Negotiable Instruments

Commercial Paper
 Negotiable Instruments
• History
• Cash Substitute

•Definition:
The word negotiable means ‘transferable by delivery,’ and the word
instrument means ‘a written document by which a right is created in favour of
some person.’

Thus, the term “negotiable instrument” literally means ‘a written document

which creates a right in favour of somebody and is freely transferable by
delivery.’

A negotiable instrument is a piece of paper which entitles a person to a certain

sum of money and which is transferable from one to another person by a
delivery or by endorsement and delivery.
Types of negotiable instruments
• Promissory Notes (promise)
• Bill of Exchange (order)
• Cheque (order to the Bank)
Promissory Note
According to Section 4, “A promissory note is 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.”

Maker Payee
Bill of Exchange
• It is an unconditional order in writing, addressed by one person to
another, signed by the person giving it, requiring the person to whom
it is addressed to pay, on demand or at a fixed or determinable future
time, a sum certain in money to, or to the order of, a specified person
or to bearer.

order to Pay
Third pays to
Person

Maker Payee
Specimen of Bill of Exchange
Cheque
A cheque is the means by which a person who has fund in the hand of a
bank withdraws the same or some part of it.
A cheque is a kind of bill of exchange but it has additional qualification
that it is always drawn on a specified banker.

Bank
order to Pay

pays to

Maker Payee
Cheque
What is Cheque?

• A cheque is a very common form of negotiable instrument.

• You need a savings bank account or current account in a bank, in order

to issue a cheque in your own name or in favor of others, thereby
directing the bank to pay the predetermined amount to the individual
named in the cheque.

• This transaction has to be handled very delicately as it may lead to

some serious banking frauds.
• It is one of the safest and convenient modes of making payments and
is transferred by mere delivery.

• One of the benefits of the cheque is that you can transfer a high-value
transaction without any hassle which would be very difficult if hard
cash was used instead.

• The issuer of the cheque has an account (savings or current) with the
bank to which it is connected.
• Some of the important details which should be present in a cheque
are as follows-

• A cheque should be dated.

• A cheque should mention the amount of money in figures and words.
• A cheque must be signed by the person (Drawer) issuing the cheque
• A cheque must be drawn upon a specified bank (Drawee).
• A cheque must have the name of the recipient (Payee) of the cheque
(optional).
Types of Cheques
Bearer cheques
• It is also known as open cheque or uncrossed cheque.
• This cheque can be transferred by mere delivery and needs no
endorsement.
Self-Cheques
• It comes under bearer cheque where instead of writing the name, the
account holder writes “self” to receive money physically from the
branch where he holds the account.
Account Payee Cheques
• A bearer cheque becomes an account payee cheque by writing “Account Payee” or crossing it
twice with two parallel lines on the left-hand side top corner.

• The amount will be transferred to the account of the person specified on the cheque.

• It is considered the safest types of cheques and is also known as a crossed cheque.
Post dated cheque
• It is a type of a crossed or accounts payee cheque but it is post-dated to
meet the obligation at a future date. It is valid from the date of the
issue up to three months.
• Crossed cheque
• When we cross a bearer cheque twice with two parallel lines on the
left-hand top corner, it becomes a crossed cheque.
• Only the name written on it can get the amount transferred to his
account.
Maturity of a Cheque:
180 days of the date mentioned on the cheque.
Dishonor of cheque:

Dishonor of cheque is a condition in which bank refuses to pay the amount

of cheque to the payee.

Whenever the cheque is dishonored, the drawee bank instantly issues a

'Cheque Return Memo' to the payee banker specifying the reasons for dishonor

Non bailable offence