3.

A cheque is said to be honoured, if the banks give the amount to the payee. While, if the bank
refuses to pay the amount to the payee, the cheque is said to be dishonoured. In other words,
dishonour of cheque is a condition in which bank refuses to pay the amount of cheque to the payee.
Whenever the cheque is dishonoured, the drawee bank instantly issues a ‘Cheque Return Memo’ to
the payee banker specifying the reasons for dishonour. The payee banker provides the memo and
the dishonoured cheque to the payee. The payee has an option to resubmit the cheque within three
months of the date specified on the cheque after fulfilling the reason for the dishonour of cheque.
Moreover, the payee has to give a notice to the drawer within 30 days from the date of receiving
“Cheque Return Memo” from the bank. The notice should state that the cheque amount will be paid
to the payee within 15 days from the date of receipt of the notice by the drawer.
However, if the drawer fails to make a fresh payment within 30 days of receiving the notice, the
payee has the right to conduct a legal proceeding against the defaulter as per Section 138 of the
Negotiable Instruments Act.
Reasons for Dishonour of Cheque
1. If the cheque is overwritten. Know ‘How to write a Cheque?’
2. If the signature is absent or the signature in the cheque does not match with the specimen
signature kept by the bank.
3. If the name of the payee is absent or not clearly written.
4. If the amount written in words and figures does not match with each other.
5. If the account number is not mentioned clearly or is altogether absent.
6. If the drawer orders the bank to stop payment on the cheque.
7. If the court of law has given an order to the bank to stop payment on the cheque.
8. If the drawer has closed the account before presenting the cheque.
9. If the fund in the bank account is insufficient to meet the payment of the cheque.
10. If the bank receives the information regarding the death or lunacy or insolvency of the drawer.
11. If any alteration made on the cheque is not proved by the drawer by giving his/her signature.
12. If the date is not mentioned or written incorrectly or the date mentioned is of three months
before.
When the cheque is dishonoured, a ‘cheque return memo’ is offered by the bank to the payee
stating why the cheque has been bounced. The payee can resubmit the cheque if he believes that it
will be honoured second time. The payee can prosecute the drawer legally if the cheque is bounced
again.
The Negotiable Instrument Act, 1881 is applicable for the cases related to dishonour of cheques. In
accordance with section 138 of this act, dishonour of cheque is a criminal offence and is punishable
with monetary penalty or imprisonment up to 2 years or both.
If a cheque is bounced, then a penalty is levied on both drawer and payee by their respective banks.
The person will additionally have to pay late payment charges if the dishounoured cheque is against
repayment of a loan.
Your credit history is negatively impacted if a cheque is dishonoured since your payment activities
are reported to the credit bureaus by the financial institutions. The lenders will trust you if you have
a good credit score. In order to have a good credit score, it’s a good practice to avoid your cheques
from being bounced. Your good payment activities will help you build good CIBIL score and benefit
you at the time of lending money from financial institutions.
Keep the above points in mind while writing the cheque so that the cheque is not dishonoured.
According to Section 138 of the Act, the dishonour of cheque is a criminal offence that is punishable
by imprisonment for two years or with monetary penalty or with even both. If the payee decides to
proceed legally, then the drawer can be given a chance of repaying the cheque amount immediately.
If a cheque is dishonored by bank by mistake then the bank will have to reimburse the cheque and
return back charges to the customer.
The court will issue the summon when they receive the compliant.
Cognizance of offenses under section 138
As per section 142 of the Act, No court inferior to that of a Magistrate or a Judicial Magistrate of the
first class shall try an offense punishable under section 138.
Secondly, an offense under section 138 shall be inquired into and tried only by a court within whose
local jurisdiction;
If the cheque is delivered for collection through an account, the branch of the bank where the payee
or holder in due course, as the case may maintain the account, is situated.
If the cheque is presented for payment by the payee or holder in due course, otherwise through an
account, the branch of the drawee bank where the drawer maintains the account, is situated.
Interim compensation( Section 143A)
The court has the power to order interim compensation to the complainant;
(a) in a summary trial or summons case, where he pleads not guilty to the accusation made in the
complaint, and
(b) in any other case, upon framing of charge.
The interim compensation shall not exceed twenty percent of the amount of the cheque. It shall be
paid within sixty days from the order, but in apposite cases, a further period of thirty days shall be
given. In case the drawer of the cheque is acquitted, the Court shall direct the complainant to repay
to the drawer the amount of interim compensation, with interest at the bank rate as published by
the Reserve Bank of India, prevailing at the beginning of the financial year.
The interim compensation payable under this section may be recovered as if it were a fine under
section 421 of the code of criminal procedure.
Penalty for the dishonor of cheque
a) Imprisonment, which may extend to two year or
b) with fine which may extend to twice the amount of the cheque or
c) with both
It must be noted that the act provides that the legal remedy shall be available to the payee only if:
The cheque is presented within the period of its validity;
The payee or the holder of the cheque, has mandatorily made a demand for the payment by giving a
written notice to the drawer of the cheque within 30 days of the receipt of information of the return
of check as unpaid by the bank, and
The drawer has failed to make the payment of the said amount to the payee or the holder in due
course, within a period of 15 days of the receipt of the above-mentioned notice.

4.

Major functions of the RBI

1. Issue of Bank Notes:
The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which
are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared
unlimited legal tender throughout the country.
This concentration of notes issue function with the Reserve Bank has a number of advantages: (i) it
brings uniformity in notes issue; (ii) it makes possible effective state supervision; (iii) it is easier to
control and regulate credit in accordance with the requirements in the economy; and (iv) it keeps
faith of the public in the paper currency.
2. Banker to Government:
As banker to the government the Reserve Bank manages the banking needs of the government. It
has to-maintain and operate the government’s deposit accounts. It collects receipts of funds and
makes payments on behalf of the government. It represents the Government of India as the
member of the IMF and the World Bank.
3. Custodian of Cash Reserves of Commercial Banks:
The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash
reserves of the commercial banks.
4. Custodian of Country’s Foreign Currency Reserves:
The Reserve Bank has the custody of the country’s reserves of international currency, and this
enables the Reserve Bank to deal with crisis connected with adverse balance of payments position.
5. Lender of Last Resort:
The commercial banks approach the Reserve Bank in times of emergency to tide over financial
difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of
interest.
6. Central Clearance and Accounts Settlement:
Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier
to deal with each other and settle the claim of each on the other through book keeping entries in the
books of the Reserve Bank. The clearing of accounts has now become an essential function of the
Reserve Bank.
7. Controller of Credit:
Since credit money forms the most important part of supply of money, and since the supply of
money has important implications for economic stability, the importance of control of credit
becomes obvious. Credit is controlled by the Reserve Bank in accordance with the economic
priorities of the government.

The central banking functions typically include not only creation of money or more broadly
monetary management, but, also often, management of public debt of Government, regulation and
supervision of banking entities, financing of developmental activities and other associated functions.
As regards the function of regulation and supervision, the argument for involvement of a central
bank emerges from the role of lender of last resort and the obligation to smoothly operate the
payments system. In this regard, the autonomy that the central bank exercises is no different from
autonomy of any regulator in the financial system. As far as the developmental role is concerned,
close coordination with Government necessarily arises, which in some ways impinges on autonomy
as it is in a way linked to money creation. What is uniquely relevant for a central bank’s
independence is its exercise of the power to modulate the creation of money and the price of
money, which impacts on the value of money, both domestic and external. In this context, the
critical issue relates to the degrees of freedom the central bank has in deciding whether or not to
fund the Government’s expenditure out of created money. The view that central banks should be
largely independent of political power and that the central bank credit to government should be
formally limited is generally believed to have emerged only in 20th century. Central bank
independence generally relates to three areas viz. personnel matters; financial aspects; and conduct
of policy. Personnel independence refers to the extent to which the Government distances itself
from appointment, term of office and dismissal procedures of top central bank officials and the
governing board. It also includes the extent and nature of representation of the Government in the
governing body of the central bank. Financial independence relates to the freedom of the central
bank to decide the extent to which Government expenditure is either directly or indirectly financed
via central bank credits. Direct or automatic access of Government to central bank credits would
naturally imply that monetary policy is subordinated to fiscal policy. Finally, policy independence is
related to the flexibility given to the central bank in the formulation and execution of monetary
policy.

5.

Credit control is an important tool used by Reserve Bank of India, a major weapon of the monetary
policy used to control the demand and supply of money (liquidity) in the economy. Central Bank
administers control over the credit that the commercial banks grant. Such a method is used by RBI to
bring "Economic Development with Stability". It means that banks will not only control inflationary
trends in the economy but also boost economic growth which would ultimately lead to increase in
real national income stability. In view of its functions such as issuing notes and custodian of cash
reserves, credit not being controlled by RBI would lead to Social and Economic instability in the
country.
CREDIT CONTROL METHODS OF RBI
It is one of the important function of RBI for controlling supply of money or credit. There are 2 types
of methods employed by the RBI to control credit creation:
Quantitative method
Qualitative method
Quantitative method:
Bank rate: It is the rate of interest at which central bank lends funds to commercial banks. During
excess demand or inflationary gap, central bank increases bank rate. Borrowings become costly and
commercial banks borrow less from central bank. During deflationary gap central bank decreases the
bank rate. It is cheap to borrow from the central bank or the part of the commercial banks which in
turn the Commercial banks also decreases their lending rates.
Open market operations: The open market operations means buying and selling of bonds and shares
by RBI is open market. It is also called buying and selling of government security by the central bank
from the public and commercial banks.
Sale of securities
At the time of inflation the RBI starts selling of government securities in the market. The resources of
commercial bank are reduced and they are not in a position to lend more to the business
community. This reduces the investment and aggregate demand.
Purchase of securities
At the time of deflation the RBI starts buying securities from open market. The reserves of
commercial banks are raised and they lend more investment, output income and aggregate demand
starts rising.
Legal Reserve Requirement: It is another method of RBI for controlling credit or supply of money. It
includes 2 types of methods such as:
Cash Reserve Ratio (CRR): It is the ratio of bank deposits that commercial bank has to keep with the
central bank. At the time of inflation the RBI increases the rate of CRR, similarly at the time of
deflation RBI decreases the rate of CRR.
Statutory Liquidity Ratio (SLR): Every bank required to maintain a fixed percentage of its assets in the
form of cash or other liquid assets called SLR. At the time of inflation the RBI increases the SLR,
similarly at the time of deflation RBI decreases the rate of SLR.
Qualitative method:
Margin requirements: It is the difference between the market value of loan and the security value of
loan. At the time of inflation the margin requirement value decreases by RBI for discouraging people
and commercial banks for approaching more and more amount of loan. On the other hand at the
time of deflation the RBI increases the value of margin just to encourage issuing of more amount of
loan to the commercial banks and general public.
Moral suasion: It refers to written or oral advices given by central bank to commercial banks to
restrict or expand credit.
Direct Action: Sometimes the RBI directly takes action against the commercial banks. It takes action
to such type of commercial banks who are not following the rules regulation of RBI. It cancels their
registration or nationalization of commercial banks.
Rationing of credit: It is the related to limiting the amount of credit, which is issued by all the
commercial banks. RBI fixes the size of issuing the credit according to the requirement of the
country.
Over time, the objectives of monetary policy in India have evolved to include maintaining price
stability, ensuring adequate flow of credit to productive sectors of the economy for supporting
economic growth, and achieving f inancial stability. Based on its assessment of macroeconomic and
financial conditions, the Reserve Bank takes the call on the stance of monetary policy and monetary
measures. Its monetary policy statements reflect the changing circumstances and priorities of the
Reserve Bank and the thrust of policy measures for the future. Faced with multiple tasks and a
complex mandate, the Reserve Bank emphasises clear and structured communication for effective
functioning of the monetary policy. Improving transparency in its decisions and actions is a constant
endeavour at the Reserve Bank.
There was a time when the Reserve Bank used broad money (M3) as the policy target. However,
with the weakened relationship between money, output and prices, it replaced M3 as a policy
target with a multiple indicators approach. As the name suggests, the multiple indicators approach
looks at a large number of indicators from which policy perspectives are derived. Interest rates or
rates of return in different segments of the financial markets along with data on currency, credit,
trade, capital flows, fiscal position, inflation, exchange rate, and such other indicators, are
juxtaposed with the output data to assess the underlying trends in different sectors. Such an
approach provides considerable flexibility to the Reserve Bank to respond more effectively to
changes in domestic and international economic environment and financial market conditions.
6.
Holder in Due Course
Holder in Due Course is a legal term to describe the person who has received a negotiable
instrument in good faith and is unaware of any prior claim, or that there is a defect in the title of the
person who negotiated it.
Section 9 of N.I. Act, define holder in due course as under.
“Holder in due course means any person who for consideration became the possessor of a
promissory note, bill of exchange or cheque, if payable to bearer, or the payee or indorsee thereof, if
payable to order, before the amount mentioned in it became payable, and without having sufficient
cause to believe that any defect existed in the title of the person from whom he derived his title.”
Holder in due course is a person who takes a negotiable instrument for the value receivable by him
in good faith and taken due care and caution while taking such instrument and he had no suspicion
or reason to believe any defect existed in the title of the person, from whom he derived title
possession of the instrument. Thus, a person claim to be a ‘holder in due course’ should satisfy the
following conditions.
He must acquire the instrument for a consideration.
The instrument acquired should be before it is matured for payment. An instrument payable on
demand is treated as current, subject to it has not been in circulation for the unreasonable length of
time.
It is most important that the holder in the course had no cause to believe that any defect existed in
the title of a person from whom he has acquired the instrument.
A person accepting an inchoate (incomplete) instrument cannot be a holder in due course.
The instrument should be complete and regular while taking its possession.
Forged signature conveys no title; as such there cannot be a holder in due course under forged
endorsement.
Rights of Holder in due Course
Section 36 of NI ACT1881 reads the rights of Holder in due course.
“Every prior party to a negotiable instrument is liable thereon to a holder in due course until the
instrument is duly satisfied.”
In the above section;
‘Every prior party’ means the maker or drawer, the acceptor, and intervening endorser/s.
Duly satisfied means if the liability of all the parties is extinguished and the instrument is discharged.
So Holder in Due Course means;
If payment is not made on a negotiable instrument when it is due, the holder can use the court
system to enforce the instrument.
Various parties, including both signers and non-signers, may be liable for it.
Accommodation parties (i.e., guarantors) can also be held liable.

Requirements for Holder in Due Course Status

To qualify as an HDC, the transferee must meet the requirements established by the UCC
The person must be the holder of a negotiable instrument that was taken:
For value.
In good faith.
Without notice that it is overdue, dishonored, or encumbered in any way, and
Bearing no apparent evidence of forgery, alterations, or irregularity.
PRIVILEGES GRANTED TO A ‘HOLDER IN DUE COURSE’ UNDER THE NEGOTIABLE INSTRUMENTS
Privileges granted to a ‘holder in due course’ under the Negotiable Instruments are given below:
1. He gets a better title than that of the transferor:
(Sec. 58).
Section 53 states that “a holder of a negotiable instrument who derives title from a holder in due
course has the rights thereon of that holder in due course.”
Thus, anybody who takes a negotiable instrument from a holder in due course can recover the
amount from all prior parties, although he had knowledge of the prior defects e.g., no consideration
was paid by some of the prior parties or some one of them was a thief.
It is important to note that a forged instrument, even if it passes through the hands of a holder in
due course, cannot be cured of its defect because there is no defect of title but there is complete
absence of title.
2. Privilege in case of inchoate stamped instruments (Sec. 20):
In the case of inchoate stamped instrument, if the holder or original payee fills more amount than
that was authorised, he cannot enforce the instrument for the whole amount (only actual authorised
amount can be recovered).
If such an instrument is transferred to a holder in due course, he can claim the whole of the amount
so entered provided that the amount is covered by the stamp affixed thereon. Thus, the defence
that the amount filled by the holder was in excess of the authority given cannot be taken against a
holder is due course.
3. Liability of prior parties:
All prior parties to a negotiable instrument (i.e., its maker or drawer, acceptor and intervening
endorsers) continue to remain liable to a holder in due course both jointly and severally (i.e., he can
hold any or all prior parties liable) until the instrument is duly satisfied (Sec. 36). Whereas, only
preceding party is liable to a succeeding party, if the succeeding party is only a holder.
4. Privilege in case of Fictitious bills (Sec. 42):
When a bill of exchange is drawn in a fictitious name and is made payable to the drawer’s order (i.e.,
where both drawer and payee of a bill are fictitious persons), the bill is said to be a fictitious bill.
Such a bill is not a good bill and cannot be enforced at law.
But the acceptor of such a bill is liable to a holder in due course provided the latter can show that
the first indorsement on the bill and the signature of the supposed drawer are in the same
handwriting.
5. Privilege when an instrument delivered conditionally is negotiated:
When a negotiable instrument is endorsed or delivered conditionally or for a special purpose only,
e.g., as collateral security or for safe custody, and not with the idea of transferring absolutely
property therein, the property in the instrument does not pass to the indorsee, and he is merely a
bailee with limited title and power of negotiating it.
This, however, does not affect the rights of a holder in due course, i.e., if such an instrument is
negotiated to a holder in due course, the parties liable on the instrument cannot escape liability
(Sections 46 and 47).
For example, if I give a cheque to a shopkeeper with the condition that he should not encash the
cheque till he supplies me the goods, anybody encashing the cheque prior to fulfilling the condition
is liable to return the money except the holder in due course.
6. Estoppel against denying original validity of instrument (Sec. 120):
The plea of original invalidity of the instrument; e.g., that no consideration actually passed between
the maker and the payee of a promissory note; cannot be put forth against the holder in due course
by the drawer of a bill of exchange or cheque or by the maker of a promissory note or by an acceptor
of a bill for the honour of the drawer.
However, the aforestated parties are not precluded from challenging the validity of the instrument
on the ground that at the time of making the instrument he was a minor or his signature had been
forged or the instrument is otherwise void ab-initio, e.g., where a promissory note is made ‘payable
to bearer’ it is void and illegal as per the Reserve Bank of India Act.
7. Estoppel against denying capacity of payee to indorse:
“No maker of a note and no acceptor of a bill payable to order shall, in a suit thereon by a holder in
due course, be permitted to deny the payee’s capacity, at the date of the note or the bill to indorse
the same” (Sec. 121).
CASE LAWS:
In the case of Gemini v Chandran,1 it was held that there is no provision in the Act in due course can
be presumed to be a holder. There is a presumption by virtue of Sec 118 of the Act that a holder is a
holder in due course in some specific situations. Therefore, a holder in due course and holder do not
mean the same.
In the case of Milind Shripad vs Kalim Khan,2 it was held that a suit for recovery of amount is liable
through a negotiable instrument can only be filed by a person who is a holder in due course of the
negotiable instrument.

7.

Securities and Exchange Board of India

SEBI is a statutory regulatory body established by the Government of India to regulate
the securities market in India and protect the interests of investors in securities.
It also regulates the functioning of the stock market, mutual funds, etc.
What is SEBI and its functions?
The Securities and Exchange Board of India (Sebi) is a statutory regulatory body established by the
Government of India in 1992 to regulate the securities market in India and protect the interests of
investors in securities.
SEBI has the power to regulate and perform functions such as check the books of accounts of stock
exchanges and call for periodical returns, approve by-laws of stock exchanges, inspect the books of
financial intermediaries such as banks, compel certain companies to get listed on one or more stock
exchanges, and handle the registration of brokers.
SEBI was established to keep a check on unfair and malpractices and protect the investors from such
malpractices. The organization was created to meet the requirements of the following three groups:
Issuers: SEBI works toward providing a marketplace to the investors where they can efficiently and
fairly raise their funds.
Intermediaries: SEBI works towards providing a professional and competitive market to the
intermediaries
Investors: SEBI protects and supplies accurate information to investors.

1
2007(1) KHC 698.
2
(2011) 4 SCC 275.
The fundamental objective of SEBI is to safeguard the interest of all the parties involved in trading. It
also regulates the functioning of the stock market. SEBI’s objectives are:
· To monitor the activities of the stock exchange.
· To safeguard the rights of the investors
· To curb fraudulent practices by maintaining a balance between statutory regulations and self-
regulation.
· To define the code of conduct for the brokers, underwriters, and other intermediaries.
Powers of SEBI
SEBI carries out the following tasks to meet its objectives: Protective functions, Regulatory functions,
and developmental functions.
Functions that SEBI performs as a part of its protective functions are:
· It checks price manipulation
· It bans Insider trading
· It prohibits unfair and fraudulent trade practices
· It promotes a fair code of conduct in the security market
· It takes efforts to educate the investors regarding ways to evaluate the investment options better
As a part of its regulatory functions, SEBI performs the following role:
· It has designed a code of conduct, rules, and regulations to regulate the brokers, underwriters, and
other intermediaries.
· SEBI also governs a company’s takeover.
· It regulates and registers the workings of share transfer agents, stockbrokers, merchant bankers,
trustees, and others who are linked with the stock exchange.
· It regulates and registers the mutual funds as well.
· It conducts audits and inquiries of stock exchanges.
As a part of its developmental functions, SEBI performs the following role:
· It facilitates the training of the intermediaries.
· It aims at promoting activities of the stock exchange by having an adoptable and flexible approach.
The objective of SEBI is to promote fair practices; hence, it educates them about it plus makes the
investors aware of the stock market in depth.
C. Regulatory Functions- In the regulatory functions, SEBI does the monitoring of the functioning of
financial market go-betweens. The implementation of SEBI bye-laws emissaries and corporate is
done. This is a vital step as it ensures that the stock market operates seamlessly with untarnished
transparency.
It is the role of SEBI to formulate guidelines and code of conduct for financial intermediaries and
regulate amalgamations, alliance and takeovers takeover of companies. Some of its regulatory
functions are:
Registering and regulating functions of mutual funds
Regulates takeover of companies
It has to register all share transfer agents, intermediaries, trustees, brokers, sub-brokers and other
people involved with the stock exchange
Conduct inquiries & audit of exchanges
Also, SEBI has the authority to charge a fee on capital market participants. Plus, it also directs the
credit rating agencies.