossing is defeated by the second
crossing

47. Obliterating a crossing
 Erasing the crossing on the cheque
 Opening of crossing-if the crossing of cheque
is cancelled ,Then it becomes a open cheque

48. Dating of Cheques
 Ante dated Cheque -date earlier to the date
of issue
 Post dated cheque – date which is yet to
come
 Stale cheque – a cheque which is not
presented for payment with in reasonable
period of time (3 months)
 Mutilated cheque-torn into two or more pieces

49. Holder
Holder (Sec.8)
 The holder of a promissory note, bill or cheque
means any person entitled in his own name (i) to
the possession thereof, and (ii) to receive or
recover the amount due thereon from the parties
thereto.

50. Holder in due course (Sec.9)
Holder in due course, a person must possess
the following qualification;
1.He must be a holder
2.He must be holder for valuable consideration
3.He must have become the holder of the
negotiable instrument before its maturity
4.He must take the negotiable instrument
complete and regular on the face of it
5.He must have become holder in good faith

51. .
Basis Holder Holder in Due Course
Consideration Not Necessary Only if he obtains NI for
Consideration
Maturity Before or After Maturity Only before Maturity
Right to Sue Cannot sue all prior parties Can Sue all the prior Parties
Privileges Less Privileges' than HDC More Privileges than Holder
Good Faith Holder even if he obtains NI other
than in Good Faith
HDC only if he obtains NI in good
Faith 51
Basis Holder Holder in Due Course
Consideration Not Necessary Only if he obtains NI for
Consideration
Maturity Before or After Maturity Only before Maturity
Right to Sue Cannot sue all prior parties Can Sue all the prior Parties
Privileges Less Privileges' than HDC More Privileges than Holder
Good Faith Holder even if he obtains NI other
than in Good Faith
HDC only if he obtains NI in good
Faith

52. DEMAND DRAFT
 It is an instrument used for effecting transfer
of money
 Validity 3 months but it can be revalidated on
application
 A demand draft is an order to pay money
drawn by an office of a bank upon another
office of the same bank for a sum of money
payable to order on demand.

54. Difference between cheque and
DD
 A cheque is issued by individual but a draft is
issued by banker
 A cheque is drawn by an account holder of a
bank.A draft is drawn by one branch of bank
on another branch of the same bank
 In a cheque drawer and drawee are different
persons.in a draft both the drawer and
draweee are the same bank
 Payment of cheque can be stopped by the
drawer.the payment of draft cannot be
stopped

55. Cont…
 In cheque payment is made after presenting
cheque to bank while DD is given after
making payment to bank
 A cheque can be made payable either to
bearer or order. A demand draft is always
payable to order of a certain persons
 A cheque can be dishonored for want of
sufficient balance in account. Draft cannot be
dishonored

56. Endorsement
Indorsum –on the back
The literal meaning of the word endorsement is
writing on the back of an instrument. Under the
NI Act, it means, writing of the name of the
endorsee on the back of the instrument by the
endorser under his signature with the object of
transferring the rights therein.
If an instrument is fully covered with endorsements
and no space is left, further endorsement can be
made on a slip of paper (called allonge)
annexed thereto

57. Effects of endorsement
 Endorsee gets the right, title or property in the
instrument
 He also gets the right of further negotiation
 The endorsee acquires the right of the
instrument as its holder
 The endorser guarantees to the endorsee
that he had a good title to the instrument
 The endorse certifies the genuiness of the
instrument

58. General rules regarding
Endorsement
 Signature of the endorser
 Spelling
 No addition or omission of the initial of the
name
 Prefixes and suffixes should be avoided
 Endorsement by women
 Endorsement by illiterate persons
 Endorsement by firms
 Endorsement by companies and other
institutions

59. General rules regarding
Endorsement
 Endorsement by agents
 Endorsement by liquidators
 Endorsement by trustees and executors

60. Kinds of Endorsement
1. Blank or general endorsement
Just put the signature of endorser without mention
the name of endorsee
Eg: sd/-
D.Mohan
2. Special or full endorsement
Including the name of endorsee
Eg:
Pay to Ghosh or order sd/-
D.Mohan

61. .
3. Restrictive endorsement
An endorsement, when it prohibits or restricts the
further negotiation of the instrument.
Eg: pay to Ghosh only sd/-
D.Mohan
4. Conditional or Qualified
An endorsement is conditional or qualified if it
limits or negates the liability of the endorser
Eg: pay to ghosh on Signing a receipt Sd/-
D.mohan

62. cont
5. Partial endorsement
When an endorser endorses only a part of the
amount mentioned in the instrument. it is
irregular
6.Sans frais endorsement-sans frais means
without expense.
pay aneesh or order ,without expense to me
sd/ M.P Sudheer

63. Liability of endorser
 Instrument will be accepted and paid
 Dishonur of bill –compensate

64. Liabili
ty
o
f
a
n
Endors
er
(Sec.3
5)
Every endorser who
endorsed an
instrument before its
maturity is liable to the
parties that are
subsequent to him.
And his liability arises
only if there is a default
by the party who is
primary liable to pay
the instrument on
maturity.
64

65. Regularity of endorsement

66. Marking of cheques
 Is a sort of certification given to the cheque
by the paying banker
 Stamping across the cheque “good for
payment”

67. Marking can be done at the
following instance
 Marking at the request of the drawer
 Payee or any holder
 Another bank

68. Electronic payment
 Decreasing technology cost
 Reduced operational and processing cost
 Increasing online commerce

69. Parties of e payment
 Payer and payee
 Financial institutions -2 roles
as an issuer –interacting with the payer
as an acquirer – interacting with payee

70. Characteristics of electronic
payment
 No paper
 Directly from home or office
 fast, efficient, safe,secure and less costly
 Fully traceble
 Same day value of payment
 Same day money transfer
 Convenient for the consumer
 Customer retention

71. Phases of E-Payment
 Registration
 Invoicing
 Payment selection and processing
 Payment authorization and confirmation

72. Types of E-payment
 Cards
 Internet
 Mobile payment
 Financial service kiosks
 Television set top boxes and satellite receiver
 Biometric payment
 Electronic payment networks
 Person to person payments