Negotiable Instruments

NEGOTIABLE INSTRUMENTS
Evolution & Revolution of Negotiable Instruments

As facilitator for trade and commerce & 10 years taking forward

Presented By:

Team # 2 Members Roll No

Sulabha Bhagat M1002
Fiona Cardoza M1004
Krunal Darji M1006
Kashyap Desai M1008
Sanket Gaikwad M1010
Rohan Ghadigaonkar M1012
Ajinkya Ingule M1014
Jatin Kambli M1016
Rucha Kapdi M1018
Poonam Khond M1020

M.M.S 2010-12
[Semester II]

Index

Sr.No Topic Page No

1 Introduction 3

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2 Evolution of Payment Systems in India 5

3 Negotiable instruments 8
4 Types of Negotiable Instruments 10
5 Section 123-131 & 138 20
6 Revolution of Payment Systems in India 23
7 Case Study 27
8 Conclusion 32
9 Bibliography 34

Introduction

Evolution of trade and commerce leading to the introduction of negotiable

instruments

In the primitive economic society each tribe or family produced all that is needed and
consumed it. Therefore need of commerce was not required. Commerce began to grow only

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after the division of labour and consequent development of exchange. These stages of the
introduction of commerce are as follows:

1. Non existence of commerce- In the early stages of economic life, man produced what
he needed and consumed it all by himself. Therefore at that time commerce did not exist as
there was no division of labour.

2. Trade in the form of barter- In the second stage, wants of the family increased and
many families found that they had some goods in excess and some goods deficient. These
families wanted to exchange their surplus goods for those goods which they did not possess.
This gave rise to “exchange of goods for goods, i.e., Barter system. Thus this how commerce
began.

3. Money as a medium of trade- Later money was created as medium of exchange to

remove the limitations of barter. This is the third stage of growth of commerce. Introduction
of money led to division of labour and specialization. People began to produce goods for
certain local markets. Gradually a separate class of artisans and traders came into existence.
The size of the market and the number of commodities exchanged in the market, both
increased.

4. Economy and growth of commerce- After the decline of the Guild system (i.e. an
association of craftsmen in a particular trade), a new class of people, entrepreneur class,
came into existence. This class of people became an intermediary between the producers and
consumers. Further, growth of commercial enterprise took place. Production began to be
undertaken for the markets extended over the whole country. Division of labour started
increasing. Production was divided into several branches and each branch was localized.

Various economic activities were divided into distinct groups:

 Agriculture
 Trade
 Commerce.

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5. World economy and the world market- Later various nations of the world formed
commercial relationships due to trade. As a result of the geographical discoveries of the late
15th, 16th and 17th century new trade routes were opened up and commerce grew between
nations. This led to the next stage of growth of commerce. Now, commodities were sold and
purchased between traders from different countries in the world. This gave rise to an
international world market and international trade.

These were the different stages of evolution of trade & commerce. The system of exchange
was confusing and complex. To avoid such confusion and to operate the business activities
smoothly negotiable instruments were introduced.

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Evolution of Payment Systems in India

1. The earliest payment instruments used in India

were coins, which were either punch marked or
cast in silver and copper.

2. In ancient India, loan deed forms were also used. They were called rnapatra or rnalekhya .
They contained details such as the name of the debtor and the creditor, the amount of loan,
the rate of interest, the condition of repayment and the time of repayment. The deed was
witnessed by a person of respectable means and endorsed by the loan-deed writer.

3. In the Buddhist period loan deeds called inapanna were used. In this era merchants in large
towns gave letters of credit to one another. Promissory notes were also used widely.

4. In the Mauryan period, the bill of exchange was used. It was called adesha. It was an order
that a banker had to pay to a third person.

5. In the Mughal period, the deeds were called dastawez and were of two types: dastawez-e-
indultalab which was payable on demand and dastawez-e-miadi which was payable after a
stipulated time. In the this period, foreign travellers used the bills of exchange in the then
great shopping centres. The Indian bankers also issued bills of exchange on foreign countries,
mainly for financing sea-borne trade. Another instrument used was the Pay order. It was
called Barattes and was similar to the present day drafts or cheques.

6. In the twelth Century, the Hundis was introduced..

7. . Hundis were used

 to transfer funds from one place to another
 to borrow money
 as bills of exchange

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8. Hundis were of various kinds as follows:

 Darshani Hundi : This was a demand bill of exchange, payable on presentation
according to the usage and custom of the place. This was mainly of four types.
 Sah-jog – This was a hundi transferable by endorsement and delivery but payable
only to a Sah or to his order. A Sah was a respectable and responsible person, a
man of worth and substance who was known in the market.
 Dhanni-jog – This was a demand bill of exchange, payable only to the dhanni,
i.e. the payee. This hundi was not negotiable.
 Firman-jog - Hundis came into existence during the Mughal period. Firman is a
Persian word meaning order and therefore, firman-jog hundis were payable to the
order of the person named. These hundis could be negotiated with a simple or
conditional endorsement.
 Dekhavanhar - Hundi was a bearer demand bill of exchange, payable to the
person presenting it to the drawee. Thus it corresponded to a bearer cheque.
 Muddati Hundi : This is a bill that is payable after stipulated time or on a given date or on
a determinable future date or on the happening of a certain stipulated event. The most
important type of muddati hundi was the jokhami hundi, which was a documentary bill of
exchange corresponding to the present day bill of lading i.e. The bill of lading is a legal
document serves as a receipt of shipment when the good is safely delivered to the
predetermined destination

9. The princely states of India had their own distinct coins. An example of this was the Arcot
Rupee coin struck by the Nawab of Arcot in the Madras Presidency.

10. By 1740, the Europeans coined this rupee, and the coins came to be known as English,
French and Dutch arcots.

11. In 1770, the first public bank-The bank of Hindustan introduced the cheque.

12. In the 18th century paper money, originated with the note issues of private banks as well as
semi-government banks. Amongst the earliest issues were those by the Bank of Hindustan,

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the General Bank in Bengal and Behar, and the Bengal Bank. Later, three Presidency Banks
were established and the job of issuing notes was taken over by them.

13. In 1827 the British introduced the Post. These were Inland Promissory notes issued by the
bank on a distant place. They were mainly used by European businessmen for purpose of
sending money to someone at a distance.

14. In 1835, the East India Company introduced the Company's Rupee to bring about uniformity
of coinage over British India.

15. In 1833, the Bank of Bengal started granting loans against the security of Company's paper,
plate, jewels or goods of non-perishable goods.

16. From 1839 the Bank of Bengal began the buying and selling bills of exchange.

17. In 1861, The Paper Currency Act gave the Government of India the monopoly to Issue
Notes, thus bringing an end to note issues of private and Presidency Banks.

18. In 1881, the Negotiable Instruments Act (NI Act) was passed, formalizing the usage and
characteristics of instruments like the cheque, the bill of exchange and promissory note. The
NI Act provided a legal framework for non-cash paper payment instruments in India.

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Negotiable Instruments

Exchange of goods and services is the basis of every business activity. Goods are bought
and sold for cash as well as on credit. All these transactions require flow of cash either
immediately or after a certain time. In modern business, large number of transactions involving
huge sums of money takes place every day. It is quite inconvenient as well as risky for either
party to make and receive payments in cash. Therefore, it is a common practice for businessmen
to make use of certain documents as means of making payment. Some of these documents are
called negotiable instruments.

Definition of Negotiable Instrument

The term 'negotiable instrument' has been defined as- A 'negotiable instrument' means a
promissory note, bill of exchange or cheque payable either to order or to bearer."

The word 'negotiable' means transferable from one person to another and the term 'instrument'
means 'any written document by which a right is created in favor of some person.' Thus, the
negotiable instrument is a document by which rights vested in a person can be transferred to
another person in accordance with the provisions of the Negotiable Instruments Act, 1881.

Meaning of Negotiable Instruments

The concept of negotiability is one of the most important features of commercial paper. A
negotiable instrument is a written document, signed by the maker or drawer, and containing an
unconditional promise to pay (or order to pay) a certain sum of money on delivery, or at a
definite time, to the bearer (or to the order).

Example

Suppose Pitamber, a book publisher has sold books to Prashant for Rs 10,000/- on three
months credit. To be sure that Prashant will pay the money after three months, Pitamber may
write an order addressed to Prashant that he is to pay after three months, for value of goods
received by him, Rs.10,000/- to Pitamber or anyone holding the order and presenting it before
him (Prashant) for payment. This written document has to be signed by Prashant to show his
acceptance of the order. Now, Pitamber can hold the document with him for three months and on

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the due date can collect the money from Prashant. He can also use it for meeting different
business transactions. For instance, after a month, if required, he can borrow money from Sunil
for a period of two months and pass on this document to Sunil. He has to write on the back of the
document an instruction to Prashant to pay money to Sunil, and sign it. Now Sunil becomes the
owner of this document and he can claim money from Prashant on the due date. Sunil, if
required, can further pass on the document to Amit after instructing and signing on the back of
the document. This passing on process may continue further till the final payment is made.

In the above example, Prashant who has bought books worth Rs. 10,000/- can also give an
undertaking stating that after three month he will pay the amount to Pitamber. Now Pitamber can
retain that document with himself till the end of three months or pass it on to others for meeting
certain business obligation (like with Sunil, as discussed above) before the expiry of that three
months time period.

Thus, we can say negotiable instrument is a transferable document, where negotiable means
transferable and instrument means document. To elaborate it further, an instrument, as
mentioned here, is a document used as a means for making some payment and it is negotiable
i.e., its ownership can be easily transferred.

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Types of Negotiable Instruments

According to the Negotiable Instruments Act, 1881 there are just three types of
negotiable instruments i.e., promissory note, bill of exchange and cheque. However many other
documents are also recognized as negotiable instruments on the basis of custom and usage, like
hundis, treasury bills, share warrants, etc., provided they possess the features of negotiability. In
the following sections, we shall study about Promissory Notes (popularly called pronotes), Bills
of Exchange (popularly called bills), Cheques and Hundis (a popular indigenous document
prevalent in India), in detail.

1. Promissory Note

Suppose you take a loan of Rupees Five Thousand from your friend Ramesh. You can
make a document stating that you will pay the money to Ramesh or the bearer on demand. Or
you can mention in the document that you would like to pay the amount after three months. This
document, once signed by you, duly stamped and handed over to Ramesh, becomes a negotiable
instrument. Now Ramesh can personally present it before you for payment or give this document
to some other person to collect money on his behalf. He can endorse it in somebody else’s name
who in turn can endorse it further till the final payment is made by you to whosoever presents it
before you. This type of a document is called a Promissory Note.

Promissory note is defined as ‘an instrument in writing (not being a bank note or a currency
note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of
money only to or to the order of a certain person or to the bearer of the instrument’.

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Specimen of a Promissory Note

Rs. 10,000/- New Delhi

September 25, 2002

On demand, I promise to pay Ramesh, s/o RamLal of Meerut or order a sum of Rs

10,000/- (Rupees Ten Thousand only), for value received.

To , Ramesh Sd/ Sanjeev

Address…….. Stamp

Parties to a Promissory Note

There are primarily two parties involved in a promissory note. They are

1. The Maker or Drawer – the person who makes the note and promises to pay the amount
stated therein. In the above specimen, Sanjeev is the maker or drawer.

2. The Payee – the person to whom the amount is payable. In the above specimen it is Ramesh.
In course of transfer of a promissory note by payee and others, the parties involved may be -

a. The Endorser – the person who endorses the note in favor of another person. In the above
specimen if Ramesh endorses it in favor of Ranjan and Ranjan also endorses it in favor of
Puneet, then Ramesh and Ranjan both are endorsers.

b. The Endorsee – the person in whose favor the note is negotiated by endorsement. In the
above, it is Ranjan and then Puneet.

(Endorsement means transfer of any document or instrument to another person by signing on its
back or face or on a slip of paper attached to it)

Features of a promissory note

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Let us know the features of a promissory note.

I. A promissory note must be in writing, duly signed by its maker and properly stamped as per
Indian Stamp Act.

ii. It must contain an undertaking or promise to pay. Mere acknowledgement of indebtedness is

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

iii. 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.

iv. It must contain a promise to pay money only. For example, if someone writes ‘I promise to
give Suresh a Maruti car’ it is not a promissory note.

v. The parties to a promissory note, i.e. the maker and the payee must be certain.

vi. 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.

vii. 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 calculated.

2. Bill of Exchange

Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer has to
return. Now, Rajiv also has to give some money to Tarun. In this case, Rajiv can make a
document directing Sameer to make payment up to Rupees Ten Thousand to Tarun on demand
or after expiry of a specified period. This document is called a bill of exchange, which can be
transferred to some other person’s name by Tarun.

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’.

Specimen of a Bill of Exchange

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Rs. 10,000/- New Delhi

May 2,2001

Five months after date pay Tarun or (to his) order the sum of Rupees Ten
Thousand only for value received.

To Accepted Stamp

Sameer Sameer S/d

Address Rajiv

Parties to a Bill of Exchange

There are three parties involved in a bill of exchange. They are

I. The Drawer – The person who makes the order for making payment. In the above
specimen, Rajiv is the drawer.

ii. The Drawee – The person to whom the order to pay is made. He is generally a debtor
of the drawer. It is Sameer in this case.

iii. The Payee – The person to whom the payment is to be made. In this case it is Tarun.

The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the
words in the bill would be Pay to us or order. In a bill where a time period is mentioned, just like
the above specimen, is called a Time Bill. But a bill may be made payable on demand also. This
is called a Demand Bill.

Features of a bill of exchange

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Let us know the various features of a bill of exchange.

I. A bill must be in writing, duly signed by its drawer, accepted by its drawee and properly
stamped as per Indian Stamp Act.

ii. It must contain an order to pay. Words like ‘please pay Rs 5,000/- on demand and oblige’ are
not used.

iii. The order must be unconditional.

iv. The order must be to pay money and money alone.

v. The sum payable mentioned must be certain or capable of being made certain.

vi. The parties to a bill must be certain.

3. Cheques

Cheque is a very common form of negotiable instrument. If you have a savings bank
account or current account in a bank, you can issue a cheque in your own name or in favor of
others, thereby directing the bank to pay the specified amount to the person named in the cheque.
Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the bank is
always the drawee in case of a cheque.

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. Actually, a cheque
is an order 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.

Specimen of a Cheque

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………......20.......

Pay……..............................................................................................................

……....................................................................................................... or Bearer

Rupees………………………………………………

……………………………………………………

STATE BANK OF INDIA

Jawaharlal Nehru University, New Delhi – 110067

MSBL 653003 110002056 10

Features of a cheque

Let us look into some important features of a cheque.

I. A cheque must be in writing and duly signed by the drawer.

ii. It contains an unconditional order.

iii. It is issued on a specified banker only.

iv. The amount specified is always certain and must be clearly mentioned both in figures and
words.

v. The payee is always certain.

vi. It is always payable on demand.

vii. The cheque must bear a date otherwise it is invalid and shall not be honored by the bank.

Types of Cheque

Broadly speaking, cheques are of four types.

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a) Open cheque, and

b) Crossed cheque.

c) Bearer cheque

d) Order cheque

Let us know details about these cheques.

a) 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 someone else by signing on the back of a cheque.

b) 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 other 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’.

c) 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.

d) 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.

There is another categorization of cheques which is discussed below:

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Ante-dated cheques:- Cheque in which the drawer mentions the date earlier to the date of
presenting if for payment. For example, a cheque issued on 20th May 2003 may bear a date 5th
May 2003.

Stale Cheque:- A cheque which is issued today must be presented before at bank for payment
within a stipulated period. After expiry of that period, no payment will be made and it is then
called ‘stale cheque’. Find out from your nearest bank about the validity period of a cheque.

Mutilated Cheque:- In case a cheque is torn into two or more pieces and presented for payment,
such a cheque is called a mutilated cheque. The bank will not make payment against such a
cheque without getting confirmation of the drawer. But if a cheque is torn at the corners and no
material fact is erased or cancelled, the bank may make payment against such a cheque.

Post-dated Cheque:- Cheque on which drawer mentions a date which is subsequent to the date
on which it is presented, is called post-dated cheque. For example, if a cheque presented on 8th
May 2003 bears a date of 25th May 2003, it is a post-dated cheque. The bank will make payment
only on or after 25th May 2003.

4. Hundis

A Hundi is a negotiable instrument by usage. It is often in the form of a bill of exchange drawn
in any local language in accordance with the custom of the place. Sometimes it can also be in the
form of a promissory note. A hundi is the oldest known instrument used for the purpose of
transfer of money without its actual physical movement. The provisions of the Negotiable
Instruments Act shall apply to hundis only when there is no customary rule known to the people.

Types of Hundis

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There are a variety of hundis used in our country. Let us discuss some of the most common ones.

1. Shah-jog Hundi: This is drawn by one merchant on another, asking the latter to pay the
amount to a Shah. Shah is a respectable and responsible person, a man of worth and known in the
bazaar. A shah-jog hundi passes from one hand to another till it reaches a Shah, who, after
reasonable enquiries, presents it to the drawee for acceptance of the payment.

2. Darshani Hundi: This is a hundi payable at sight. It must be presented for payment within a
reasonable time after its receipt by the holder. Thus, it is similar to a demand bill.

3. Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time. This is
similar to a time bill.

There are few other varieties like Nam-jog hundi, Dhani-jog hundi, Jawabee hundi, Jokhami
hundi, Firman-jog hundi, etc.

Features of Negotiable Instruments

After discussing the various types of negotiable instruments let us sum up their features as under

1. A negotiable instrument is freely transferable. Usually, when we transfer any property to

somebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But,
such formalities are not required while transferring a negotiable instrument. The ownership is
changed by mere delivery (when payable to the bearer) or by valid endorsement and delivery
(when payable to order). Further, while transferring it is also not required to give a notice to the
previous holder.

2. Negotiability confers absolute and good title on the transferee. It means that a person who
receives a negotiable instrument has a clear and undisputable title to the instrument. However,
the title of the receiver will be absolute, only if he has got the instrument in good faith and for a
consideration. Also the receiver should have no knowledge of the previous holder having any
defect in his title. Such a person is known as holder in due course. For example, suppose Rajiv
issued a bearer cheque payable to Sanjay. It was stolen from Sanjay by a person, who passed it
on to Girish. If Girish received it in good faith and for value and without knowledge of cheque

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having been stolen, he will be entitled to receive the amount of the cheque. Here Girish will be
regarded as ‘holder in due course’.

3. A negotiable instrument must be in writing. This includes handwriting, typing, computer

printout and engraving, etc.

4. In every negotiable instrument there must be an unconditional order or promise for

payment.

5. The instrument must involve payment of a certain sum of money only and nothing else.
For example, one cannot make a promissory note on assets, securities, or goods.

6. The time of payment must be certain. It means that the instrument must be payable at a time
which is certain to arrive. If the time is mentioned as ‘when convenient’ it is not a negotiable
instrument. However, if the time of payment is linked to the death of a person, it is nevertheless a
negotiable instrument as death is certain, though the time thereof is not.

7. The payee must be a certain person. It means that the person in whose favour the instrument
is made must be named or described with reasonable certainty. The term ‘person’ includes
individual, body corporate, trade unions, even secretary, director or chairman of an institution.
The payee can also be more than one person.

8. A negotiable instrument must bear the signature of its maker. Without the signature of the
drawer or the maker, the instrument shall not be a valid one.

9. Delivery of the instrument is essential. Any negotiable instrument like a cheque or a

promissory note is not complete till it is delivered to its payee. For example, you may issue a
cheque in your brother’s name but it is not a negotiable instrument till it is given to your brother.

10. Stamping of Bills of Exchange and Promissory Notes is mandatory. This is required as
per the Indian Stamp Act, 1899. The value of stamp depends upon the value of the pronote or bill
and the time of their payment.

Section 123-131 & 138

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Section 123- Cheque crossed generally

Where a cheque bears across its face an addition of the words "and company" or any
abbreviation thereof, between two parallel transverse lines, either with or without the words "not
negotiable" that cheque shall be deemed to be crossed generally.

Section 124- Cheque crossed specially

Where a cheque bears across its face an addition of the name of a banker, either with or
without the words "not negotiable", that addition shall be deemed to be crossed specially.

Section 125- Crossing after issue

Where a cheque is uncrossed, the holder may cross it generally or specially. Where a
cheque is crossed generally, the holder may cross it specially. Where a cheque is crossed
generally or specially, the holder may add the words "not negotiable".
Where a cheque is crossed specially, the banker to whom it is crossed may again cross it
specially to another banker, his agent, for collection. Whoever, being a public servant, legally
bound as such public servant to apprehend or to keep in confinement any person charged with or
liable to apprehended for an offence, intentionally omits to apprehend such person, or
intentionally suffers such person to escape, or intentionally aids such person in escaping or
attempting to escape from such confinement, shall be punished as follows, that is to say:-
With imprisonment of either description for a term which may extend to seven years, with
or without fine, if the person in confinement, or who ought to have been apprehended, was
charged with, or liable to be apprehended for, an offence punishable with death; or
With imprisonment of either description for a term which may extend to three years, with
or without fine, if the person in confinement or who ought to have been apprehended, was
charged with, or liable to be apprehended for, an offence punishable with *[imprisonment for
life] or imprisonment for a term which may extend to ten years; or
With imprisonment of either description for a term which may extend to two years, with or
without fine, if the person in confinement, or who ought to have been apprehended, was charged
with, or liable to be apprehended for, an offence punishable with imprisonment for a term less

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than ten years.

* Subs. by Act 26 of 1955, sec.117 and sch., for "transportation for life" (w.e.f.1-1-1956 ).

Section 126- Payment of cheque crossed generally

Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise
than to a banker.
Payment of cheque crossed specially.- Where a cheque is crossed specially, the banker on whom
it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for
collection.

Section 127- Payment of cheque crossed specially more than once

Where a cheque is crossed specially to more than one banker, except when crossed to an agent
for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.

Section 128- Payment in due course of crossed cheque

Where the banker on whom a crossed cheque is drawn has paid the same in due course,
the banker paying the cheque, and (in case such cheque has come to the hands of the payee) the
drawer thereof, shall respectively be entitled to the same rights, and be placed in the same
position in all respects, as they would respectively be entitled to and placed in if the amount of
the cheque had been paid to and received by the true owner thereof.

Section 129- Payment of cheque crossed specially more than once

Any banker paying a cheque crossed generally otherwise than to a banker or a cheque
crossed specially otherwise than to the banker to whom the same is crossed, or his agent for
collection, being a banker, shall be liable to the true owner of the cheque for any loss he may
sustain owing to the cheque having been so paid.

Section 130-Cheque bearing not negotiable

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A person taking a cheque crossed generally or specially, bearing in either case the words
"not negotiable", shall not have and shall not be capable of giving, a better title to the cheque
than that which the person from whom he took it had.

Section 138- Dishonour of cheque for insufficiency, etc., of funds in the accounts
Where any cheque drawn by a person on an account maintained by him with a banker for
payment of any amount of money to another person from out of that account for the discharge, in
whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of
the amount of money standing to the credit of that account is insufficient to honour the cheque or
that it exceeds the amount arranged to be paid from that account by an agreement made with that
bank, such person shall be deemed to have committed an offence and shall without prejudice to
any other provisions of this Act, be punished with imprisonment for 2["a term which may extend
to two year"], or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless-

(a) The cheque has been presented to the bank within a period of six months from the date on
which it is drawn or within the period of its validity, whichever is earlier.

(b) The payee or the holder induce course of the cheque, as the case may be, makes a demand for
the payment of the said amount of money by giving a notice, in writing, to the drawer, of the
cheque, 3["within thirty days"] of the receipt of information by him from the bank regarding the
return of the cheques as unpaid, and

(c) The drawer of such cheque fails to make the payment of the said amount of money to the
payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the
receipt of the said notice.

Revolution of Payment Systems in India

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 Negotiable Instruments

Digital cash

A ‘digital coin’ or digital cash consists of a message issued by a bank or other entity and
encrypted by its
Private Key. The message contains the serial number of the cash, the identity of the issuer and its
Internet address, the amount of the cash and an expiry date. This serial number is unique to bank
and can be decrypted by bank only this serial cannot be altered unless message is tweaked i.e it is
permanent in nature and once set cannot be changed.

Main feature of digital cash is that 1)it is not traceable i.e one cannot track the initial user or
whom the money is been transferred.2) it is transnational it can be sent anywhere in world.

Example- when ganesh has bought a book from online retailer and wants to make payment in
digital cash then for given price digital-cash code that is associated with the requested digital-
cash valuei.e book price generated from ganesh bank who provides him digital cash service this
code Is then communicated to online retailer ,the retailer will confirm the code from bank
wheather it is correct value and there is no multiple transaction and then enter the encrypted
code with retailersbank account code to transfer money into retailer’s account.

Smart Card

A smart card is like an "electronic wallet". It is a standard credit card-sized plastic

intelligent token within which a microchip has been embedded within its body and which makes
it smart. Amongst other things, the card can be used to store money, or a value of money,
including digital coins

Example: Rajesh had gone out of station at his cousin marriage for 5 days to Delhi. He had gone
out for shopping in a mall. He purchase clothes, shoes and perfume for his cousin marriage. He
saw that cash he was carrying in his wallet was not enough to pay the bill. So he thought rather
of withdrawing cash from A.T.M he would pay directly by using his credit card. This will save
his time and easy to do the transaction.

Electronic fund transfer

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 Negotiable Instruments

Electronic Funds Transfer (EFT) is the electronic exchange or transfer of money from
one account to another, either within a single financial institution or across multiple institutions,
through computer-based systems. The primary modes of funds transfer at present are demand
draft, mail transfer and telegraphic transfer. The time taken by these modes of transfer for
transfering the money from sender to beneficary is around 8 to 10 days. In the case of Electronic
fund transfer, fund reaches the beneficiary either on the same day or the next day.

For e.g: Suppose there are two parties party A and party B entered into to a contract. If party A
wants to make payment to party B through Electronic Funds Transfer then party A will approach
his bank to make the payment to party B. Party A will give all the details of party A and party B
required for making a Electronic Fund Transfer to his bank and then the bank of party A will
make the payment to the bank of party B. The bank of party B then will make the payment to
party B.

Digital Cheque

Digital cheque is a form of payment used in Ecommerce. A digital cheque functions in

the same way as a paper cheque. It acts as a message to a bank to transfer funds to a third party;
however, it has a number of security advantages over conventional cheques since the account
number can be encrypted, a digital signature can be employed, and digital certificates can be
used to validate the payer, the payer's bank, and the account.

There are two types of digital cheques

1. Electronic cheque:

Electronic cheque is issued electronically and no paper is involved. The electronic

cheques are issued in electronic form with digital signatures / biometric signatures /
encrypted data.

2. Truncated cheque:

In cheque truncation, at some point in the flow of the cheque, the physical cheque is
replaced with an electronic image of the cheque and that image moves further. The
processing is done on the basis of this truncated cheque and physical cheque is stored.

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 Negotiable Instruments

For example, a company that is depending on the received cheque clearing in time to use the
funds to manage an employee payroll will appreciate the speed that the electronic cheque deposit
method provides in comparison to waiting several days for paper cheque to clear.

Biometrics

It consists of methods for uniquely recognizing humans based upon one or more intrinsic
physical or behavioral traits. The traits that are considered include fingerprints, retina and iris
patterns, facial characteristics and many more. Biometrics is used as a form of identity access
management and access control”

The meaning of Biometrics is “life measurement" which measure a particular set of a person's
vital statistics in order to determine identity. E.g. Identify individuals in groups are means of
identity access management & A PIN on an ATM system at a bank is means of access control.

Biometric characteristics can be divided in two main classes

1. Behavioral biometrics: it is basically measures the characteristics which are acquired
naturally over a time. It is generally used for verification.
e.g.
 Speaker Recognition - analyzing vocal behavior
 Signature - analyzing signature dynamics
 Keystroke - measuring the time spacing of typed words
2. Physical biometric definition: it is measures the inherent physical characteristics on an
individual. It can be used for either identification or verification.
e.g.
 Fingerprint - analyzing fingertip patterns
 Facial Recognition - measuring facial characteristics
 Hand Geometry - measuring the shape of the hand
 Iris Scan - analyzing features of colored ring of the eye
 Retinal Scan - analyzing blood vessels in the eye
 DNA - analyzing genetic makeup

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 Negotiable Instruments

Advantages of Biometrics in negotiable instruments:

 Increase security - Provide a convenient and low-cost additional tier of security.

 Reduce fraud by employing hard-to-forge technologies and materials. For e.g.Minimise

the opportunity for ID fraud, buddy     punching.

 Eliminate problems caused by lost IDs or forgotten passwords by using physiological

attributes. For e.g. Prevent     unauthorised use of lost, stolen or "borrowed" ID
cards.

 Reduce password administration costs.

 Replace hard-to-remember passwords which may be shared or observed.

 Integrate a wide range of biometric solutions and technologies, customer applications

and databases into a robust and     scalable control solution for facility and network
access

 Make it possible, automatically, to know WHO did WHAT, WHERE and WHEN!

 Offer significant cost savings or increasing ROI in areas such as Loss Prevention or
Time & Attendance.

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 Negotiable Instruments

Case Study

THE JVG SCANDAL

A graduate from Kurukshetra University, Sharma began his career as a materials supplier to
Swadeshi Polytex in 1979. Between 1985 and 1989, Sharma supplied construction materials and
equipment to contractors. In September 1989, Sharma launched his first company JVG Finance.
Over the next few years, the company brought over 3000 small firms under its control. Sharma
also launched JVG Steels, JVG Departmental Stores, JVG Foods, JVG Petrochemicals and many
other companies. From being a small-time contractor earning less than Rs 2500 a month, Sharma
went on to run a group, which on paper had an annual turnover of Rs 1000 crore, in just seven
years. However, most part of the JVG empire was created largely from public fixed deposits. In
the early 1990s, Sharma opened branches of his finance companies in various towns and villages.
He followed it up with heavy advertising on the interest rates, which were as high as 30%.
Investors flocked to buy the company's schemes and the deposit base soon crossed Rs 1000
cores. The JVG group's turnover increased from Rs 102 cores in 1994-95 to Rs 700 cores in
1995-96.

JVG's troubles started in June 1997, after the Securities and Exchange Board of India (SEBI)
asked JVG Finance to refund the Rs 45 crore it had raised from a public issue in March 1997. A
day after the issue had opened, RBI issued a show-cause notice asking why JVG Finance should
not be barred from accepting deposits as the group companies had already exceeded their deposit
limits. By the time RBI conditionally cleared the issue after assurances from Sharma, the 70-day
stipulated period for listing the shares had passed. Because of the time-lapse, SEBI intervened
and ordered the refund of the public's money according to the allotment rules. Sharma refused to
refund the money to the investors and appealed against the order to the Finance ministry.

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 Negotiable Instruments

He admitted that JVG had exceeded its limits while accepting deposits but claimed that since
December 1996 (much before the RBI ban) it had stopped accepting deposits on its own and had
even given RBI an undertaking. RBI did not accept the argument and barred the group from
accepting any more public deposits.In September 1997, post-dated cheques issued for principal as
well as interest on JVG's deposits bounced. Investors then complained to the civil courts, consumer
courts, Company Law Board and criminal courts under the Negotiable Instruments Act upon
which legal proceedings were initiated against the group. The government received a large number
of complaints on non-repayment of deposits on maturity by the JVG group.. the RBI complaint
also said that the deposit forms issued by the JVG Group did not contain any information
regarding premature withdrawals, which was necessary as per RBI provisions. The companies had
not provided any information about the rate of interest to the investors on the receipts issued to
them. Further, the companies failed to submit their audited balance sheets for the period ending
March 31, 1994 and 1995 15 days after their annual general meeting (AGM) and did not inform
the RBI about the changes in the composition of the board of directors.  

A total of 31 bank accounts of the JVG group of companies were seized and an amount of Rs 5
lakh lying in these accounts was frozen. Land and property, including 238 acres in Gurgaon,
Rewari and Faridabad, in the name of JVG group of companies were attached. Nine company
vehicles were taken into police possession and a number of properties located in Bombay and
Delhi (held by the company) were identified and the income-tax authorities in Delhi and
Bombay.On a complaint filed by the RBI, the Delhi High Court ordered the winding up of the
company.

Meanwhile, JVG, fearing a withdrawal rush on its deposits, asked all its depositors to send their
certificates to the Delhi office for scrutiny and also issued notices in the dailies assuring
investors that all deposits which had matured would be redeemed immediately. Sharma revealed
that all genuine matured amounts had been repaid and only Rs 30 crore was to be paid to
depositors of JVG Finance by January 1998 and another Rs 100 crore to JVG Leasing
depositors between July 1998 and June 1999. He also admitted that it was impossible for him to
repay all his depositors, including those whose deposits had not matured. Sharma’s allegation

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 Negotiable Instruments

that his agents had issued fake certificates to depositors for more than Rs 100 crore was seen as
a ploy to wash his hands off the responsibility to pay them.

THE CASE: (Kerala High Court)

HON’BLE J.B. KOSHY, J.

Nanu…………………………………………………….Appellant

 Versus

Vijayan…………………………………………………Respondent

Crl. A. No. 217 of 1999, decided on 21.12.2006

Summary

In this appeal before the Kerala high court, the question that arose was whether period of
limitation is to be reckoned from the date of cheque drawn and can the date of cheque be
excluded while calculating period o six months prescribed in Sec 138, of Negotiable Instrument
Act 1881. If the cheque is presented after six months of the date of issue.

Facts of the case

The respondent issued a cheque of Rs 10,000 to the appellant on the 16th of January, 1994 for a
business transaction. However, the applicant contested that the cheque issued by the respondent
for the said amount (i.e.Rs 10,000) in lieu of valid consideration was dishonored for
insufficiency of fund which was presented after six months of the date of issue (i.e. on 17th
September, 1994).

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 Negotiable Instruments

A complaint was filed in the trial court under Section 138 of Negotiable Instruments Act but the
compliant for the said discrepancy was rejected and the accused was acquitted as the cheque
was presented after six months

According to the appellant the date of issue should be excluded in calculating six months period
in presenting the cheque. They filed an appeal after being aggravated by the decision of the Trial
Court.

The question that came before the respected Kerala High Court was whether the date of issue
shall be excluded in calculating the validity of the cheque and whether the date of presentation
of the cheque in the bank should be taken into consideration while calculating the said validity.

Judgements and reasons for decision

 Section 138 of Negotiable Instruments Act 1881, Provision (a) of the said Act

 “The cheque has been presented to the bank within a period of six months from the date on
which it is drawn or within the period of its validity, whichever is earlier”.

 Period of limitation has to be reckoned from the date on which the cheque was drawn. Date
of cheque cannot be enclosed in calculating the period of six months prescribed in Section
138 of Negotiable Instruments Act 1881.

 Provisions of the Negotiable Instruments Act as held by the Apex Court in

Jiwanlal vs Remeshwarlal, A.I.R 1967 Section 1118 was referred to as a torch bearer.

K V Muhammed Kunhi vs P Janardhan, 1998 Crl. L.J. 4330(Ker) was referred for pervasive
value and it was held the words “within the period of six months assumes importance and
Section 138, Provision (a) is clear that the date of limitation will commence from the date put
in the cheque or instrument.

 Months means British Calendar Month as defined under Sec 3(35) of General Clauses Act.

 Another case that was referred was Saketh India Ltd. & Ors.vs India Securities Limited,
(1999) 3 S.C.C. 1, held that for calculating the period of one month for filing the
complaint will be reckoned from the date immediately following the day of expiry of the

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 Negotiable Instruments

period of 15 days from the date of receipt of the notice [as envisaged in Proviso (a) to Section
138] by the drawer. In this case, cheque was presented after six months of the date of the
cheque.

Points of decision

Is the dishonourment of cheque issued by the respondent under Section 138 of Negotiable
Instruments Act 1881 triable when the cheque was presented after passing of six months since
the date of issue.

Points decided

 While calculating the validity of the cheque, the date of issue shall be included.

 The complaint of dishonourment of cheque for insufficiency of fund must be brought within
the period of six months from the date of issuance of the cheque.

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 Negotiable Instruments

Conclusion

A global world means different people, different culture, different opinions, different
understanding and different laws in every country. When trade of goods and services started,
problems also started taking up their roles. The cases of payment problems were observed among
the exporting parties. Since the laws of different countries differ from each other, these matters
could not be solved legally and the distance between each country made it even more
uncomfortable. The ups and downs in the foreign exchange of every country were making them
go through stagnancy. A certain kind of negotiation was required at an international level to
make the road of trade go smooth. There was indeed a need for a negotiable instrument which is
accepted by every law internationally.

Taking these factors into consideration The Negotiable Instrument Act was passed. Negotiable
instrument include promissory notes, Bills of exchange and Cheque. These instruments had
conditional and unconditional undertakings signed by the maker. These instruments are
internationally accepted.

 Negotiable instrument helped exporters and importers of goods and services to drag their
defaulters to court.
 A smooth flow of trade was observed after the introduction of negotiable instruments.
 Exporters of goods and services felt a sigh of relief when they export their goods and services
on credit basis as they had the negotiable instrument with them dually signed by both the
parties i.e. drawer and the drawee which was a strong proof document.

Negotiable instruments play a vital role in the economic development of every country with its
significant features. One of the main features includes that Negotiable instruments are freely
transferable and while transferring it is also not required to give a notice to the previous holder.

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 Negotiable Instruments

Negotiable instrument is always in writing so there is no fear of the drawee backing off the
instrument. Whereas stamping of bills of exchange and promissory notes are mandatory.

The peace and harmony which we see today in regards to the wholesome trade which goes on a
very big scale and which is rising every single day is because of the existing negotiable
instruments which are accepted internationally by every individual. The complaints regarding
negotiable instruments should be filed as early as possible in there nearby allocated court. So it
helps the complainant to get its judgment at the earliest. The grievances regarding the negotiable
instruments are taken at the top priority as it directly affects the economy of the country. Each
country is trying hard to do the necessary amendments for making these negotiable instruments
run more smoother and efficiently so that the growing economy grows with more pace and
peace.

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 Negotiable Instruments

Bibliography

 Business and Corporate Law — N. D. Kapoor

 Business Law — Buichandani
 http://www.indianlawcases.com/Act-The.Negotiable.Instrument.Act,.1881-2155

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