Negotiable instruments

 Negotiable means transferability

 It means a promissory note, bill of exchange or cheque payable either to order or bearer
 Features
o Transferability
o Title of the holder free from all effects
o Recovery (legally bound)
o Consideration (you need to prove the reason of payment)
 Types
o Negotiable by custom or usage
o Negotiable by statue
 Promissory note: A promissory note is an instrument in writing containing an
unconditional undertaking, signed by the maker to pay a certain sum of
money only to or to the order of certain person, or to the bearer of the
instrument.
 In writing
 Promise to pay
 Definite and unconditional
 Signed by the maker
 Certain parties
 Certain sum of money
 Promise to pay money only
 Currency notes are not promissory notes
 May be payable on demand or after definite period of time
 Bill of exchange: -
 It is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person, to pat a certain sum
of money
 3 parties involved
 Drawer: person who writes the bill
 Payee: person who receives the bill
 Drawee: person who pays to payee on behalf of drawer
 Cheque
 It is special type of bill exchange, where bank acts as the 3 rd party.
 Drawer: person who writes the cheque
 Payee: person who receives the cheque
 Drawee: person who pays to payee on behalf of drawer(bank)
 Last 2 digits of MICR cheque of current account (last line with
number): 29
 At par cheque: It gets cleared at par of the deposited. Location
doesn’t matter.
 Non at par cheque: If the location of the payee’s bank is in another
city than deposit, it gets transferred to the branch of the payee’s
bank and then gets cleared
 MICR no: - “Cheque number” “Bank number Branch number” “RBI
code” “TRAN code (it shows which account it is issued to)”
 Order cheque: - in Current Account only. It means payee can instead
of depositing, endorse the cheque and passed it on to another
person. No OTC payment
 Bearer cheque: - in Saving Account only. It means payee can instead
of depositing, he can go to branch bank of the issuer and ask for OTC
(Over the counter) payment.
 General crossing: Two transverse parallel lines, it means it is no
more bearer/order cheque. It means it can only deposit in the bank
account of payee
 Special crossing: General crossing + name of the bank inside lines. It
means he can deposit it in that particular bank only
 No cancelling or crossing allowed even with a cross sign.
 Validity of cheque 3 months
 Legally, black ink is allowed for issuing a cheque
 Officially only English and Hindi. For regional language a transcript
needs to attached, and you should in that state only. Local language
is allowed only if that is the official language of state
 In case of mismatch in amount in numbers and words. Banker can
dishonor the cheque or honor the cheque with the lower amount
 When can a bank refuse payment
o Stop payment: when issuer of cheque instructs not to
transfer payment
o Death of the drawer
o Insolvency of the drawer
o Garnishee order
 Types of cheques: -
o Local Cheque vs Outstation: - Issue and Deposit in Same city
o CTS2010 vs Non CTS2010: Cheque Truncation System,
2010.Non-CTS process was, cheque goes from deposit bank
to RBI to issuer cheque for verification. In CTS MICR strip’s
electronic image travels to RBI and to issuer bank. This is a
transition going on.
o Transfer cheque: Issue and Deposit in the same bank
o Clearing cheque: Issue and Deposit in another bank
 Cheque Dishonor
o Conditions
 Financial (lack of balance)
 Section 138
 Payee has a legal right to send notice to
drawer before or at 15 days of dishonor
 Drawer needs to repay in 15 days after
notice received.
 If drawer does not pay, you can drag it to
court.
 Penalty range: Fine of twice the amount
or/and imprisonment up to 2 years
  Technical (wrong format of date, mismatch of words
and numbers, signature mismatch etc.)
 Section 402
 When drawer intentional mismatch the
signature to delay the payment
 Payee has a legal right to send notice to
drawer before or at 15 days of dishonor
 Drawer needs to repay in 15 days after
notice received.
 If drawer does not pay, you can drag it to
court.
 Penalty range: Fine of twice the amount
or/and imprisonment up to 2 years
 Clearing Cycle: -
o Local issue and deposit: max. T+2 day
o Out stationed cheque & non-CTS cheque: t+7 to t+15 day
(Non at par cheque)
o Out stationed cheque & CTS cheque & CTS branch: T+2 days
(At par cheque) (Only CTS cheque)
o CTS cheque: T+1 days
o High Value: (T+1) CTS And (T+2) non-CTS days
 two parameters: -
 Distance from clearing house: in range of 10kms
 Value: - 2 lakhs or higher
o Transfer cheque: - T-day
o Clearing week: Monday to Saturday, expect 2nd and 4th
Saturday and public banks.
o Inward clearing: - Cheque is issued by customer of bank,
drawee Bank, collecting bank (it collects cheque from RBI),
cheque comes in, money goes out.
o Outward clearing: - Cheque is deposited by customer of
bank, payee bank, depositing bank, cheque goes out, money
comes in
o Drawer issues the cheque and hands it over to payee. Payee
deposits it in its branch, which is beginning for outward
clearing for the payee bank. Payee bank sends this cheque
to payee service bank where they segregate cheques bank
wise. From service branch these cheques are sent to
clearing house where the details are recorded and
instrument changes hands from payee bank to drawee bank.
Payee bank is presenting bank, drawee bank is collecting
bank. This is the beginning of inward clearing for drawee
bank. This cheque is brought to drawee bank service branch
where they are segregated branch wise. The respective
bundles are sent to retail branch of drawer where it is
honored or dishonored. The once that are honored
activated a payment prompt to payee bank through the
clearing house. The one which gets dishonored are sent
back to the payee branch through the clearing house