Module 2negotiableinstruments

Swayam Siddhi College of Mgt & Research
SSCMR Presentor : Prof. Rahul Shah
NEGOTIABLE INSTRUMENTS
ACT , 1881
In India only three kinds of instruments are

recognized as negotiable instruments viz.,
promissory notes, bills of exchange and cheques.
Negotiable Instruments
 Documents of a certain type, used in commercial

transactions and monetary dealings, are called
Negotiable instruments.
 “Negotiable” means transferable by delivery and
“instrument” means a written document by which a
right is created in favour of some person.
 Thus, negotiable instrument means “ a
document transferable by delivery”
Negotiable Instruments
Definition:
Negotiable Instruments Act , 1881 states that,
“ A negotiable instrument means a promissory note, bill
of exchange or cheque payable either to order or to
bearer”.
---Sec. 13(1)
What is Negotiation?
 When a Promissory note, Bill of exchange or

cheque is transferred to any person, to make that
person the owner of the negotiable instruments,
then the instrument is said to be negotiated.
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
Characteristics of the Negotiable Instruments

 Freely transferable
 Negotiability
 In writing
 Unconditional order or promise
 Payment of a certain sum of money
 Time of payment
 The payee must be a certain person
 A negotiable instrument must bear the signature of its maker
 Delivery of instrument is essential
 Stamping of bill of exchange and promissory notes is
mandatory
Types of negotiable instruments
 1. Promissory note
 2. Bill of Exchange
 3. Cheque
What is Promissory note?
 A Promissory note is the simplest and earliest kind of

credit instrument.
 “It is an unconditional written promise by one
person to another in which the maker (payer)
promise to pay on demand or at a fixed or
determinable date in the future, a stated sum of
money to or to the order of a specified person or
the bearer of the instrument”.
Promissory Note (Pro-Note or Hand-Note)

Definition:
“ A promissory note is an instrument in writing (not
being a bank note or currency note) containing an
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 bearer of the instrument.”
-------Sec. 4
The person who makes the promise to pay is called the
Maker. He is the debtor and must sign the
instrument.
The person who will get the money (the creditor) is
called Payee.
Essential Elements of a Promissory Note
1. The instrument must be in writing.
2. It must be signed by the maker of it. The signature or mark may be placed
anywhere on the instrument, not necessarily at the bottoms. It may be at the
top or at the back of the instrument.
3. It must contain a promise to pay. It must be expressed not implied or inferred.
e.g. “Mr. Sen I.O.U. Rs. 1000”. Here I.O.U. stands for “ I owe you.” This is only an
admission of indebtedness and not a promise to pay. So it’s not a promissory
note.
4. The promise to pay must be unconditional. If it is coupled with a condition , it is
not a promissory note.
e.g. “ I promise to pay B Rs.300 on D’s death provided D leaves me enough to pay
this sum.”
Promise to pay at a specified time or at a specified place or after the
occurrence of an event which is certain to occur or payment after
calculating interest at a certain rate
---------are not regarded as conditions.
Essential Elements for a Promissory Note

5. The maker of must be certain and definite.
6. It must be stamped according to the Indian Stamp Act.
7. The sum of money to be paid must be certain.
e.g. “ I promise to pay some money on the occasion of his marriage”
8. The payment must be in the legal tender money of India and
certain quantity of goods or foreign money.
9. The money must be payable to a definite person or according to his
order i.e. payee is indicated by his official designation.
10.It must be payable on demand or after a certain definite period of
time.
11.The Reserve Bank Act prohibits the creation of a promissory note
payable on demand to the bearer of the note, except by the Reserve
Bank or the Government of India.
Specimens of Promissory Notes

 “ One year after date I promise to pay B or order Rs.
500.” ---- Sd/X.Y.
Date…………
 “ On demand I promise to pay A.B of No.37, College Street or
order Rs1000(Rupees one thousand only)
with interest at 8 percent per annum, for value
received in cash.” Sd/X.Y
Date…………………
Address……………….
 “ I acknowledge myself to be
indebted to B in Rs.
1000 to be paid on demand, for value received.”
Sd/X.Y
Specimen of a Promissory Note
Rs 1,000 New Delhi, 25 Aug’11

One month after date I promise to pay to Mr. A.K.Jha
or on his order the sum of Rupees One Thousand only,
for value received.
Revenue
Stamp
Sd/X.Y.
Bill 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.
Bill of Exchange
Definition:
“ 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.”
----Sec. 5
e.g. To A.B.
“ Six months after date pay P.Q. or order Rs. 1000”
Sd/X.Y.
Date………………..
Stamp…………………
Bill of Exchange
 The maker of a bill of exchange is called the Drawer.
The person who is directed to pay is called the Drawee.
The person who will receive the money is called the
Payee.
 When the payee has custody of the bill, he is called the
Holder. It is the holder’s duty to present the bill to the
drawee for acceptance. The drawee becomes the
Acceptor after signing on the bill.
 Sometimes the name of another person is mentioned
as the person who will accept the bill if the original
drawee does not accept it. Such a person is called the
Drawee in case of Need.
Essential Elements Bill of Exchange

A Bill of Exchange to be valid must fulfill the
following requirements:
1. The instrument must be in writing.
2. It must be signed by the drawer.
3. It must contain an order to pay, which is express
and unconditional.
4. The drawer, drawee and the payee must be certain and definite
individuals.
5. The amount of money to be paid must be certain.
6. The payment must be in the legal tender money of India.
7. The money must be payable to a definite person or according to his order.
8. It must be properly stamped.
Essential Elements Bill of Exchange
9. The bill may be payable on demand or after a definite period of

time. But no one except the Reserve Bank and the Government of
India can draw a bill payable on demand to the bearer of the bill.
If any of the requirements mentioned above is not fulfilled, the
document is not a bill of exchange.
e.g. “ Please let the bearer have Rs. 1000 and oblige.”
“ We hereby authorize you to pay on our account to the order of

X, Rs 6000.”
Classification of Bill of Exchange
 Periods
 1- Demand bill
 2-Term bill
 Purpose
 1-Trade bill
 2-Accomodation bill-help party financially
 Inland bills
 Foreign bills
Specimen of a Bill of Exchange

Rs 1,000 New Delhi, 25 Aug’11
One month after date pay to Mr. A.K.Jha or order the sum of
rupees one thousand only, for value received.
d
pte
Ac
ce er
e nd
aty
To Sd
/-S
Revenue
Satyender 12 Stamp
miles MIM,
Ranchi
Sd/Ritesh.
Difference between Promissory Note and Bill Of Exchange
1. Two parties 1. Three parties
2. Unconditional promise to 2. Unconditional order to pay
pay
3. Maker of a note is the dr. & 3. The drawer of a bill is the
he himself undertakes to creditor who directs the
pay drawee (his dr.) to pay
4. Liability of maker is 4. Liability of maker or
primary. drawer is secondary.
5. A pro-note cannot be made 5. Drawer and payee may be
payable to the maker same.
himself.
6. A note requires no 6. It must be accepted by
acceptance drawee
CHEQUES
What is a 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.
 Cheque is always drawn on a specified banker and it
is always payable on demand.
Cheque
Definition:
“ A cheque is a bill of exchange drawn upon a specified
banker and payable on demand.”
----Sec. 6
Specimen of a cheque
Cheques are usually printed in the form shown
below. e.g.
Date
……………
Pay A.B. or order (or bearer) the sum of Rupees Five
Hundred only Rs. 500/-
To
Essentials of a Cheque
It must be unconditional order
It must be in writing
It must be drawn on a specified banker
It must be signed by the drawer
The order must be for the payment of a certain sum of money only
Drawer, drawee and payee must be certain
The amount must be payable on demand
The signature must tally with the specimen signature of the
drawer kept in the bank.
A cheque must be dated.
A cheque drawn with a future date is valid but it is payable on and
after the date specified. Such cheques are called post-dated
cheques.
Difference between bill of exchange and Cheque
Bill of Exchange Cheque

1. A bill of exchange may 1. But a cheque is always
be drawn on any person drawn on a bank
2. A bill must be accepted 2. But a cheque does not
by the drawee before require acceptance
making payment upon it
3. A bill is entitled to 3 3. A cheque is not entitled to
days of grace any days of grace
Difference between bill of exchange and Cheque
4.A bill may be payable on 4. But a cheque is always

demand or after the payable on demand.
expiry of a certain
period 5. A cheque may be
5. No need to crossed crossed
6. A bill must be stamped 6. A cheque does not
require any stamp
7. A payment of a bill 7. Payment may be
cannot be countermanded by the
countermanded drawer
Types of Cheques
 We have two types of cheques:

 Open cheque
 Crossed cheque
What is open Cheque?
Open Cheque:
 Open Cheques are those Cheques which are paid
across the counter of the bank.
 Open Cheques has further two types
 Bearer Cheque
 Order Cheque
Types of Open Cheque
 Bearer Cheque:
 If a drawer orders the bank to pay a stated sum of money to

the bearer, it is called a bearer Cheque.
 Any person who lawfully possesses a bearer Cheque is
entitled to receive payment of that Cheque.
 Name of the payee need not be written
 Bank shall take signature of the
bearer
 Order Cheque:
 If the Cheque is to the order of a person in whose favour the
Cheque is drawn, it is called order Cheque.
 The order Cheque is paid by the bank only when the bank is
satisfied about the identity of the payee.
 Name of the payee should be mentioned
 Cannot be transferred by mere delivery. Requires
endorsement.
M.I.C.R Cheque(Magnetic Ink Character Recognition)

 Speed up the cheque clearing process
 Special quality paper and printing
specifications
 Code line at the bottom of the MICR cheque
 first six numbers indicate the cheque number
 next three – city code
 next three – bank code
 next three - branch code
Truncated cheque
 Cheque truncation means that the physical cheque is

scanned at the bank of first deposit (presenting bank)
and thereafter the electronic image of the cheque is
sent to the clearing house.
Electronic cheque
 Electronic version of a paper cheque
 Using email or other transport methods
 Exact mirror image of a paper cheque
 Digital signature
Steps to create electronic cheque
 Prepare physical paper cheque. it should be signed

by drawer
 Create electronic image
 Add digital signature
 Addition to biometric signatures – only
optional
Crossed cheque
 If a cheque is crossed by drawing two parallel lines
across the face of the Cheque, with or with out the
words & Co or A/c payee only, it is called a Crossed
Cheque.
 The crossed Cheque cannot be paid on the
counter of the drawee bank. It will be deposited
in the account of a person in whose order or favor
it is drawn.
Objectives of Crossing
 The Cheque is crossed to achieve the

following objectives;
 It prevent the payment of the Cheque to a wrongful
holder
 It ensure safe payment to the concerned receiver
 It facilitate in tracing the recipient of the payment if
the Cheque is wrongfully crossed
 Further it is a guard against any cheating or theft.
Kinds of Crossing
 Legally there are two kinds of crossing;

 General crossing
 Special crossing
Kinds of Crossing
General crossing:
 The drawing up of two parallel lines on the face of the
Cheque at the top left hand corner with or without the
words & Co not negotiable or Account payee only is
known as a General Crossing.
 The effect of general crossing is that the crossed
Cheque cannot be paid at the counter of the bank.
 Its payment can only be deposited into the payee’s
account only.
Kinds of Crossing
Kinds of Crossing
Special crossing:
 A Cheque is deemed to be crossed specially when it
bears across its face the name of the banker either
with or without the words not negotiable.
 In case of special crossing the payment can only be
made to the bank named therein the Cheque.
 A special crossing makes a cheque safer than
general
Kinds of Crossing
Kinds of Crossing
Not Negotiable Crossing

The cheque must contain the words ‘not negotiable’. The
cheque must be crossed generally or specially. The effect
of the words ‘not negotiable’ on a crossed cheque is that
when such a cheque is endorsed, the endorsee cannot
get a better title than that of the endorser.
Not negotiable does not mean not transferable
Kinds of Crossing
Restrictive Crossing or Account Payee Crossing
It has been adopted by commercial and banking

usage.
 In this type, the words a/c payee are added to the general
or specific crossing.
 It warns the collective banker that t he proceeds are
to be credited only to the account of the payee.
 Fur t h e r protection
Kinds of Crossing
Double crossing
 Crossing a cheque specially to more than one banker
 A cheque cannot have Double crossing
– first crossing is defeated by the second
crossing
Kinds of Crossing
Obliterating a crossing
 Erasing the crossing on the cheque
 Opening of crossing-if the crossing of cheque is
cancelled ,Then it becomes a open cheque
Dating of Cheques
 Ante dated Cheque -date earlier to the date of issue
 Post dated cheque – date which is yet to come
 Stale cheque – a cheque which is not presented
for payment with in reasonable period of time (3
months)
 Mutilated cheque-torn into two or more pieces
Holder (Sec. 8)
 The holder of a promissory note, bill or cheque
means any person entitled in his own name (i) to the
possession thereof, and (ii) to receive or recover the
amount due thereon from the parties thereto.
Holder in due course (Sec.9)

Holder in due course, a person must possess the
following qualification:
1. He must be a holder
2. He must be holder for valuable consideration
3. He must have become the holder of the
negotiable instrument before its maturity
4. He must take the negotiable instrument
complete and regular on the face of it
5. He must have become holder in good faith
.
Difference between Holder and Holder in due course
Basis Holder Holder in Due Course
Holder Holder in Due Course

Consideration Not Necessary Only if he obtains NI for
Consideration
Maturity Before or After Maturity Only before Maturity
Right to Sue Cannot sue all prior parties Can Sue all the prior Parties
Privileges Less Privileges' than HDC More Privileges than Holder
Good Faith Holder even if he obtains NI other HDC only if he obtains NI in good
than in Good Faith Faith
DEMAND DRAFT
 It is an instrument used for effecting transfer of

money
 Validity 3 months but it can be revalidated on
application
 A demand draft is an order to pay money drawn by
an office of a bank upon another office of the same
bank for a sum of money payable to order on
demand.
DEMAND DRAFT
Difference between Cheque and Demand Draft
 A cheque is issued by individual but a draft is issued

by banker
 A cheque is drawn by an account holder of a bank.A
draft is drawn by one branch of bank on another
branch of the same bank
 In a cheque drawer and drawee are different
persons.in a draft both the drawer and draweee are
the same bank
 Payment of cheque can be stopped by the drawer
but the payment of draft cannot be stopped
Difference between Cheque and Demand Draft
 In cheque payment is made after presenting cheque to

bank while DD is given after making payment to bank
 A cheque can be made payable either to bearer or
order. A demand draft is always payable to order of a
certain persons
 A cheque can be dishonored for want of sufficient balance
in account. Draft cannot be dishonored
Endorsement
Indorsum –on the back

The literal meaning of the word endorsement is writing on
the back of an instrument. Under the NI Act, it means,
writing of the name of the endorsee on the back of the
instrument by the endorser under his signature with the
object of transferring the rights therein.
If an instrument is fully covered with endorsements and no
space is left, further endorsement can be made on a slip of
paper (called allonge) annexed thereto
Effects of Endorsement
 Endorsee gets the right, title or property in the

instrument
 He also gets the right of further negotiation
 The endorsee acquires the right of the
instrument as its holder
 The endorser guarantees to the endorsee that he
had a good title to the instrument
 The endorse certifies the genuiness of the
instrument
General rules regarding Endorsement
 Signature of the endorser
 Spelling
 No addition or omission of the initial of the name
 Prefixes and suffixes should be avoided
 Endorsement by women
 Endorsement by illiterate persons
 Endorsement by firms
 Endorsement by companies and other institutions
 Endorsement by agents
 Endorsement by liquidators
 Endorsement by trustees and executors
Kinds of Endorsement
1. Blank or general endorsement
Just put the signature of endorser without mention the
name of endorsee
Eg: sd/-
D.Mohan
2. Special
or full
endorse
Eg:ment
Pay to Ghosh or order
Including sd/-
the name D.Mohan
. Swayam Siddhi College of Mgt & Research
3. Restrictive endorsement
An endorsement, when it prohibits or restricts the further

negotiation of the instrument.
Eg: pay to Ghosh only sd/-
D.Mohan
4. Conditional or Qualified
An endorsement is conditional or qualified if it limits
or negates the liability of the endorser
Eg: pay to ghosh on Signing a receipt Sd/-

D.mohan
5. Partial endorsement
When an endorser endorses only a part of the amount
mentioned in the instrument. It is irregular
6. Sans frais endorsement-sans frais means without
expense.
Pay Aneesh or order,without expense to me
sd/
M.P Sudheer
Liability of Endorser
 Instrument will be accepted and paid

 Dishonour of bill –compensate
Every endorser who And his liability arises

endorsed an only if there is a default
instrument before its by the party who is
maturity is liable to the primary liable to pay
parties that are the instrument on
subsequent to him. maturity.
Electronic payment
 Decreasing technology cost

 Reduced operational and processing cost
 Increasing online commerce
Parties of E - payment
 Payer and payee
 Financial institutions -2 roles
as an issuer –interacting with the
payer as an acquirer – interacting with payee
Characteristics of Electronic Payment
 No paper
 Directly from home or office
 fast, efficient, safe,secure and less costly
 Fully traceble
 Same day value of payment
 Same day money transfer
 Convenient for the consumer
 Customer retention
Phases of E-Payment
 Registration
 Invoicing
 Payment selection and processing
 Payment authorization and confirmation
Types of E-payment
 Cards
 Internet
 Mobile payment
 Financial service kiosks
 Television set top boxes and satellite receiver
 Biometric payment
 Electronic payment networks
 Person to person payments
THANK YOU…!!!

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Module 2negotiableinstruments

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Swayam Siddhi College of Mgt & Research

SSCMR Presentor : Prof. Rahul Shah

In India only three kinds of instruments are

 Documents of a certain type, used in commercial

 When a Promissory note, Bill of exchange or

Characteristics of the Negotiability

 An instrument is negotiable by virtue of the

Characteristics of the Negotiable Instruments

Types of negotiable instruments

What is Promissory note?

 A Promissory note is the simplest and earliest kind of

Promissory Note (Pro-Note or Hand-Note)

Essential Elements for a Promissory Note

Specimens of Promissory Notes

Specimen of a Promissory Note

Rs 1,000 New Delhi, 25 Aug’11

 A bill of exchange is playing an important part in the

Essential Elements Bill of Exchange

Essential Elements Bill of Exchange

9. The bill may be payable on demand or after a definite period of

“ We hereby authorize you to pay on our account to the order of

Classification of Bill of Exchange

Specimen of a Bill of Exchange

Difference between bill of exchange and Cheque

Bill of Exchange Cheque

4.A bill may be payable on 4. But a cheque is always

 We have two types of cheques:

What is open Cheque?

 If a drawer orders the bank to pay a stated sum of money to

M.I.C.R Cheque(Magnetic Ink Character Recognition)

 Cheque truncation means that the physical cheque is

Steps to create electronic cheque

 Prepare physical paper cheque. it should be signed

 The Cheque is crossed to achieve the

 Legally there are two kinds of crossing;

Not Negotiable Crossing

It has been adopted by commercial and banking

Holder in due course (Sec.9)

Difference between Holder and Holder in due course

Basis Holder Holder in Due Course

Holder Holder in Due Course

 It is an instrument used for effecting transfer of

Difference between Cheque and Demand Draft

 A cheque is issued by individual but a draft is issued

Difference between Cheque and Demand Draft

 In cheque payment is made after presenting cheque to

Indorsum –on the back

 Endorsee gets the right, title or property in the

An endorsement, when it prohibits or restricts the further

Eg: pay to ghosh on Signing a receipt Sd/-

 Instrument will be accepted and paid

Every endorser who And his liability arises

 Decreasing technology cost

Characteristics of Electronic Payment

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