These future transaction (credit) done with help of documents called as Negotiable Instruments. The word Negotiable means ‘transferable by delivery’ & the word Instrument means ‘written document’. types of negotiable instruments like cheque and its types, promissory notes and its features and bill of exchange. endorsement and it types. crossing of cheque.

1. Mr. Rathesh J
Asst. Prof,
New Horizon College,
Kasturinagar
Negotiable Instruments

2. Negotiable Instruments
Introduction
 Business activity comprises exchange of goods and
service. It allows cash inflow to business. It includes
both credit and cash transaction.
 It is not possible to all business to carry transaction
in ready cash. So, they prefer credit transaction it is
also called as future cash.
 These future transaction (credit) done with help of
documents called as Negotiable Instruments.
 The Law relating to Negotiable Instruments is
contained in The Negotiable Instruments Act, 1881.
The Act came into force on 1st March 1882.

3. Meaning & Definition
 The word Negotiable means ‘transferable by
delivery’ & the word Instrument means ‘written
document’.
 A Negotiable Instrument is an instrument which
entitles a person holding it to a sum of money &
which is transferable from person to person by
mere delivery like cash.
 According to section 13(a) of IN Act 1881,
“Negotiable Instrument means a Promissory note,
bill of exchange or cheque payable to bearer,
whether the word or bearer appear on the
instrument or not”.

4. Essential elements (features) of
Negotiable Instruments
1. It must be in Writing.
2. it must be Signed by the maker or drawer.
3. There must be an unconditional Promise or
order to pay.
4. Payment of certain sum of money only.
5. Instrument must be payable at a time.
6. The drawee must be named.
7. in case of transfer, transferee receives
Negotiable Instruments in good faith & for
value.

5. Presumptions about Negotiable
Instruments (section 118-119)
 Consideration {sec 118(a)}
 Date {sec 118(b)}
 Time of acceptance {sec 118(c)}
 Time of transfer {sec 118(d)}
 Order of endorsement {sec 118(e)}
 Stamp {sec 118(f)}
 Holder in due course {sec 118(g)}
 Proof of protest (sec 119)

7. Types of Negotiable Instruments
 Negotiable by Customs or usage:
 Hundies
 Hundies were financial instruments that evolved in
India. These were used in credit transactions.
 Technically “A Hundi is an unconditional order in
writing made by a person directing another person
to pay a certain sum of money to a person named
in the order”.
 Share warrants: “Share warrant is like an option
issued by a company that gives the holder the right
to buy stock from the company at a specified price
within a certain designated time period”.
 Dividend Warrants: “A Dividend Warrant is an
instrument by which company pays dividend in the

8.  Bankers Draft: “ A banker’s cheque or banker draft is a
cheque where the funds are withdrawn dircectly from a
banker’s, not from an individual’s account”
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 Circular notes: “Circular notes is a written request by a
bank to its foreign correspondents to pay a specified
sum of money to a named person” The correspondents
must be satisfied of the identity of the applicant, before
payment; and the requisite proof of such identity
 Bearer Debentures: “The debentures which are payable
to the bearer & whose names do not appear in the
register of the debenture holder are known as Bearer
Debentures”.
 Railway Receipts: receipts which are issued under
section 65 of The Railways Act 1989
 Debentures of Bombay Port Trust

9. Negotiable by Statute
 Promissory Note: Promissory Note in writing
by a person to pay certain sum of money to
specified person.
 Also called as Pro-Note.
 According to section 4 of Negotiable
Instrument Act “A Promissory note is an
instrument in writing containing an
unconditional undertaking signed by the
maker to pay a certain sum of money
only to, or the order of certain person, or

10. Parties of Promissory Note
Maker: person who makes the promissory
note & promises to pay the money stated.
Payee: person to whom the amount of
promissory note is payable (to whom the
promise to pay is made)

11. Specimen of Pro-Note:

12. Essential elements (features) of Pro-
Note
1. It must be in Writing
2. The maker must Sign
3. It must contain an express Promise
4. Payment must be in legal money only
5. Maker must be certain
6. Payee must be certain
7. Sum payable must be certain
8. Bank note or Currency note is Not a Pro-
Note
9. Promise to must be Unconditional

13. Pro-Note Case analysis

14. Bill of Exchange
 Drafts were used for commercial
transaction in early Babylon, Egypt &
Rome.
 Bill of exchange also termed as Money
Draft. It can be used in both in domestic &
Foreign Trade & also can be discounted.
 A cheque is also a Bill of Exchange.
 It is a written order signed by one person
(drawer) requiring a second person
(drawee) to pay on demand or at a stated

17. PARTIES
 Drawer: The maker of the bill of exchange & the
responsible person for content written in the bill.
 Drawee & Acceptor: The person who is directed
to pay & who accept the directions.
 Payee: The person to whom the payment is made
by the Drawee (many times Drawer is Payee).
 Holder: The Drawer or Payee who is in
possession of the bill.
 Endorser: The person who transfer the bill to
another person.

18. Essential features of Bill of Exchange
1. It must be in Writing
2. The Drawer must Sign
3. Drawer, Drawee & Payee must be
certain
4. It must contain Unconditional order
5. It should be an order to pay
6. Sum payable must be certain
7. It should be stamped
8. Order to pay must be in legal money

19. Types of Bills of Exchange
On the basis of
Period
Demand Bills
Term Bills
On the basis of
Object
Trade Bills
Accommodation
Bills
Other
Classification
Inland Bills
Foreign Bills

20. Types of Bills of Exchange
 On the basis of Period
Demand Bills
These bills have no fixed date of the
payment. These Bills are payable
anytime when the bill is presented by
the Payee.
 Term Bills
These bills are payable after specified
period of time.

21. On the basis of Object
 Trade Bills
 These bills are drawn & accepted against the
sale & purchase of goods on credit.
 Trade bills are drawn by the seller (Drawer) &
accepted by the buyer (Drawee)
 Accommodation Bills
 These bills do not drawn against any trade (buying &
selling).
 This bill drawn without any consideration
 The intention is to help one party or both the parties
financially

22. Other Classification
 Inland Bills
 These bills are drawn in a country upon person
lining in the same country or payable in same
country.
 All the parties involved in the bill resides in the
same country
 Eg: ‘A’ is residing in Bangalore draws a bill on ‘B’
residing in Mumbai for the purchase of
Machinery.
 Foreign Bills
 These bills are drawn in one country & accepted,

24. Cheque
 According to Sec 6 of Negotiable Instrument Act,
1881 “A Cheque is a Bill of exchange drawn on a
specific banker, & not expressed to be payable
otherwise than on demand”
 In simple words – Cheque is a Bill of
exchange drawn on a banker payable on
demand

25. Parties of Cheque
 Drawer: Who draws the cheque
 Drawee: On whom cheque is drawn (Always
banker is drawee)
 Payee: Who receives money through cheque
(whose name is written on it)
 Holder: Who is entitled in his own name to the
possession of the instrument.

26. Features of cheque
 It must be signed by the drawer
 It must contain an unconditional order
 Order to a specific banker
 Payable on demand
 Order to pay certain sum of money

27. Types of cheques
Bearer Cheque
Order Cheque
Uncrossed/Open Cheque
Crossed Cheque
Anti-dated Cheque
Post-dated Cheque
Stale Cheque

28.  Bearer Cheque:
 When a cheque includes “or bearer” on the
face of the cheque & which is not cancelled is
Bearer cheque.
 Cheques are payable to the specified person
or any other who presents it to bank.
 This type of cheques are associated with risk
 Order Cheque:
 When a cheque in which the word “bearer”
appearing on the face of the cheque is
cancelled & when in its place word “or
order” written on the face of the cheque.
 These cheques are payable to specified
person or to any one else to whom it is

29.  Crossed Cheque:
When a particular cheque in which 2
parallel lines are drawn on the face of the
cheque or with written like “A/c Payee” or “&
Co” or “Not negotiable”
Sum payable of these cheques can not be
withdrawn at the bank counter but it can
only credited to the payee’s account
..Picturescrossed cheque
 Uncrorssed/open Cheque:
When a particular cheque is not crossed
Sum payable for these cheque can be
withdrawn at the bank counter.

30.  Anti-dated Cheque
 Cheque which bears a date earlier than the date
on which it is presented to bank.
 This cheque is valid up to 3 months from the date
of issuance.
 Post-dated Cheque:
 If a cheque bears a date which is yet to come
(future date) is called post-dated cheque
 Stale Cheque:
 If a cheque is presented for payment after 3
months form the date issue date is called stale
cheque
 Stale cheques will not be paid by the banker
 Eg:A cheque dated 01.12.2017 can be paid upto
28.02.2018 and as on 01.03.2018 it will be treated

31. Difference between Promissory Note & Bill of Exchange
Bill of Exchange Promissory Note
It is an unconditional order to pay
money.
It is an unconditional undertaking or
promise to pay money.
There are mainly 3 parties i.e drawer.
Drawee and payee
There are mainly 2 parties i.e maker and
payee
It is drawn by the creditor It is made by the debtor
It requires acceptance It does not require any acceptance
Payable to the maker himself It cannot be made payable to the maker
The drawee of a bill can attach
conditions while accepting bill
The maker of promissory note cannot
attach any condition to it
Liability of the maker is only secondary Liability of the maker is primary
It is mainly used for financing trade It is mainly used for raising loans
The liability of the two or more acceptors
is only joint liability
The liability of the two or more makers
may be joint or joint and several
liability
Notice of dishonour is required to be
given to the maker
Notice of dishonour is not required to
be given to the maker.

32. Difference between promissory Note & Cheque
Cheque Promissory Note
It is an unconditional order to pay
money.
It is an unconditional undertaking or
promise to pay money.
There are mainly 3 parties i.e drawer.
Drawee and payee
There are mainly 2 parties i.e maker and
payee
It is drawn by the creditor It is made by the debtor
It can be made payable to the maker
himself i.e self cheque.
It cannot be made payable to the maker
It is required to be paid by the drawee i.e
Banker.
It is required to be paid by the maker.
A cheque may be crossed. A promissory note is not crossed.
It does not require a stamp duty It requires a stamp duty.
It is a means of payment It is a means of borrowing.
It is always made payable on demand It is payable either on demand or after a
fixed time.

33. Crossing of cheque
 Crossing of cheque means act of drawing two
parallel transverse lines across the face of the
cheque with or without the words “& company”
or “Not Negotiable” or “ Account Payee”
between the parallel transverse lines, that is
usually drawn on the left hand corner of the
cheque.

34. Types or kinds of Crossing
1. General Crossing:
 A general crossing defined in Section
123 of the Indian Negotiable Instrument
Act,1881 as,
The words “and company” or any
abbreviation thereof between 2 parallel
lines or
2 lines with the words “not
negotiable”.

36. 2. Special Crossing
 Special crossing means writing the name of some
banker with or without two parallel lines or words like
“not negotiable” and “account payee” across the face of
a cheque.

37. 3. Double Crossing
 Section 125 of Indian Negotiable Instrument Act, 1881,
“Where a cheque is crossed specially to the banker, the
banker to whom it is crossed, may again cross it
specially to another banker as his agent for
collection”.
 In other words, crossing a cheque specially to more
than one banker.

38. 4. Restrictive Crossing
 This type of crossing directs the banker to pay
only to the account of the “payee”, or “the party
named”, or “his agent”.

39. Endorsement (Indorsement)
 The term “endorsement” or “indorsement” is
derived from the Latin term “in-dorsum” which
means “on the back”
 Endorsement means signing one’s name on the
back of a negotiable instrument may be a bill of
exchange, a promissory note, or a cheque, with a
view of transferring to another person through
delivery.

40. Parties of Endorsement:
 Endorser (Transferor): The Person who
endorsed the instrument that is the person who
signs his name on the back of the instrument for
the purpose of transferring the property or value
to another.
 Endorsee (Transferee): The person to whom the
instrument is endorsed is called endorsee.

41. Features of Valid Endorsement
 It should be on the instrument
 It should be made by the holder
 Endorser should sign
 Signature should be in Ink (not by pencil or
rubber stamp)
 An illiterate person should endorsed by
putting his left hand thumb impression
 An endorsement need not be dated.
 Name of married women should be
accomplished by the name of her husband

42. Who can endorse an
Instrument:
 The Payee of the instrument.( 1st Endorser)
 The holder of a negotiable instrument.
 The endorsee of the instrument.
 The drawer or maker of a promissory note
or a bill of exchange or a cheque
 All of the several joint payees, drawers,
makers or endorsees of the instrument.

43. Kinds of endorsement
 Blank or General Endorsement:
It is one where the endorser signs only his
name on the back of the instrument.
 No further endorsement is necessary for blank
endorsement.
 Full or Special Endorsement:
If the endorser adds a direction above his
signature so as to make the instrument payable
to a specified person or to his order
If an endorser signs not only his name but also
name of the endorsee on the back of the
instrument. Eg., “Pay A or order”

44.  Partial Endorsement:
 Instructs to transfer only a part of the amount
payable under the instrument or which purports to
transfer the instrument to two or more endorsees.
 For example: “Pay B or order Rs. 2000 and C or
order Rs.2000”
 Restrictive Endorsement:
 The endorsement which prohibits further
negotiation (Transferability) of the instrument.
 The endorsee gets the right to receive the payment
& he cannot further negotiate the instrument
 Eg: “Pay to A Only”

45. Conditional Endorsement: It is
one whereby the endorser excludes
or limits his liability to the endorsee.
For example- “ Pay A or order on
arrival of ship to Goa”
Sans Recourse Endorsement:
Endorser does not incur any
liability to endorsee
Eg: “pay to Z sans Recourse”

46. Facultative Endorsement:
Endorser Give up some rights
against the instrument.
Eg: “Pay to A. Notice of Dishonor
waived”
Sans Frais Endorsement:
When endorser does not want the
endorsee of any subsequent
holder to incur any expenses.