Bangalore university notes

1. NEGOTIABLE INSTRUMENTS
B.COM II SEM
SUNITHA N (ASST.PROF)
SOUNDARYA INSTITUTE OF MANAGEMENT AND SCIENCE

2. NEGOTIABLE INSTRUMENTS
• “Negotiable” means transferable by delivery and
• “Instrument” means a written document by which a right is created in favor of
some person. Thus, negotiable instrument means a document which is
transferable by delivery.
• Meaning: A negotiable instrument is that document that includes a ‘promise
to pay’ a certain amount of money to the bearer of the document. Its a mode
of transferring a debt from one person to another. Negotiable instruments are
always in written form.
• Definition: According to section 13(a) of negotiable instrument act,
“negotiable instrument means a promissory note, bill of exchange or cheque
payable either to order to bearer, whether the word “order” or “bearer” appear
on the instrument or not”.

3. FEATURES OR CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS
 Must be in writing- A negotiable instrument must be in writing. This includes handwriting, typing,
computer print out and engraving, etc.
 Signature- 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.
 Unconditional order- in every negotiable instrument there must be an unconditional order or
promise for payment.
 Payment- the instrument must involve payment of a certain sum of money only and nothing else.
 Delivery- 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.
 The time of payment must be certain- it means that the instrument must be payable at a time
which is certain to arrive.
 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.

4.  Title- 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. such a
person is known as a holder in due course.
 Easy transferability- A negotiable instrument is freely transferable.
• Notice: it is not necessary to give notice of transfer of a negotiable instrument to the party liable
to pay. The transferee can sue in his own name.
PRESUMPTIONS ABOUT NEGOTIABLE INSTRUMENTS
 Consideration: it is presumed that every negotiable instrument has been made or drawn for the
consideration. When a negotiable instrument is accepted, endorsed, negotiated or transferred, it
is also presumed that it was so accepted, endorsed for a consideration.
 Date: In case of a dated negotiable instrument it is presumed that it has been made or drawn on
the date that appears on it.
 Time of acceptance: That every accepted bill of exchange was accepted within a reasonable
time after its date and before its maturity.

5.  Time of transfer-that every transfer of a negotiable instrument was made before its maturity.
 Order of endorsements-that the endorsements appearing upon a negotiable instrument were
made in the order in which they appear thereon.
 Stamps-that in case a lost or destroyed promissory note, bill of exchange or cheque was duly
stamped.
 Holder in due course-the holder of a negotiable instrument is a holder in due course. But when a
negotiable instrument is obtained by a person from its lawful holder by means of an offence or fraud
or for unlawful holder by means of an offence or fraud or for unlawful consideration, the holder will
have to prove that he is a holder in due course.
• Proof of protest-in a suit upon an instrument which has been dishonored, the court on proof of the
protest, presume the fact of dishonor, unless and until such fact is disproved.

6. Types or kinds of negotiable instruments
1. Negotiable instruments recognized by statute are :
1. Promissory notes
 2. Bills of exchange
3. Cheques
2. Negotiable instruments recognized by usage or custom are :
Hundis
Share warrants
Dividend warrants
Bankers draft
Circular notes
Bearer debentures
Debentures of Bombay port trust
Railway receipts
Delivery orders.

7. PROMISSORY NOTE: A promissory note is an instrument in writing (note being a bank-note or
a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain
sum of money to or to the order of a certain person, or to the bearer of the instruments.” The
person who makes the promissory note and promises to pay is called the maker. The person to
whom the payment is to be made is called the payee.

8. CHARACTERISTICS OF A PROMISSORY NOTE
• It is an instrument in writing
• It is a promise to pay
• Signed by the maker
• Other formalities
• Definite and unconditional promise
• Promise to pay money only
• Maker must be a certain person
• Payee must be certain
• Sum payable must be certain
• It may be payable on demand or after a definite period of time
• It cannot be made payable to bearer on demand

9. Parties to a promissory note
• Maker: he is the person who promises to pay the amount stated in the note. He is the debtor.
• Payee: he is the person to whom the amount is payable i.E. The creditor.
• Holder: he is the payee or the person to whom the note might have been indorsed.
Bill of exchange: 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”. It is also called a draft.
Special benefits of bill of exchange:
• A bill of exchange is a double secured instrument.
• In case of immediate requirement, a bill may be discounted with a bank.

10. Parties of bills of exchange
• Drawer: the maker of a bill of exchange is called the ‘drawer’.
• Drawee: the person directed to pay the money by the drawer is called the ‘drawee’.
• Payee: the person named in the instrument, to whom the money is directed to be paid by the
instrument is called the ‘payee’.
• Holder: a person who is legally entitled to the possession of the negotiable instrument in his own
name and to receive the amount thereof, is called a ‘holder’.
• Acceptor: the person who accepts the bill is termed as acceptor. He is none other than the
drawee.

12. Essential elements of a bill of exchange
• The instrument must be in writing.
• The instrument must be signed by the drawer.
• The instrument must contain an order to pay, which is express and unconditional.
• The drawer, drawee and the payee must be certain and definite individuals.
• The amount of money to be paid must be certain.
• The payment must be in the legal tender currency of India. (Money only)
• It must be in the form of an order to the drawee.
• A bill of exchange must be properly stamped.

13. • Types of bill of exchange on the basis of period:
On the basis of period bills are of two types:
Demand bills
Term bills
• Demand bills of exchange:
There is no fixed date for the payment of such bill. They become payable at ay time,
when they are presented before payee by the holder.
• Term bills of exchange:
These bills are payable after specified period of time. The period after which these bill
become due for payment is called tenor.
Types of bill of exchange on the basis of object:
On the basis of purpose of writing the bills, the bills can be classified as:
Trade bills
Accommodation bills

14. • Trade bills:
These bills are drawn and accepted against the sale and purchase of goods on credit.
These are drawn by the seller (creditor) and accepted by the buyer (debtor).
• Accommodation bills:
Such bills do not involve any sale and purchase of goods, rather they are drawn
without any consideration. The purpose of such bills is to help one party or both the parties
financially.
Other classification of bills:
The bills can be classified into two classes given as under:
• Inland bill:
These bills are drawn in a country upon person living in the same country or made
payable in the same country. Both drawer and the drawee reside in the same country.
• Foreign bills:
These bills are drawn in one country and accepted and payable in another country,
e.g. A bill drawn in England and accepted and payable in India.

15. Basis for Comparison Bill of Exchange Promissory Note
Meaning
Bill of Exchange is an
instrument in writing showing
the indebtedness of a buyer
towards the seller of goods.
A promissory note is a written
promise made by the debtor to
pay a certain sum of money to
the creditor at a future
specified date.
Defined in
Section 5 of Negotiable
Instrument Act, 1881.
Section 4 of Negotiable
Instrument Act, 1881.
Parties
Three parties, i.e. drawer,
drawee and payee.
Two parties, i.e. drawer and
payee.
Drawn by Creditor Debtor
Liability of Maker Secondary and conditional Primary and absolute
Can maker and payee be the
same person?
Yes No
Copies Bill can be drawn in copies.
Promissory Note cannot be
drawn in copies.
Dishonor
Notice is necessary to be given
to all the parties involved.
Notice is not necessary to be
given to the maker.
It contains an unconditional It contains an unconditional

16. CHEQUE: "Cheque is an instrument in writing containing an unconditional order, addressed to a
banker, sign by the person who has deposited money with the banker, requiring him to pay on
demand a certain sum of money only to or to the order of certain person or to the bearer of
instrument."
• Section 5 of the Indian negotiable instrument act of 1881 defines the cheque as “a bill of exchange
drawn specially on a specified banker and not on expressed to be payable otherwise than on
demand”...
SPECIMEN OF CHEQUE:

17. ESSENTIALS OF CHEQUE
• It is an instrument in writing, i.e., It must be written in ink and not by pencil.
• It must be drawn on particular bank.
It is drawn by a customer who has deposited money with the bank.
• It must not contains any conditions.
• It must be signed by the account holder.
• It is always payable on demand.
• It must contain an order to pay certain sum of money
• a cheque is payable to a specified person only

19. Parties of cheque:
Drawer: A person who draws a cheque.
Drawee: A bank to whom cheque is drawn.
Payee: A person in whose favour the cheque is drawn.
Types of cheque
• Bearer cheque
• order cheque
• Open cheque
• crossed cheque
• anti-dated cheque
• post-dated cheque
• stale cheque

20. Bearer cheque
The words “or bearer” printed on the cheque, & it is not cancelled, then the cheque is called a
bearer cheque. • A bearer cheque is made payable to the bearer i.e. It is payable to the person who
presents it to the bank for encashment. • In simple words a cheque which is payable to any person
who presents it for payment at the bank counter is called ‘bearer cheque’

21. ORDER CHEQUE
The word "or order" is written on the face of the cheque, the cheque is called an order
cheque. Such a cheque is payable to the person specified therein as the payee, or to any one else
to whom it is endorsed (transferred).

22. OPEN CHEQUE
When a cheque is not crossed, it is known as an “open cheque” or an “uncrossed
cheque”. • These cheques may be cashed at any bank and the payment of these cheques can be
obtained at the counter of the bank or transferred to the bank account of the bearer. • An open
cheque may be a bearer cheque or an order cheque.

23. CROSSED CHEQUE
Crossed cheque means drawing two parallel lines on the left corner of the cheque
with or without additional words like “account payee only” or “not negotiable”. • A crossed
cheque cannot be en-cashed at the cash counter of a bank but it can only be credited to
the payee’s account. This is a safer way of transferring money then an uncrossed or open

24. Anti-dated cheque
Cheque in which the drawer mentions the date earlier than the date on which it is
presented to the bank, it is called as “anti-dated cheque”. • Such a cheque is valid upto
three months from the date of the cheque drawn.

25. Post-dated cheque
Cheque on which drawer mentions a date which is yet to come (future date) to the date on
which it is presented, is called postdated cheque. • For example – if a cheque presented on 10th jan
2012 bears a date of 25th jan 2012, it is a post-dated cheque. The bank will make payment only on
or after 25th jan 2012.

26. STALE CHEQUE
• If a cheque is presented for payment after three months from the date of the cheque, it is
called stale cheque. After expiry of that period, no payment will be made by banks against that
cheque. A stale cheque is not honored by the bank.

27. CROSSING OF CHEQUE
• crossing of a cheque means "drawing two parallel lines" across the face of the cheque.
Thus, crossing is necessary in order to have safety.
• Crossed cheque must be presented through the bank only because they are not paid at
the counter.
• Crossing is a popular device for protecting the drawer and payee of a cheque.
Types of crossing :
1. General crossing
2. Special crossing
3. Double crossing
4. Restrictive crossing

28. GENERAL CROSSING
• There are two transverse parallel lines, marked across its face, or – the cheque bears an
abbreviation "& co. "Between the two parallel lines, or – the cheque bears the words "not
negotiable" between the two parallel lines, or – the cheque bears the words "A/c. Payee"
between the two parallel lines.

29. SPECIAL CROSSING
• Crossing is that the bank makes payment only to the banker whose name is written in the
crossing. Specially crossed cheques are more safe than a generally crossed cheques.

30. DOUBLE CROSSING:
• When a cheque bears two separate special crossing, it is said to have been doubly crossed.
• As per section-127, of NIA “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.”
• What it means is that, if the cheque is drawn account payee to say Mr x, the payee cannot further
cross it as payable to account of ‘ y’; such a crossing is valid only when ‘y is the agent banker who
is acting as the collecting banker of Mr x;
• Thus a paying banker shall pay a cheque doubly crossed only when the second banker is acting
only as the agent of the first collecting banker and this has been made clear on the instrument.

31. RESTRICTIVE CROSSING:
It includes words like A/c payee, Ashok only etc between traverse parallel lines.
The effect is that the collecting banker is supposed to credit the amount of the cheque to the
account of the payee only & nobody else.

32. • WHO MAY CROSS A CHEQUE?
A)A cheque may be crossed generally or specially by the drawer.
B) Holder may also cross it.
C) Holder may turn a general crossing into special crossing.
D) A banker may cross an uncrossed cheque & it may cross it especially to itself or to another
banker for purpose of collection through it.

34. Indorsement (endorsement)
Endorsement means signature of the holder (an individual who has lawfully received possession)
made with object of transferring the document.
The signature & message on the back of a cheque to either cash it, deposit it or to handover the
rights of the cheque to someone else.
Who may endorse:
The payee of an instrument is the rightful person to make the first endorsement. Thereafter, the
instrument may be endorsed by any party who has become the holder of the instrument (sec.15).
Essentials of a valid Indorsement:
1. It must be signed by the holder.
2. In case of illiterate, a thumb impression should be fixed.
3. It must be on the back of the cheque or bill or on an along of them.

35. Essentials of a valid Indorsement:
4. It may be in ink, print or with a stamp.
5. Partial endorsement is not valid legally it must be of the entire value of the cheque or bill.
6. If the number of payee are more then one then all the payees will sign or that person who is
authorized.
7. The endorsee can also add, the proper signatures if the endorse is not clear.
8. If the payee are more than two the endorsement should be in the same order which is opened
down on the back of the bill.
9. It should be completed by the delivery.
10. The intention must be clearly expressed.

36. TYPES OF ENDORSEMENT
Blank or General endorsement – endorser signs his name without mentioning the name of the
person to whom the cheque is endorsed.
Restrictive endorsement - the endorser restricts the further negotiation of the cheque by
expressing in words at the back of the cheque.

37. FULL OR SPECIAL ENDORSEMENT – Endorser not only write his name but also the name of the
person to whom cheque is endorsed.
Conditional or qualified endorsement – the endorsement may be preceded by certain condition
which should be fulfilled by the endorsee to receive the payment.
“Pay Ram or Order on the arrival of Sumit at J.P
nagar, Mumbai by 30 September,2008.
Sd/B. Chandrasekhar
Pay B.S. Lather or Order
Sd/B.CAHNDRASHEKAR

38. Conditional endorsement are of the following types-
• Sans recourse endorsement: In this type of endorsement the endorser frees himself from
any liability like dishonor of instrument by writing the word “sans recourse after writing the
name of endorsee Ex: “pay to X or order sans recourse”.
• Sans frais endorsement: where the endorser does not want the endorsee or any subsequent
holder, to incur any expense on his account on the instrument, the endorsement is ‘sans frais’.

39. • Facultative endorsement: the endorser waives this duty of endorsee by writing in the endorsement
‘notice of dishonor waived’ the endorser remains liable to the endorsee.
• Liability of endorser depends upon a contingency: the liability of the endorser depends upon the
happening of an event. If the event does not take place, the liability of the endorser does not arise.
For example, if Mr. A makes an endorsement as “pay Mr. B on his arrival”

40. Effects of Indorsement:
 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
Cancellation of indorsement:
Where the holder of a negotiable instrument, without the consent of the indorser, destroys or
impairs the indorser remedy against a prior party, the indorser is discharged from liability to the
holder to the same extent as if the instrument had been paid at maturity.

41. HUNDIES: A hundi is a financial instrument used in trade and credit transactions. Hundis are
used as a form of remittance instrument to transfer money from place to place, as a form of
credit instrument or IOU to borrow money and as a bill of exchange in trade transactions.
The reserve bank of India describes the hundi as "an unconditional order in writing
made by a person directing another to pay a certain sum of money to a person named in the
order.
Types of hundies:
• Sahyog hundi: This is drawn by one merchant on another, asking the latter to pay the
amount to a third merchant.
• Darshani hundi: this is a hundi payable on 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.
• Muddati hundi: a muddati hundi is payable after a specified period of time. This is similar to
a time bill.

43. OTHER CLASSES OF HUNDIS
• Nam-jog hundi - such a hundi is payable only to the person whose name is mentioned on the hundi.
Such a hundi cannot be endorsed in favour of any other person.
• Furman-jog hundi - such a hundi can be paid either to the person whose name is mentioned in the
hundi or to any person so ordered by him.
• Dhani-jog hundi - when the hundi is payable to the holder or bearer,it is known as a dhani jog hundi.
It is similar to an instrument payable to bearer.
• Jokhim-hundi - normally a hundi is unconditional but a jokhim hundi is conditional in the sense that
the drawer promises to pay the amount of the hundi only on the satisfaction of a certain condition.
• Jawabi hundi - if money is transferred from one place to another through the hundi and the person
receiving the payment on is to give an acknowledgement (jawab) for same, then such a hundi is
known as a jawabi hundi.
• Khaka hundi - a hundi which has already been paid is known as a khaka hundi.
• Khoti hundi - in case there is any kind of defect in the hundi or in case the hundi has been forged,
then such a hundi is known as a khoti hundi.

44. SHARE WARRANT: a warrant is like an option issued by a company that gives the holder the right
to buy stock from the company at a specified price within a certain designated time period.

45. DIVIDEND WARRANTS: A dividend warrant is an instrument by which a company pays dividend in
the form of cash back to its share holders from the profit it has been made out of its business
operations.

46. BANK DRAFT: A bank draft is a cheque which you can buy from a bank in order to pay
someone who is not willing to accept a personal cheque.
A bank draft is a payment on behalf of a payer that is guaranteed by the issuing bank. A
draft is used when payee wants a highly secure form of payments.

47. Circular notes: It is a written request by a bank to its foreign correspondents to pay a specified sum
of money to a named person.

48. Bearer debentures: The debentures which are payable to the bearer and whose name do not
appear on the register of debenture holders are known as “Bearer debentures”.

49. Railway receipts: means the receipt issued under sec 65 of railway act,1989. these are also a type
of negotiable instruments issued with monetary values.

50. Debentures of Bombay port trust: these are the debentures issued by Mumbai port trust. The
debentures are having the same features of general classes of debentures.
Delivery receipts: is a document from the consignee, shipper, or owner of freight ordering the
release of freight to another person.

51. REFERENCES:
INTERNET (GOOGLE)
TEXTBOOKS: HIMALAYA PUBLISHERS, SKYWARDS PUBLISHERS.