NEGOTIABLE

INSTRUMENTS

BY:
VENIKA SAINI
37 MBA 09
ANUJ GUPTA
43 MBA 09
 Negotiable Instruments

• What is negotiable?

– Negotiable means transferable.

– The negotiation that goes on refers to the

transfer of the instrument between two people,
or from one bank to another, or even from one
country to another.
• What is an instrument?

– In the broadest sense, almost any agreed-

upon medium of exchange could be considered
a negotiable instrument.

– In day-to-day banking, a negotiable

instrument usually refers to cheques, drafts,
bills of exchange, and some types of
promissory notes.
 SECTION 13(1):
“A negotiable instrument means a promissory
note, bill of exchange or cheque payable either
to order or bearer”

Justice Willis:
“A negotiable instrument is one, the property in
which is acquired by anyone who takes it
bonafide, and for value not withstanding any
defect of title in the person from whom he took
it”
 How many negotiable
instruments we have?
• We have three main negotiable
instruments.
• 1. Promissory note
• 2. Bill of Exchange
• 3. Check
 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
• 1. Transferable by delivery:
• The instrument is transferable by delivery
or by endorsement and delivery.

• 2. Entitled to receive
money:
• The legal holder of the instrument is
entitled to receive money mentioned in it.
• 3. Filing a suit:
• The holder of a negotiable
instrument has the right to file a suit
in his name for payment from all or
any of the concerned parties.
 Promissory Note
• Section (4)
defines a promissory note as an “instrument in
writing containing 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 order of a certain person or to the bearer
of the instrument.”
 Essential feature of the
Promissory note
1. A promissory note must be in writing, duly signed by its
maker and properly stamped as per Indian Stamp Act.

2. It must contain an undertaking or promise to pay.For

example, if some one writes ‘I owe Rs. 5000/- to Satya
Prakash’, it is not a promissory note.

3. The promise to pay must not be conditional. For example,

if it is written ‘I promise to pay Suresh Rs 5,000/- after
my sister’s marriage’, is not a promissory note.

4. It must contain a promise to pay money only. For

example, if some one writes ‘I promise to give Suresh a
Maruti car’ it is not a promissory note.
5. A promissory note may be payable on demand or after a
certain date. For example, if it is written ‘three months
after date I promise to pay Satinder or order a sum of
rupees Five Thousand only’ it is a promissory note.

6. The sum payable mentioned must be certain or capable of

being made certain. It means that the sum payable may
be in figures or may be such that it can be calcul

7. There are two parties a promissory note.

(i) Maker
(ii) Payee
• (i) Maker:
• He is the person who draws and signs the
Promissory note and promise to pay the amount.
• (ii) Payee:
• He is the person to whom the amount of the
promissory note is payable.

• Specimen of a Promissory Note

 Bills 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.
• According to Section 5,
“ 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.”
 Parties to a Bill of
Exchange:
• There are three parties involved in a bill of
exchange:

1. The Drawer – The person who makes the order

for making payment.
2. The Drawee – The person to whom the order to
pay is made. He is generally a debtor of the
drawer.
3. The Payee – The person to whom the payment
is to be made.
Specimen of a Bill of
Exchange
 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 cheque is called

drawer, the bank on which the cheque is drawn is
called drawee, and the person to whom payment
is to be made is called Payee.
• The Negotiable Instruments Act,1881 defines a
“ cheque” as a bill of exchange drawn on a
specified banker and not expressed to be payable
otherwise than on demand.
SPECIMEN OF A CHEQUE
 Features of a cheque:
• It must be in writing & duly signed by the drawer.

• It contains an unconditional order.

• It is issued on a specified banker only.

• The amount specified is always certain and must

be clearly mentioned both in figures and words.
• It is always payable on demand.

• The cheque must bear a date

otherwise it is invalid and shall not
be honored by the bank.
 Types of Cheque
• Open cheque.

• Crossed cheque.

• Bearer cheque.

• Order cheque
 Open cheque
• A cheque is called ‘Open’ when it is possible to
get cash over the counter at the bank. The holder
of an open cheque can do the following:

i. Receive its payment over the counter at the

bank,
ii. Deposit the cheque in his own account
iii. Pass it to some one else by signing on the
back of a cheque.
 Crossed cheque
• Since open cheque is subject to risk of theft, it is
dangerous to issue such cheques. This risk can be
avoided by issuing another types of cheque called
‘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’.
 Bearer cheque
• A cheque which is payable to any person who
presents it for payment at the bank counter is
called ‘Bearer cheque’.

• A bearer cheque can be transferred by mere

delivery and requires no endorsement.
 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.
 Revolution of negotiable
instrument
• Credit card

• Debit card

• Mobile banking

• Online banking
 Disadvantages
• Credit card fraud

• Charging fees
 CASE STUDY

 Three Held With Shahrukh

Khan’s Credit Card
o On Feb10, Vinay Vijay Tambe (22),
James Paul Peremal (28), Shekar Jadhav (44),
went to Shopper’s Stop and did shopping of
Rs.25000 with Shahrukh’s credit card.
 Connecting Globally

 Individual Feels Free To

Trade Globally.

 Smooth Flow of Trade.

 Negotiable Instruments
As Legal Proof.