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Evolution & Revolution of Negotiable Instruments

which have Transformed the Commercial World into a
Virtual Single Global eace
!" EV#$%TI#N #& TR'(E 'N( C#))ERCE $E'(ING T# T*E
The world as a whole has been the cradle of commerce because this
exchange is not only between individuals but also between peoples and
nations. This naturally implies the existence of:
1- C!T"#$ %&!'(&% )* +"(T,
-- C!T"#$ '!).#%#)$ *)! C)//&$#C"T#)$
0oth of which are essential for growth of commerce. &nless there is a surplus
of wealth and provision for communication1 commerce cannot grow.
2"/'(- #n the primitive economic society when each tribe or family
produced all that is needed and consumed all that it produced1 need of
commerce did not and could not arise. )nly after the division of labour and
conse3uent development of exchange1 commerce began to grow. )nce it
started growing1 it spread its invisible thread throughout the length and
breadth of the world leading to its present day complex mechanism. These
stages may be summari4ed as follows:
!" N#N E,ISTENCE #& C#))ERCE- #n the early stage of economic life
of man division of labour scarcely existed. /an produced what he
needed and consumed all that he produced. Therefore commerce did
not exist in this stage.
." TR'(E IN T*E &#R) #& +'RTER- #n the second stage1 wants of the
family became more numerous and many families found themselves
with certain goods and surplus and deficient in certain other goods.
These families wanted to exchange their surplus goods for those goods
which they did not possess. This gave rise to exchange of goods for
goods1 i.e.1 0arter system. Thus this is the place from where commerce
may be said to have begun.
/" )#NE0 'S ' )E(I%) #& TR'(E 'N( T#WN 'S T*E CENTRE #&
TR'(E- Commerce reached into its third stage of growth when money
was evolved as medium of exchange to remove the limitations of barter.
#ntroduction of money began led to the extension of division of labour
and speciali4ation. 'eople began to produce goods for certain local
mar5ets. Thus1 division of labour was extended to a locality. 6radually a
separate class of artisans and traders came into existence. They settled
down at fixed places which came to be 5nown as towns.
6rowth of these towns gave great stimulus to commerce. The si4e of
the mar5et and the number of commodities exchanged in the mar5et1
both increased. Traders from other countries brought luxury articles1
metals and ornaments for sale.
1" EC#N#)0 'N( GR#WT* #& C#))ERCE- Commerce continued to
grow both in volume and space. "fter the decline of 6uild system1 a new
class of people1 $T!'!$&! class1 came into existence. This class
of people became a real intermediary between the producers and
consumers. *urther1 growth of commercial enterprise too5 place. Trade
began to assume fixed forms. 'roduction began to be underta5en for the
mar5ets extended for the whole country. 7ivision of labour received further
impetus. 'roduction was divided into several branches and each branch
tended to be locali4ed. .arious economic activities came to be clearly
mar5ed off into distinct groups:
'- 'GRIC%$T%RE
+- TR'(E
C- C#))ERCE"
W#R$( EC#N#)0 'N( T*E W#R$( )'R2ET- Commerce
entered into another stage of its growth when nations of the world were
brought into commercial relationships through the invisible thread of
trade. "s a result of the geographical discoveries of the late 18
1 19
and 1:
centuries new trade routes were opened up and commerce
grew between nations. $ow1 in addition to the local mar5et and the
trade extending over the whole area of a single country1 commodities
came to be sold and purchased between traders from different
countries in the world. This gave rise to an international world mar5et
and to the international trade. Thus the nations of the world were lin5ed
together through the medium of the world mar5et.
volution of commerce is a never ending process. "lmost every day
new experiments in its mechanism are made. $ew forms and methods
are being evolved in both socialist and capitalist countries1 in both
developed and developing nations.
,istorically business developed by stages.
;1< 'astoral stage ;-< "gricultural stage ;=< ,andicrafts stage ;>< 6uild
stage ;8< 7omestic stage and ;9< *actory stage.
astoral stage4 #n primitive society man used things ?ust as they were found
in nature. +ith time1 he learned to domesticate animals and breed them for
food and clothing. %ince he had to find pastures for his animals1 he tended to
lead a wandering life. 0ut in this stage his wor5 served mainly to support only
him with his own needs and left very little surplus available foe exchange on a
business basis.
'gricultural stage: #n course of time1 the nomadic tribes settled permanently
at fixed places1 built up the huts and shelters for their residences and began
cultivating the land in common. 6rowing corns1 grasses etc. became the main
occupation. "griculture emerged as the basic feature of economic living of
man. ,e gradually produced more and then started to exchange it with other
commodities. This was 5nown as barter system.
*andicraft stage4 #n this stage manufacturing was limited to the human
efforts to transform raw materials into finished goods. #t included candle and
soap ma5ing1 spinning1 weaving1 ma5ing of clothes and shoes1 blac5smithing1
leather dressing1 carpentry etc.
Guild stage: " guild is an association of persons following a similar
occupation and it is formed to protect and promote the interest of its members
through cooperative endeavors.
(omestic stage: " new class entrepreneur emerged as a lin5 between
producer and consumer. $ow entrepreneur purchased the raw materials for
the purpose of manufacture and sale nut did not do the processing himself.
,e too5 the ris5 of productions and sale. )ut of the proceeds of his
underta5ing1 he paid for the materials and labour. The amount left was his
&actor5 stage: #n this stage an organi4ed system of production under a single
roof came to be identified as a factory. (arge scale operations with the use of
mechani4ed production processes resulted in producing good 3uality products
at cheaper rates. ,owever it was greatly influenced not only by its own
processes but also by government under which it operates.
These were the different stages of evolution of business. ,owever it was
noted that the growth was very slow and the system was very complex. There
were different instruments used to purchase different commodities in different
stages. The system of exchange was such that it led to confusion and various
complexities. To avoid such confusion and to operate the business activities
smoothly negotiable instruments were introduced.
xchange of goods and services is the basis of every business activity. 6oods
are bought and sold for cash as well as on credit. "ll these transactions re3uire
flow of cash either immediately or after a certain time. #n modern business1 large
number of transactions involving huge sums of money ta5es place every day. #t is
3uite inconvenient as well as ris5y for either party to ma5e and receive payments
in cash. Therefore1 it is a common practice for businessmen to ma5e use of
certain documents as means of ma5ing payment. %ome of these documents are
called negotiable instruments.
)eaning of Negotiable Instruments
The concept of negotiability is one of the most important features of commercial
paper. " negotiable instrument is a written document1 signed by the ma5er or
drawer1 and containing an unconditional promise to pay ;or order to pay< a
certain sum of money on delivery1 or at a definite time1 to the bearer ;or to the
To understand the meaning of negotiable instruments let us ta5e a few
examples of day-to-day business transactions.
%uppose 'itamber1 a boo5 publisher has sold boo5s to 'rashant for !s 1@1@@@A-
on three months credit. To be sure that 'rashant will pay the money after three
months1 'itamber may write an order addressed to 'rashant that he is to pay
after three months1 for value of goods received by him1 !s.1@1@@@A- to 'itamber
or anyone holding the order and presenting it before him ;'rashant< for payment.
This written document has to be signed by 'rashant to show his acceptance of
the order. $ow1 'itamber can hold the document with him for three months and
on the due date can collect the money from 'rashant. ,e can also use it for
meeting different business transactions. *or instance1 after a month1 if re3uired1
he can borrow money from %unil for a period of two months and pass on this
document to %unil. ,e has to write on the bac5 of the document an instruction to
'rashant to pay money to %unil1 and sign it. $ow %unil becomes the owner of
this document and he can claim money from 'rashant on the due date. %unil1 if
re3uired1 can further pass on the document to "mit after instructing and signing
on the bac5 of the document. This passing on process may continue further till
the final payment is made.
#n the above example1 'rashant who has bought boo5s worth !s. 1@1@@@A- can
also give an underta5ing stating that after three month he will pay the amount to
'itamber. $ow 'itamber can retain that document with himself till the end of
three months or pass it on to others for meeting certain business obligation ;li5e
with %unil1 as discussed above< before the expiry of that three months time
Bou must have heard about a che3ue. +hat is itC #t is a document issued to a
ban5 that entitles the person whose name it bears to claim the amount
mentioned in the che3ue. #f he wants1 he can transfer it in favour of another
person. *or example1 if "5ash issues a che3ue worth !s. 81@@@A - in favour of
0idhan1 then 0idhan can claim !s. 81@@@A- from the ban51 or he can transfer it to
Chander to meet any business obligation1 li5e paying bac5 a loan that he might
have ta5en from Chander. )nce he does it1 Chander gets a right to !s. 81@@@A-
and he can transfer it to 7ayanand1 if re3uired. %uch transfers may continue till
the payment is finally made to somebody. #n the above examples1 we find that
there are certain documents used for payment in business transactions and are
transferred freely from one person to another. %uch documents are called
$egotiable #nstruments.
Thus1 we can say negotiable instrument is a transferable document1 where
negotiable means transferable and instrument means document. To elaborate it
further1 an instrument1 as mentioned here1 is a document used as a means for
ma5ing some payment and it is negotiable i.e.1 its ownership can be easily
Thus1 negotiable instruments are documents meant for ma5ing payments1 the
ownership of which can be transferred from one person to another many times
before the final payment is made.
(efinition of Negotiable Instrument
"ccording to section !/ of the Negotiable Instruments 'ct6 !77!1 a negotiable
instrument means promissory note1 bill of exchange1 or che3ue1 payable either
to order or to bearer.
:i;.-" promissory note1 bill of exchange or che3ue is payable to order which is
expressed to be so payable or which is expressed to be payable to a particular
person1 and does not contain words prohibiting transfer or indicating an intention
that it shall not be transferable.
:ii;.-" promissory note1 bill of exchange or che3ue is payable to bearer which is
expressed to be so payable or on which the only or last endorsement is an
endorsement in blan5.
:iii;.-+here a promissory note1 bill of exchange or che3ue1 either originally or by
endorsement1 is expressed to be payable to the order of a specified person1 and
not to him or his order1 it is nevertheless payable to him or his order at his option.
" negotiable instrument may be made payable to two or more payees
?ointly1 or it may be made payable in the alternative to one of two1 or one or
-some of several payees.
/" T59es of Negotiable Instruments
"ccording to the $egotiable #nstruments "ct1 1DD1 there are ?ust three types of
negotiable instruments i.e.1 promissory note1 bill of exchange and che3ue.
,owever many other documents are also recogni4ed as negotiable instruments
on the basis of custom and usage1 li5e hundis1 treasury bills1 share warrants1
etc.1 provided they possess the features of negotiability. #n the following sections1
we shall study about 'romissory $otes ;popularly called pronotes<1 0ills of
xchange ;popularly called bills<1 Che3ues and ,undis ;a popular indigenous
document prevalent in #ndia<1 in detail.
i" romissor5 Note
%uppose you ta5e a loan of !upees *ive Thousand from your friend !amesh.
Bou can ma5e a document stating that you will pay the money to !amesh or the
bearer on demand. )r you can mention in the document that you would li5e to
pay the amount after three months. This document1 once signed by you1 duly
stamped and handed over to !amesh1 becomes a negotiable instrument. $ow
!amesh can personally present it before you for payment or give this document
to some other person to collect money on his behalf. ,e can endorse it in
somebody elseEs name who in turn can endorse it further till the final payment is
made by you to whosoever presents it before you. This type of a document is
called a 'romissory $ote.
Section 1 of the Negotiable Instruments 'ct6 !77! defines a promissory note
as Fan instrument in writing ;not being a ban5 note or a currency note< containing
an unconditional underta5ing1 signed by the ma5er1 to pay a certain sum of
money only to or to the order of a certain person or to the bearer of the
" signs instrument in the following terms
;a< G# promise to pay 0 or order !s. 8@@.G
;b< G # ac5nowledge myself to be indebted to 0 in !s. 11@@@ to be paid on
demand1 for value received.G
;c< /r. 01 ) & !s. 11@@@.G
;d< # promise to pay 0 !s. 8@@ and all other sums which shall be due to him.G
;e< # promise to pay 0 !s. 8@@1 first deducting there out any money which he may
owe me.G
;f< G # promise to pay 0 !s. 8@@ seven days after my marriage with C.G
;g< G # promise to pay 0 !s. 8@@ on 7Hs death1 provided 7 leaves me enough to
pay that sum.G
;h< G # promise to pay 0 !s. 8@@ and to deliver to him my blac5 horse on 1st
Ianuary next.G
The instruments respectively mar5ed ;a< and ;b< are promissory notes. The
instruments respectively mar5ed ;c<1 ;d<1 ;e<1 ;f<1 ;g< and ;h< are not promissory
Specimen of a Promissory Note
Rs. 10,000/- New Delhi
September 25, 2002
On demand, I promise to pay Ramesh, s/o Ramal o! "eer#t or order a s#m
o! Rs 10,000/- $R#pees %en %ho#sand only&, !or 'al#e re(ei'ed.
%o , Ramesh Sd/ San)ee'
*ddress++.. Stamp
arties to a romissor5 Note
There are primarily two parties involved in a promissory note. They are
i" The )a<er or (rawer = the person who ma5es the note and promises to
pay the amount stated therein. #n the above specimen1 %an?eev is the ma5er or
ii" The a5ee = the person to whom the amount is payable. #n the above
specimen it is !amesh. #n course of transfer of a promissory note by payee and
others1 the parties involved may be -
a" The Endorser = the person who endorses the note in favour of another
person. #n the above specimen if !amesh endorses it in favour of !an?an and
!an?an also endorses it in favour of 'uneet1 then !amesh and !an?an both are
b" The Endorsee = the person in whose favour the note is negotiated by
endorsement. #n the above1 it is !an?an and then 'uneet.
;ndorsement means transfer of any document or instrument to another person
by signing on its bac5 or face or on a slip of paper attached to it<
&eatures of a 9romissor5 note
(et us 5now the features of a promissory note.
i" " promissory note must be in writing1 duly signed by its ma5er and properly
stamped as per #ndian %tamp "ct.
ii" #t must contain an underta5ing or promise to pay. /ere ac5nowledgement of
indebtedness is not enough. *or example1 if someone writes F# owe !s. 8@@@A- to
%atya 'ra5ashE1 it is not a promissory note.
iii" The promise to pay must not be conditional. *or example1 if it is written F#
promise to pay %uresh !s 81@@@A- after my sisterEs marriageE1 is not a promissory
iv" #t must contain a promise to pay money only. *or example1 if someone writes
F# promise to give %uresh a /aruti carE it is not a promissory note.
v" The parties to a promissory note1 i.e. the ma5er and the payee must be certain.
vi" " promissory note may be payable on demand or after a certain date. *or
example1 if it is written Fthree months after date # promise to pay %atinder or order
a sum of rupees *ive Thousand onlyE it is a promissory note.
vii" The sum payable mentioned must be certain or capable of being made
certain. #t means that the sum payable may be in figures or may be such that it
can be calculated.
$See spe(imen below&.
Rs. 10,000/- New Delhi
No'ember 1,, 2002
I, Ramesh , s/o Sadanand o! S#rat, -#)arat promise to pay Sashi.ant, s/o S#nil
/#mar o! *hmedabad, -#)arat or order, on demand, the s#m o! Rs 10,000/- $R#pees
%en %ho#sand only& with interest at the rate o! 10 per(ent per ann#m, !or 'al#e
Sd/- Ramesh
*hmedabad, -#)arat
ii" +ill of E8change
%uppose !a?iv has given a loan of !upees Ten Thousand to %ameer1 which
%ameer has to return. $ow1 !a?iv also has to give some money to Tarun. #n this
case1 !a?iv can ma5e a document directing %ameer to ma5e payment up to
!upees Ten Thousand to Tarun on demand or after expiry of a specified period.
This document is called a 0ill of xchange1 which can be transferred to some
other personEs name by Tarun.
Section > of the Negotiable Instruments 'ct6 !77! defines a bill of exchange
as Fan instrument in writing containing an unconditional order1 signed by the
ma5er1 directing a certain person to pay a certain sum of money only to or to the
order of a certain person1 or to the bearer of the instrumentE.
Specimen of a Bill of Exchange
Rs. 10,000/- New Delhi
"ay 2,2001
0i'e months a!ter date pay %ar#n or $to his& order the s#m o! R#pees %en
%ho#sand only !or 'al#e re(ei'ed.
%o *((epted Stamp
Sameer Sameer S/d
*ddress Ra)i'
arties to a +ill of E8change
There are three parties involved in a bill of exchange. They are
i" The (rawer = The person who ma5es the order for ma5ing payment. #n
the above specimen1 !a?iv is the drawer.
ii" The (rawee = The person to whom the order to pay is made. ,e is
generally a debtor of the drawer. #t is %ameer in this case.
iii" The a5ee = The person to whom the payment is to be made. #n this
case it is Tarun.
The drawer can also draw a bill in his own name thereby he himself becomes the
payee. ,ere the words in the bill would be Pay to us or order. #n a bill where a
time period is mentioned1 ?ust li5e the above specimen1 is called a Time Bill. 0ut
a bill may be made payable on demand also. This is called a Demand Bill.
&eatures of a bill of e8change
(et us 5now the various features of a bill of exchange.
i. " bill must be in writing1 duly signed by its drawer1 accepted by its drawee and
properly stamped as per #ndian %tamp "ct.
ii. #t must contain an order to pay. +ords li5e Fplease pay !s 81@@@A- on demand
and obligeE are not used.
iii. The order must be unconditional.
iv. The order must be to pay money and money alone.
v. The sum payable mentioned must be certain or capable of being made certain.
vi. The parties to a bill must be certain.
iii" Che?ues
Che3ue is a very common form of negotiable instrument. #f you have a savings
ban5 account or current account in a ban51 you can issue a che3ue in your own
name or in favour of others1 thereby directing the ban5 to pay the specified
amount to the person named in the che3ue. Therefore1 a che3ue may be
regarded as a bill of exchangeJ the only difference is that the ban5 is always the
drawee in case of a che3ue.
The Negotiable Instruments 'ct6 !77! defines a che3ue as a bill of exchange
drawn on a specified ban5er and not expressed to be payable otherwise than on
demand. "ctually1 a che3ue is an order by the account holder of the ban5
directing his ban5er to pay on demand1 the specified amount1 to or to the order of
the person named therein or to the bearer.
Specimen of a Cheque
++....................................................................................................... or
3awaharlal Nehr# 4ni'ersity, New Delhi 5 110067
"S2 " # $ % % $ & & % % % ' % # " & %
&eatures of a che?ue
(et us loo5 into some important features of a che3ue.
i. " che3ue must be in writing and duly signed by the drawer.
ii. #t contains an unconditional order.
iii. #t is issued on a specified ban5er only.
iv. The amount specified is always certain and must be clearly mentioned both in
figures and words.
v. The payee is always certain.
vi. #t is always payable on demand.
vii. The che3ue must bear a date otherwise it is invalid and shall not be honoured
by the ban5.
T59es of Che?ue
0roadly spea5ing1 che3ues are of four types.
a< )pen che3ue1 and
b< Crossed che3ue.
c< 0earer che3ue
d< )rder che3ue
(et us 5now details about these che3ues.
a; #9en che?ue4 " che3ue is called F)penE when it is possible to get cash over
the counter at the ban5. The holder of an open che3ue can do the following:
i. !eceive its payment over the counter at the ban51
ii. 7eposit the che3ue in his own account
iii. 'ass it to someone else by signing on the bac5 of a che3ue.
b; Crossed che?ue4 %ince open che3ue is sub?ect to ris5 of theft1 it is dangerous
to issue such che3ues. This ris5 can be avoided by issuing other types of che3ue
called FCrossed che3ueE. The payment of such che3ue is not made over the
counter at the ban5. #t is only credited to the ban5 account of the payee. "
che3ue can be crossed by drawing two transverse parallel lines across the
che3ue1 with or without the writing F"ccount payeeE or F$ot $egotiableE.
c; +earer che?ue: " che3ue which is payable to any person who presents it for
payment at the ban5 counter is called F0earer che3ueE. " bearer che3ue can be
transferred by mere delivery and re3uires no endorsement.
d; #rder che?ue: "n order che3ue is one which is payable to a particular
person. #n such a che3ue the word FbearerE may be cut out or cancelled and the
word ForderE may be written. The payee can transfer an order che3ue to someone
else by signing his or her name on the bac5 of it.
There is another categori@ation of che3ues which is discussed below:
'nte-dated che?ues:- Che3ue in which the drawer mentions the date earlier to
the date of presenting if for payment. *or example1 a che3ue issued on -@th /ay
-@@= may bear a date 8th /ay -@@=.
Stale Che?ue:- " che3ue which is issued today must be presented before at
ban5 for payment within a stipulated period. "fter expiry of that period1 no
payment will be made and it is then called Fstale che3ueE. *ind out from your
nearest ban5 about the validity period of a che3ue.
)utilated Che?ue:- #n case a che3ue is torn into two or more pieces and
presented for payment1 such a che3ue is called a mutilated che3ue. The ban5
will not ma5e payment against such a che3ue without getting confirmation of the
drawer. 0ut if a che3ue is torn at the corners and no material fact is erased or
cancelled1 the ban5 may ma5e payment against such a che3ue.
ost-dated Che?ue:- Che3ue on which drawer mentions a date which is
subse3uent to the date on which it is presented1 is called post-dated che3ue. *or
example1 if a che3ue presented on Dth /ay -@@= bears a date of -8th /ay -@@=1
it is a post-dated che3ue. The ban5 will ma5e payment only on or after -8th /ay
iv" *undis
" ,undi is a negotiable instrument by usage. #t is often in the form of a bill of
exchange drawn in any local language in accordance with the custom of the
place. %ometimes it can also be in the form of a promissory note. " hundi is the
oldest 5nown instrument used for the purpose of transfer of money without its
actual physical movement. The provisions of the $egotiable #nstruments "ct shall
apply to hundis only when there is no customary rule 5nown to the people.
T59es of *undis
There are a variety of hundis used in our country. (et us discuss some of the
most common ones.
!" Shah-Aog *undi4 This is drawn by one merchant on another1 as5ing the latter
to pay the amount to a %hah. %hah is a respectable and responsible person1 a
man of worth and 5nown in the ba4aar. " shah-?og hundi passes from one hand
to another till it reaches a %hah1 who1 after reasonable en3uiries1 presents it to
the drawee for acceptance of the payment.
." (arshani *undi4 This is a hundi payable at sight. #t must be presented for
payment within a reasonable time after its receipt by the holder. Thus1 it is similar
to a demand bill.
/" )uddati *undi4 " muddati or miadi hundi is payable after a specified period of
time. This is similar to a time bill.
There are few other varieties li5e $am-?og hundi1 7hani-?og hundi1 Iawabee
hundi1 Io5hami hundi1 *irman-?og hundi1 etc.
1" A( !ifferences )et*een Bill of Exchange + Promissory Notes
Promissory Note Bill of Exchange
1. It (ontains an #n(onditional
1. It (ontains an #n(onditional order.
2. %here are 2 parties 5 the 8
the payee.
2. %here are 9 parties 5 the drawer,
the drawee 8 the payee.
9. It is made by the debtor. 9. It is made by the (reditor.
,. *((eptan(e is not re:#ired. ,. *((eptan(e by the drawee is a
5. %he liability o! the
is primary 8 absol#te.
5. %he liability o! the is
se(ondary 8 (onditional #pon non-
payment by the drawee.
B( !istinction )et*een a Cheque an, a Bill of Exchange
Cheque Bill of Exchange
1. It is drawn only on a
1. It (an be drawn on anybody
in(l#din; a
2. %he amo#nt is always payable on
-. %he amo#nt is payable on
demand or a!ter a spe(i!ied period.
9. It (an be (rossed to end its
=. It (annot be (rossed.
,. *((eptan(e is not re:#ired.
>. *((eptan(e is a m#st.
>" &eatures of Negotiable Instruments
"fter discussing the various types of negotiable instruments let us sum up their
features as under
i" A negotiable instrument is freely transferable. &sually1 when we transfer
any property to somebody1 we are re3uired to ma5e a transfer deed1 get it
registered1 pay stamp duty1 etc. 0ut1 such formalities are not re3uired while
transferring a negotiable instrument. The ownership is changed by mere delivery
;when payable to the bearer< or by valid endorsement and delivery ;when
payable to order<. *urther1 while transferring it is also not re3uired to give a notice
to the previous holder.
ii. Negotiability confers absolute and good title on the transferee. #t means
that a person who receives a negotiable instrument has a clear and undisputable
title to the instrument. ,owever1 the title of the receiver will be absolute1 only if he
has got the instrument in good faith and for a consideration. "lso the receiver
should have no 5nowledge of the previous holder having any defect in his title.
%uch a person is 5nown as holder in due course. *or example1 suppose !a?iv
issued a bearer che3ue payable to %an?ay. #t was stolen from %an?ay by a
person1 who passed it on to 6irish. #f 6irish received it in good faith and for value
and without 5nowledge of che3ue having been stolen1 he will be entitled to
receive the amount of the che3ue. ,ere 6irish will be regarded as Fholder in due
iii. A negotiable instrument must be in writing. This includes handwriting1
typing1 computer printout and engraving1 etc.
iv. #n every negotiable instrument there must be an unconditional order or
promise for payment.
v. The instrument must involve payment of a certain sum of money only and
nothing else. *or example1 one cannot ma5e a promissory note on assets1
securities1 or goods.
vi. The time of payment must be certain. #t means that the instrument must be
payable at a time which is certain to arrive. #f the time is mentioned as Fwhen
convenientE it is not a negotiable instrument. ,owever1 if the time of payment is
lin5ed to the death of a person1 it is nevertheless a negotiable instrument as
death is certain1 though the time thereof is not.
vii. The payee must be a certain person. #t means that the person in whose
favour the instrument is made must be named or described with reasonable
certainty. The term FpersonE includes individual1 body corporate1 trade unions1
even secretary1 director or chairman of an institution. The payee can also be
more than one person.
viii. " negotiable instrument must bear the signature of its maker. +ithout the
signature of the drawer or the ma5er1 the instrument shall not be a valid one.
ix. Delivery of the instrument is essential. "ny negotiable instrument li5e a
che3ue or a promissory note is not complete till it is delivered to its payee. *or
example1 you may issue a che3ue in your brotherEs name but it is not a
negotiable instrument till it is given to your brother.
x. Stamping of Bills of xchange and !romissory Notes is mandatory. This
is re3uired as per the #ndian %tamp "ct1 1DKK. The value of stamp depends upon
the value of the pronote or bill and the time of their payment.
B" Negotiation of Commercial a9er
*our Common Types of ndorsements
Assignment Commercial paper that does not meet all of the re3uirements of
negotiability cannot be negotiated. #t can only be transferred by assignment1
which is governed by the ordinary principles of contract law.
Negotiation $egotiation is the transfer of an instrument in such a form that the
transferee becomes a holder. " holder is a person who is in possession of an
instrument issued or indorsed to that person1 to that personHs order1 to bearer1 or
in blan5.
ndorsements "n instrument is endorsed when the holder signs it1 thereby
indicating the intent to transfer ownership to another. ndorsements may be
written in in51 typewritten1 or stamped with a rubber stamp.
Blank ndorsements" " blan5 endorsement consists of the signature alone
written on the instrument.
LSpecial ndorsements" " special endorsement is made by writing the words
pay to the order of or pay to followed by the name of the person to whom it is to
be transferred and the signature of the endorser.
L#estrictive ndorsements" " restrictive endorsement limits the rights of the
endorsee in some manner in order to protect the rights of the endorser. "n
endorsement is restrictive if it is conditional.
L$onditional ndorsement" " conditional endorsement1 a type of restrictive
endorsement1 ma5es the rights of the endorsee sub?ect to the happening of a
certain event or condition.
L%ualified ndorsements" " 3ualified endorsement is one in which words have
been added to the signature that limit the liability of the endorser.
C" E8ce9tions
&nder the Code1 the following are not negotiable instruments1 although the law
governing obligations with respect to such items may be similar to or derived
from the law applicable to negotiable instruments.
1. (etters of Credit1 which are governed by "rticle 8 of the Code.
2. 0ills of (ading and other documents of title1 which are governed by "rticle
: of the Code.
9. %ecurities1 such as %toc5s M 0onds1 which are governed by "rticle D of the
,. 7eeds M other documents conveying interests in real estate1 although a
mortgage may secure a promissory note which is governed by "rticle =.
5. #)&s. relating to netting practices and domestic payments and settlement
D. E- Transfers
Electronic &unds Transfer 'ct
#n 1KK81 the !eserve 0an5 had set up the Committee for 'roposing (egislation
on lectronic *unds Transfer and other lectronic 'ayments ;Chairperson : %mt.
N.%.%here<. The %here Committee had recommended a set of *T !egulations
by the !eserve 0an5 under the !eserve 0an5 of #ndia "ct11K=> and amendment
to the 0an5ersE 0oo5s vidence "ct11DD1 as short term measures and promotion
of a few "cts li5e the lectronic *unds Transfer "ct1 the Computer /isuse and
7ata 'rotection "ct etc. as long term measures. The !eserve 0an5 has already
initiated steps for framing of *T !egulations. The 6overnment of #ndia have
also initiated steps for promoting #nformation and Technology "ct1 1KKK and
conse3uential amendments to the !eserve 0an5 of #ndia "ct1 1K=>1 the 0an5ersE
0oo5s vidence "ct1 1DD1 etc.
The proposed #nformation Technology 0ill1 1KKK and lectronic Commerce 0ill1
1KKK are intended to be general purpose legislation covering mainly issues li5e
secure electronic records and signatures1 acceptance of digital signatures1 duties
of certification authority1 liability of networ5 service providers1 computer crime and
data protection. 0oth the bills deal with electronic contracts and they are being
promoted by the 6overnment of #ndia primarily to facilitate introduction of
lectronic 7ata #nterchange in the commercial sector. ,owever1 they are e3ually
applicable for electronic funds transfer already launched by the !eserve 0an5
and is going to be increasingly resorted to by the user ban5s of the .%"T based
networ51 the #$*#$T. ,owever1 there is still a need for a separate "ct for
lectronic *unds Transfer because certain transactional issues li5e payments
finality1 rights and obligations of the parties involved in electronic funds transfer
etc. cannot be covered in general purpose bills li5e the proposed #nformation
Technology 0ill or the proposed lectronic Commerce 0ill. The *T !egulations
being framed by the !eserve 0an5 would address only the specific type of *T
system that the !eserve 0an5 would be involved with as a service provider as
also a regulator. The *T !egulations would1 moreover1 cover only credit transfer
related transactions and not 7ebit Clearing transactions. " separate legislation
on the lines of lectronic *unds Transfer "ct of &%" is1 therefore1 re3uired which
would be consumer protection oriented and would at the same time address
transactional issues li5e execution of payment order1 settlement finality1 etc.
The !eserve 0an5 has ta5en the help of a consultant in drafting a new
legislation on lectronic *unds Transfer %ystem and proposing amendment to
the !eserve 0an5 of #ndia "ct 1K=>. The Committee1 after a careful examination
of the issue1 has endorsed the view that the proposed lectronic *unds Transfer
"ct should cover all forms of electronic payments. The Committee supports the
view that the !eserve 0an51 at an appropriate time1 considers operating the inter-
ban5 payment systems through an agency or subsidiary so that its regulatory role
is rendered distinct from its supervisory role. !etail payment systems such as the
C% and the *T !emittance 'rocessing %cheme presently operational may be
managed by a group of large ban5s with country wide branch networ5 and
technical capability1 with settlement assistance from the !eserve 0an5. This
would help the !0# to focus its efforts only on large value time critical funds
transfers to be settled on an !T6% basis. #n the ongoing debate on the role of
central ban5 in payment systems1 the trend is towards distinguishing the central
ban5 role as a regulator from that of service providers which could be commercial
ban5s themselves or the entities under the control of commercial ban5s. The
Committee has considered it necessary that the legal framewor5 for payment
system ta5es into account this international trend.
'dmission of electronic files as evidence and 9reservation of records4
The %here Committee had discussed the issues of admitting electronic files as
evidence and of preserving electronic records and recommended the need to
amend the 0an5ersH 0oo5s vidence "ct1 1DD1 on the lines of the Customs and
Central xcise (aws ;"mendment< "ct1 1KDD and Central xcise and %alt "ct1
1K>> for the purpose. #t is learnt that 6overnment of #ndia is processing the draft
0ill amending the 0an5ersE 0oo5s vidence "ct1 1DD1. This is a welcome
development and would meet the legal re3uirement of acceptance of contracts1
documents etc. in electronic form as evidence.
The Committee considered certain provisions of the proposed lectronic
Commerce 0ill for admitting electronic records A signatures as evidence. Clauses
K1 1@1 111 1- and 1> of this proposed 0ill which are relevant in this connection are
given in 'nne8ure !B " #t is worth mentioning that while clauses K1 1@ and 11 of
this 0ill are based on the &$C#T!"( /odel (aw1 clauses 1- and 1> are based
on %ingapore lectronic Transactions "ct. "s and when the lectronic
Commerce 0ill is passed1 these provisions will be made applicable1 ipso facto1 to
electronic funds transfer transactions as well.
&unds Transfer through E&T S5stems from Ta8 Com9liance 'ngle
The %here Committee had recommended that the Central 0oard of 7irect Taxes
;C07T< may be re3uested to ta5e up the 3uestion of clarifying and1 if re3uired1
amending the relative provisions of the 7irect Tax (aws li5e %ection >@" of the
#ncome-Tax "ct1 1K91. The Committee however felt that1 for according the funds
transfer under the *T system the same status of payment as one made by an
"Ac payee che3ue1 suitable technology may have to be developed for treating
such transfers as "Ac payee transfers. " mere recognition to that effect by the
C07T may not be ade3uate to treat such transfer as "Ac payee che3ues. (egal
provisions need to be made if such recognition has to be given. The first test
would arise when paper instruments li5e che3ues are used along with the use of
*T system. %o long as both the systems are in existence at the same time1 it
would re3uire either amendments to the $egotiable #nstruments "ct or a
separate legislation to deal with the matter.

Che?ue Truncation
Che3ue Truncation is a method of payment processing where under movement
of the paper instrument is truncated by substituting with electronic transmission
of the che3ue details or data. The %here Committee had examined the legal
issues pertaining to che3ue truncation and had indicated that the definition of
presentment in the $egotiable #nstruments "ct may have to be amended for
adoption of che3ue truncation system in #ndia. &nder the $egotiable #nstruments
"ct1 1DD11 che3ues would have to be presented for payment to drawee A drawer
ban5. +ithout such presentment1 no cause of action arises against the drawer. #n
default of presentment of a che3ue to the drawee for payment1 other parties to
the che3ue are not liable to the holder. #t is by ban5ing practice and under the
&niform !ules and !egulations for Clearing ,ouses that ban5s have agreed for
presentment at any place other than the branch1 such as the clearing house.
0esides1 the implications of the definition of payment in due course under the
$egotiable #nstruments "ct1 1DD1 may ma5e it difficult for ban5s to introduce
che3ue truncation system simply by agreement among themselves. The right of
the paying ban5 to re3uire physical presentation and possession of the che3ue
are designed to provide the ban5 with an opportunity to examine the signature
and other authentication of the che3ue. This is meant essentially to protect the
interest of the drawer. Therefore1 in &N1 the che3ue truncation system started
with customer consent agreements and was eventually introduced after a fair
degree of familiari4ation with imaging technology by the ban5s. Thus1
introduction of che3ue truncation system may re3uire adoption of a fairly
standardi4ed imaging technology and appropriate amendments to the $egotiable
#nstruments "ct1 1DD1.

D" Section !/1 to !/C is of an International $aw
and the said 1 sections read as follows4
1=>. (aw governing liability of ma5er1 acceptor or endorser of foreign instrument.
#n the absence of a contract to the contrary1 the liability of the ma5er of drawer of
a foreign promissory note1 bill of exchange or che3ue is regulated in all essential
matters by the law of the place where he made the instrument1 and the
respective liabilities of the acceptor and endorser by the law of the place where
the instrument is made payable.
" bill of exchange was drawn by " California where the rate of interest is -8 per
cent and accepted by 01 payable in +ashington where the rate of interest is 9 per
cent. The bill is endorsed in O#ndiaP1 and is dishonoured. "n action on the bill is
brought against 0 in O#ndiaP. ,e is liable to pay interest at the rate of 9 per cent1
onlyJ but if " is charged as drawer1 " is liable to pay interest at the rate of -8 per
1=8. (aw of place of payment governs dishonours.
+here a promissory note1 bill of exchange or che3ue is made payable in a
different place from that in which it is made or endorsed1 the law of the place1
where it is made payable determines what constitutes dishonour and what notice
of dishonour is sufficient.
" bill of exchange drawn and endorsed in O#ndiaP1 but accepted payable in
*rance1 is dishonoured. The endorsee causes it to be protested for such
dishonour and gives notice thereof in accordance with the law of *rance through
not in accordance with the rules herein contained in respect of bills which are not
foreign. The notice is sufficient.

1=9. #nstrument made1 etc. out of #ndia1 but in accordance with the law of #ndia
#f a negotiable instrument is made1 drawn accepted or endorsed Ooutside #ndiaP1
but in accordance with the Olaw of #ndiaP1 the circumstance that any agreement
evidenced by such instrument is invalid according to the law of the country
wherein it was entered into does not invalidate any subse3uent acceptance or
endorsement made thereon Owithin #ndiaP.
1=:. 'resumption as to *oreign (aw.
The law of any foreign country OQQQP regarding promissory note1 bills of exchange
and che3ues shall be presumed to be the same as that of O#ndiaP1 unless and until
the contrary is proved.
!E (ishonor #f Negotiable Instruments
Com9laints of che?ue 4
To answer in nutshell1 a person desirous to initiate action under section 1=D of
$egotiable #nstruments "ct ;GComplainantG<1 should ensure following:
-The instrument is a che3ue ;and not any other instrument li5e bill of exchange or
promissory note<
-Complainant is a payee or holder in due course of a returned che3ue
-The che3ue should have been in discharge of debt or liability ;and not gift etc<
-The che3ue should have returned for reasons Gwant of fundsG1 aAc closed or
stopped payment
-Complainant should ma5e out a prima facie case. Thereafter1 the accused has
to prove absence of consideration
-Complainant should issue a demand notice within =@ days from the
ComplainantHs receiving information of return. the notice need not be received by
the accused ;i.e. drawer of the che3ue< within =@ days
-#t is advisable to give demand notice only once by a single mode1 say registered
ad letter
-7emand notice may cover more than one returned che3ue
-7emand notice should demand the drawer to pay within 18 days from its receipt
by the drawer of the che3ue
-"dvisable to gather the date and evidence of receipt of demand notice by the
drawer of the che3ue
-Cause of action arises on 19th day when the drawer of the che3ue doesnHt pay
within 18 days from the 7rawerEs receiving or refusing demand notice
-Cause of action arises only once1 though there can be several returns. ,ence
advisable to give notice only when it is decided to file a complaint
-Complaint should be filed within =@ days from 19th day from the date of receipt
by 7rawer of the 7emand $otice
-#f the last day of limitation for filing a complaint is a holiday1 may file it on the
next wor5ing day. Courts not allowed to condone delay in filing a complaint and
hence timing should be adhered to
-Complaint is maintainable against all the partners for a che3ue return of their
-#n case of a company1 managing directorA deputy managing directorEs liability is
assumed while as regards other directors etc it is necessary that such person
was in charge of and responsible for the conduct of business of the company and
this is specifically averred in the complaint
-#t is not necessary to ma5e the company or the firm a party to the complaint
-Complaint runs independent of any other proceeding
-Complaint is not maintainable against legal heirs of the 7rawer.
+I$$S #& E,C*'NGE
7ishonor of the bill: when the bill of exchange is not accepted or not paid on
maturity the bill is said to have been dishonored. *rom the above it is clear that
the bill is dishonored on two accounts:
a. 7ishonor by non-acceptance
b. 7ishonor by non-payment
7ishonor by non-acceptance: when the drawee refuses to accept the bill1 it
stands to be dishonored. The dishonor by-non-acceptance may have the
following reasons:
1. The drawee doesnEt accept the bill within -> hours of its receipt.
-. +hen the drawee is not entitled to accept it.
=. +hen the drawee is a fa5e person.
>. #f the bill is to be conditionally accepted
8. +hen the drawee disappears.
9. #n case there are many drawees1 and all the drawees do not sign the bill.
7ishonor by $on-'ayment: "nother reason for the dishonor of a bill is its non-
payment at maturity the drawee may refuse to ma5e the payment of the bill when
it is presented at maturity1 this refusal gives rise to dishonor by nonpayment.
The dishonor affects all the parties to the bill. They include the drawer1 all
endorse and endorse1 who are all accountable and liable to the holder.
!!"Negotiable instruments connects global 9eace
" global world means different people1 different culture1 different opinions1
different understanding and different laws in every country. +hen trade of goods
and services started1 problems also started ta5ing up their roles. The cases of
payment problems were observed among the exporting parties. %ince the laws of
different differ from each other1 these matters could not be solved legally and the
distance between each country made it even more uncomfortable. The ups and
downs in the foreign exchange of every country were ma5ing them go through
stagnancy. " certain 5ind of negotiation was re3uired at an international level to
ma5e the road of trade go smooth. There was indeed a need for a negotiable
instrument which is accepted by every law internationally.
Ta5ing these factors into consideration The $egotiable #nstrument "ct was
passed. $egotiable instrument include promissory notes1 0ills of exchange and
Che3ue. These instruments had conditional and unconditional underta5ings
signed by the ma5er. These instruments are internationally accepted. #t helped
many countries who were going through foreign exchange deficit.
$egotiable instrument helped exporters and importers of goods and
services to drag their defaulters to court.
" smooth flow of trade was observed after the introduction of negotiable
xporters of goods and services felt a sigh of relief when they export their
goods and services on credit basis as they had the negotiable instrument
with them dually signed by both the parties i.e. drawer and the drawee
which was a strong proof document.
$egotiable instruments play a vital role in the economic development of every
country with its significant features. )ne of the main features includes that
$egotiable instruments are freely transferable and while transferring it is also not
re3uired to give a notice to the previous holder. $egotiable instrument is always
in writing so there is no fear of the drawee bac5ing off the instrument. +hereas
stamping of bills of exchange and promissory notes are mandatory.
The peace and harmony which we see today in regards to the wholesome
trade which goes on a very big scale and which is rising every single day is
because of the existing negotiable instruments which are accepted internationally
by every individual. The complaints regarding negotiable instruments should be
filed as early as possible in there nearby allocated court. %o it helps the
complainant to get its ?udgment at the earliest. The grievances regarding the
negotiable instruments are ta5en at the top priority as it directly affects the
economy of the country. ach country is trying hard to do the necessary
amendments for ma5ing these negotiable instruments run more smoother and
efficiently so that the growing economy grows with more pace and peace.
12. Case studies
I.6Hs troubles started in Iune 1KK:1 after the %ecurities and xchange
0oard of #ndia ;%0#< as5ed I.6 *inance to refund the !s >8 crore it had
raised from a public issue in /arch 1KK:. " day after the issue had
opened1 !0# issued a show-cause notice as5ing why I.6 *inance should
not be barred from accepting deposits as the group companies had
already exceeded their deposit limits. 0y the time !0# conditionally cleared
the issue after assurances from %harma1 the :@-day stipulated period for
listing the shares had passed. 0ecause of the time-lapse1 %0# intervened
and ordered the refund of the publicHs money according to the allotment
rules. %harma refused to refund the money to the investors and appealed
against the order to the *inance ministry.
,e admitted that I.6 had exceeded its limits while accepting deposits
but claimed that since 7ecember 1KK9 ;much before the !0# ban< it had
stopped accepting deposits on its own and had even given !0# an
underta5ing. !0# did not accept the argument and barred the group from
accepting any more public deposits. #n %eptember 1KK:1 post-dated
che3ues issued for principal as well as interest on I.6Hs deposits
bounced. #nvestors then complained to the civil courts1 consumer courts1
Company (aw 0oard and criminal courts under the $egotiable #nstruments
"ct upon which legal proceedings were initiated against the group. The
government received a large number of complaints on non-repayment of
deposits on maturity by the I.6 group.
)n a complaint filed by the !0#1 the 7elhi ,igh Court ordered the winding
up of the company. The court also appointed an official li3uidator and said
that the !0# did not consider the revival scheme filed by the company
viable. The !0# also filed criminal prosecution petitions in the /etropolitan
/agistratesH Courts in $ew 7elhi.
!0# alleged that the company had accepted deposits worth !s DD.D- crore
which was :89.9DR of its net owned fund. This was much higher than the
permissible limit of -8R O1P. %imilarly1 I.6 (easing had received deposits
worth !s 1K.-D crore which was 1>:.8DR of its net owned fund. The !0#
complaint also said that the deposit forms issued by the I.6 6roup did not
contain any information regarding premature withdrawals1 which was
necessary as per !0# provisions. The companies had not provided any
information about the rate of interest to the investors on the receipts issued
to them. *urther1 the companies failed to submit their audited balance
sheets for the period ending /arch =11 1KK> and 1KK8 18 days after their
annual general meeting ;"6/< and did not inform the !0# about the
changes in the composition of the board of directors.
!0#Hs petition also stated that the company had not maintained li3uid
assets as re3uired by section >8#0 of the !0# "ct1 1K=>. !0# further
contended that I.6 %ecurities accepted public deposits through I.6
(easing (td. and had illegally credited it to the account of I.6 *inance (td.
Thus1 I.6 %ecurities facilitated collection of further deposits by I.6
*inance (td.1 a company which had already accepted public deposits
beyond the permissible limit in spite of the warning from !0# not to accept
any further deposits.
'dvocate arrested in credit card fraud case
$aw5ers6 9olice on war9ath
Tribune News Service
(udhiana1 "pril -D
The local police and the lawyers are heading for a showdown over the issue of
arrest of an advocate by the 7ivision $o D police in an alleged credit card fraud
" verbal spat too5 place between a group of local lawyers and city policemen at
the 7ivision $o D police station when the policemen were giving details about a
credit card fraud allegedly committed by a city-based advocate1 a pic5poc5et and
a former employee of a private telephone company.
The police was claiming that it had arrested advocate "mar?it %ingh of *au?i
/ohalla here on the basis of evidence along with .i5as1 former employee of a
telephone company1 for doing shopping worth over !s > la5h from a stolen credit
card of an $!#. The third accused was %onu1 an alleged pic5poc5et1 who had
stolen the credit card. ,e was missing.
The credit card was stolen six months ago in $ovember -@@> from 6!7
"cademy here where the /iss +orld 'un?aban contest was being held. The
alleged victim1 $!# Iaswinder %ingh1 was watching the show when his poc5et
was pic5ed.
,owever1 a group of lawyers led by a former president of the 7istrict 0ar
"ssociation1 /r. ,arish !ai 7handa1 openly charged the police with falsely
implicating the accused advocate. They also alleged that some policemen had
demanded money from the advocate but when he refused to pay1 he was boo5ed
in a false case. The police have denied the allegations.
7%' %imratpal %ingh 7hindsa stated at a press conference that the accused had
indulged in shopping using the stolen credit card from showrooms of "didas1
$i5e1 +ee5ender1 Tanish31 Titan and %ant !am /angat !am.
The police narrowed down on the accused after the complainant learnt that the
credit card was being misused.
,owever1 /r. 7handa alleged that the lawyer was innocent and had been falsely
implicated in the case. ,e said the lawyer was tortured in police custody. " group
of lawyers later filed a complaint before a local Iudge against police torture and
/eanwhile1 ta5ing a tough stand against the arrest and the alleged custodial
torture of the advocate1 the 7istrict 0ar "ssociation ;70"< has demanded
immediate suspension of the guilty policemen.
/r. !ana ,ar?asdeep %ingh1 %ecretary1 70"1 said in a statement that they had
got the medical examination of the accused advocate conducted from the Civil
,ospital. " delegation of the 70" would meet the %%' tomorrow and demand
action against the %,) and other policemen of the 7ivision $o D police station.
*ormer 70" president N.!. %i5ri condemned the incident and termed it as
breach of trust and of an understanding reached between the lawyers and a
former 76'1 7r " " %iddi3ui1 last year that the police would ta5e the 70" into
confidence before arresting an advocate in any case1 except a rape or a murder
!/" &R'%(
+ithin this specification by a negotiable instrument is meant a
che3ue1 a credit card1 a debit card1 a bond1 a share certificate1 an account
card1 a travelerEs che3ue1 an electronic transfer1 and any other instrument
that has inherent value to the owner thereof and in relation to which the
owner can suffer a financial loss as a result of unauthori4ed andAor
fraudulent dealing therewith by third parties.
&raud in relation to the use of negotiable instruments is an international
problem. /any different forms of fraud that can result in the owner of a
negotiable instrument suffering a financial loss are 5nown1 with the
common element generally being that the negotiable instrument is
presented for serving as a payment for goods purchased1 for converting its
value into cash1 or for depositing its value into a third party account1
without authori4ation of the original owner or in a form in which it has been
fraudulently tampered with to the detriment of the original owner.
"lthough the invention as defined and described hereafter is directed
mainly at inhibiting fraud in relation to the use of che3ues and credit
cards1 it must be understood that the invention applies also to inhibiting
of fraud in relation to the use of any other negotiable instrument and the
features of the invention must be interpreted as such.
*or the sa5e of convenience and clarity1 the original owner of a negotiable
instrument as herein envisaged shall merely be referred to as the owner of
the negotiable instrument who1 in relation to certain negotiable
instruments such as che3ues1 promissory notes1 and the li5e1 will be the
person issuing such instruments1 and in relation to other negotiable
instruments such as credit cards1 will be the person who legally presents
such instruments in order to serve their intended purpose. The owner is
thus generally the person1 whether a natural or a ?uristic person1 who can
suffer a loss as a result of the unauthori4ed or fraudulent use of the
negotiable instrument of which he is the owner.
The person or body to whom a negotiable instrument is presented shall
hereinafter be referred to as the presentee who1 for example1 in relation
to che3ues1 and the li5e1 generally will be a ban5 and particularly an
employee of a ban51 and in relation to credit cards1 generally will be a
vendor who accepts the use of a credit card as payment for goods
purchased or for services rendered. The presentee also is the party who1 in
accordance with the present invention1 is generally responsible for
ensuring that the owner of the negotiable instrument is not pre?udiced.
The person presenting a negotiable instrument to the presentee shall
hereinafter merely be referred to as the presentor and1 in practice1 this
may be a legitimate person to whom the instrument has been issued or
who owns the instrument1 or an illegitimate person who may be attempting
a fraudulent act andAor who is not authori4ed to present the instrument.
#t will be appreciated that the various negotiable instruments as herein
envisaged can be associated with various different StypesS of presenters
and presentees. 'resentees need not necessarily be ban5s or vendors1
but may be any third party who generally deals with andAor who is
responsible for dealing with1 such instruments.
The application of the system for inhibiting fraud in relation to the use
of negotiable instruments is associated with a suitably programmed central
communication and processing unit that can be communicated with via a
direct telephone line1 via the internet1 or the li5e. This unit shall
herein be referred to as a central communication and processing unit and
any reference to this unit must be interpreted as a reference to a
suitably programmed unit that includes means for communicating with the
unit1 as well as data processing means and data storage means that
permit processing of stored data and of data communicated to it1 for
enabling the system of the invention as defined hereafter.
+RIE& S%))'R0 #& T*E INVENTI#N
"ccording to the invention there is provided a system for inhibiting fraud
in relation to the use of negotiable instruments1 which includes the steps
the owners of negotiable instruments communicating with a central
communication and processing unit in order to register with the unit by
providing information1 including at least identification numbers1 lin5ed
directly with the respective owners and information lin5ed directly with
the negotiable instruments in respect of which fraud is to be inhibited1
each owner then being provided with an individual secret code by the unitJ
and the presentees of negotiable instruments communicating with the
central communication and processing unit in order to register with the unit
by providing information1 including at least identification numbers1 lin5ed
directly with the respective presentees1 each presentee then being
provided with an individual secret code by the unit1 and which includes1
in relation to each negotiable instrument to be issued or used by a
registered owner1 the steps of:
the registered owner communicating with the central communication and
processing unit in order to authori4e the negotiable instrument1 by
identification via the identification number and the individual secret
code lin5ed with the owner and by providing sufficient details in respect
of the negotiable instrument for subse3uently permitting the instrument to
be verified1 the unit then issuing an authori4ation code to be lin5ed with
the instrumentJ and upon presentation of the authori4ed negotiable
instrument by a presentor to a presentee1 the presentee communicating
with the central communication and processing unit in order to verify the
negotiable instrument1 by identification via the individual secret code lin5ed
with the presentee and providing the authori4ation code lin5ed with the
instrument1 the unit in response communicating to the presentee the
details for verifying the instrument provided by the owner of the instrument
and thereby permitting the presentee to verify the instrument as the
instrument authori4ed by the owner.
The system of the invention particularly may provide for the central
communication and processing unit to permit communication via a direct
telephone line and1 as such1 includes an audio text electronic processing
system that permits verbal information to be converted into binary code1
and a processing and memory system lin5ed to the audio text electronic
processing system for processing information received by the audio text
electronic processing system and thereby carrying out the functions of the
unit. "lternatively1 or in addition1 the central communication and
processing unit may permit communication via the internet and1 as such1
may include a processing and memory system for receiving and
processing information received via the internet and thereby carrying out
the functions of the unit.
'resentees registering with the unit also will provide the unit with any
other information1 including at least their names1 that will subse3uently
permit the unit to identify a particular presentee that dealt with the
verification of a particular negotiable instrument.
)wners registering with the unit1 insofar as the owners are natural
persons1 may provide at least their names and their official identity
numbers. #nsofar as owners are ?uristic persons such as registered
businesses1 upon registering with the unit they will provide at least their
names and their official registration numbers.
The system of the invention may provide for owners registering with the
unit1 insofar as they wish to use the system for inhibiting fraud in
respect of negotiable instruments such as che3ues rendered payable via
their ban5 accounts1 to provide the unit with the name of each relevant
ban51 the branch code associated with the said relevant ban5 and the
relevant ban5 account number.
#nsofar as owners registering with the unit wish to use the system for
inhibiting fraud in respect of negotiable instruments such as credit cards
issued to them by ban5s and lin5ed to accounts1 the system will provide
for such owners to provide the unit with the name of each relevant ban5
and the card type1 the number of each relevant card and the name of the
card owner that appears on the card.
*urther according to the invention1 the system may provide for the
registered owner of a che3ue being issued by the owner1 when authori4ing
the che3ue1 to provide to the unit ban5 account details of the payee and
an identification number lin5ed with the payee1 the che3ue number1 the
amount indicated on the che3ue and the name of the payee and1 when
issued by the unit with an authori4ation code1 to apply the code to the
che3ue. #n relation to an authori4ed che3ue1 the system may provide for
the presentee1 upon being presented with an authori4ed che3ue and in
order to verify the che3ue1 following the identification of the presentee to
the unit and the provision of the authori4ation code applied to the che3ue1
for the unit to communicate to the presentee account details of a payee1
the identification number lin5ed with a payee1 a che3ue number1 an
amount and a payee name and if this information matches the information
applied to the che3ue presented1 to verify the che3ue. %till further1
following verification of the che3ue1 the system may provide for the unit to
provide the presentee with a transaction code which must be applied by
the presentee to the che3ue1 the transaction code permitting details of
verification as stored by the unit to be retrieved from the unit.
The system of the invention may provide still further for the registered
owner of a credit card issued by a ban51 upon authori4ing a telephonic or
an online credit card transaction1 for the owner to provide the unit with
the name of the ban5 that issued the card and the type of card1 the card
number and the name of the card owner that appears on the card1 and
when issued with an authori4ation code by the unit1 to supply the code to
the vendor with whom the transaction is ta5ing place to permit the vendor
as presentee to verify the credit card by communicating with the unit.
%till further according to the invention1 the system may provide1 when a
registered owner of a credit card issued by a ban5 presents as presentor
the card to a vendor as presentee1 in order to perform a direct credit
card transaction1 for the authori4ation and verification of the card to be
simultaneously performed by the presentee providing the unit with the
credit card number and the presentor providing the unit with the
individual secret code of the owner1 in response to which the unit
provides the presentee a name of a ban5 that issued a card1 a card
number and a name of a card owner and if this information matches the
information on the card as presented to the presentee1 the card is both
authori4ed and verified thereby.
The invention extends also to a central communication and processing unit
which is controlled by a software program for enabling a system for
inhibiting fraud in relation to the use of negotiable instruments in
accordance with the invention. %till further1 the invention extends to a
software program for controlling the operation of a central communication
and processing unit for enabling a system for inhibiting fraud in relation to
the use of negotiable instruments in accordance with the invention.
#t must be appreciated that the system of the invention as above defined
may be applied specifically also to the authori4ation and verification of
negotiable instruments not particularly in the form of che3ues or credit
cards1 by applying the same principles to those applied when authori4ing
and verifying che3ues or credit cards1 and the system of the invention as
defined must be interpreted as such.
Ins9ite of all the inventions made to sto9 fraudulent 9ractices6 the
fraud <ee9s ta<ing 9lace " Ever5 da5 we read in the news 9a9er how
a credit card is stolen and easil5 used for ma<ing 9urchases b5 the
thief without the <nowledge of the real owner" Then when ma<ing
9a5ments online b5 credit card so man5 times the credit card number
gets hac<ed and then used b5 the hac<er for ma<ing online
9urchases "+5 the time the owner reali@es the thief gets awa5 b5
ma<ing big 9urchases"
New laws and wa5s are being ado9ted for sto99ing fraudulent
9ractices but the best and the onl5 wa5 it can be <e9t under control is
b5 the owner of these negotiable instruments himself" *e should be
careful and ta<e all necessar5 9recautions while using these
negotiable instruments "When ma<ing online 9a5ments one should
ma<e sure later b5 calling his ban< customer care and confirming
that onl5 the transaction made b5 him is showing "In the event of
misuseGtheft6 one should immediatel5 re9ort to the concerned
authorities for sto99ing 9a5ment from that account
REC'%TI#NS T# +E T'2EN T# 'V#I( &R'%(
1. Neep an eye on your credit card every time you use it1 and ma5e sure you get
it bac5 as 3uic5ly as possible. Try not to let your credit card out of your sight
whenever possible.
-. 0e very careful to whom you give your credit card. 7onHt give out your account
number over the phone unless you initiate the call and you 5now the company is
reputable. $ever give your credit card info out when you receive a phone call.
;*or example1 if youHre told there has been a Hcomputer problemH and the caller
needs you to verify information.< (egitimate companies donHt call you to as5 for a
credit card number over the phone.
=. $ever respond to emails that re3uest you provide your credit card info via
email -- and donHt ever respond to emails that as5 you to go to a website to verify
personal ;and credit card< information. These are called HphishingH scams.
>. $ever provide your credit card information on a website that is not a secure
8. %ign your credit cards as soon as you receive them.
9. %hred all credit card applications you receive.
:. 7onHt write your '#$ number on your credit card -- or have it anywhere near
your credit card ;in the event that your wallet gets stolen<.
D. $ever leave your credit cards or receipts lying around.
K. %hield your credit card number so that others around you canHt copy it or
capture it on a cell phone or other camera.
1@. Neep a list in a secure place with all of your account numbers and expiration
dates1 as well as the phone number and address of each ban5 that has issued
you a credit card. Neep this list updated each time you get a new credit card.
11. )nly carry around credit cards that you absolutely need. 7onHt carry around
extra credit cards that you rarely use.
1-. )pen credit card bills promptly and ma5e sure there are no bogus charges.
Treat your credit card bill li5e your chec5ing account -- reconcile it monthly. %ave
your receipts so you can compare them with your monthly bills.
1=. #f you find any charges that you donHt have a receipt for -- or that you donHt
recogni4e -- report these charges promptly ;and in writing< to the credit card
1>. "lways void and destroy incorrect receipts.
18. %hred anything with your credit card number written on it.
19. $ever sign a blan5 credit card receipt. Carefully draw a line through blan5
portions of the receipt where additional charges could be fraudulently added.
1:. Carbon paper is rarely used these days1 but if there is a carbon that is used
in a credit card transaction1 destroy it immediately.
1D. $ever write your credit card account number in a public place ;such as on a
postcard or so that it shows through the envelope payment window<.
1K. #deally1 itHs a good idea to carry your credit cards separately from your wallet
-- perhaps in a 4ippered compartment or a small pouch.
-@. $ever lend a credit card to anyone else.
-1. #f you move1 notify your credit card issuers in advance of your change of
(egal issues relating to electronic transaction processing at ban5s are very
many and the need to address them by amending some of the existing "cts
and by promoting legislation in a few hitherto unexpected areas has assumed
critical urgency. $ecessary legislative support is essential to protect the
interests as much of the customers as of the ban5s A branches in several
areas relating to electronic ban5ing and payment systems. This is specially
re3uired to establish the credibility of C% and *T schemes based on the
electronic message transfer. %ince the !eserve 0an5 is embar5ing on large
electronic schemes such as the nationwide !T6%1 it is time that efforts are
made to bring about necessary legislative framewor5 that synchroni4es and
synthesi4es with the initiatives ta5en by the 6overnment of #ndia1 7epartment
of lectronics for promotion of the #nformation Technology 0ill1 1KKK and A or
the lectronic Commerce 0ill1 1KKK.
Need for Regulation G $egislation on Netting
There is a growing debate on the legality of netting in inter-ban5 funds transfer
transactions. This is more so in the case of large value transactions. The position
gets all the more complicated in the case of cross border netting arrangements.
#n fact1 the issue gained critical significance while examining the proposal for
setting up of a foreign exchange clearing and settlement system in #ndia. The
basic issue in netting systems is that of the settlement ris5 and the systemic ris5s
borne by the participants if one or some of the participants fail to meet the
clearing liability. #n case of funds transfers settled on a gross basis1 the parties
involved are only two and principal risk if any1 is only for the specific transaction.
0ut in multilateral netting systems where claims and obligations accumulate over
a period of time ;called the clearing cycle<1 incoming and outgoing payments are
set off against each other. #n case of failure of a party in meeting the clearing
liability1 the methodology of identifying the counter-parties A counterparts and
determining the exposure level becomes difficult. "lthough netting system is in
vogue in #ndia for all inter-ban5 clearings by way of procedural details embodied
in the &niform !ules and !egulations for Clearing ,ouses1 it is necessary that
the provisions are made statutory. There is a need to amend %ection 8D of the
!eserve 0an5 of #ndia "ct1 1K=> with a view to enabling !0# to frame specific
!>" S%))'R0
The pro?ect on negotiable instruments starts with the evolution of trade and
commerce which in turn leads to the discovery of negotiable instruments. +e as
a group wor5ing on this topic had curiosity on the need of negotiable instruments
in the mar5et. )ur research gave us an idea and an overview of the evolution of
trade and commerce as a whole which 5ept on developing and growing bigger.
+e came across the different stages through which trade and commerce went:
1. '"%T)!"( %T"6 where business was limited and survival by breeding
of animals was the main motto. The first stage had to do nothing with
money1 people lived a nomadic life.
-. ,owever man learned 3uic5ly to grow food for their own need which can
be termed as the "6!#C&(T&!"( %T"6. The demand increased for
other commodities as well and thus 0"!T! %B%T/ was introduced.
This can be termed as the turning point of trade and commerce.
=. "fter this man never loo5ed bac5. They started producing speciali4ed
products which led to the introduction of ,"$7#C!"*T %T"6.
>. Then came the era in which people started to thin5 about development and
thus formed groups to protect their rights1 this was 5nown as the 6&#(7
8. Then came the stage where technology was introduced and business
forms became complex1 this is where the necessity of introducing
negotiable instruments were felt.
This was 5nown as the *"CT)!B %T"6
,owever it was noted that the growth was very slow and the system was very
complex. There were different instruments used to purchase different
commodities in different stages. The system of exchange was such that it led
to confusion and various complexities. To avoid such confusion and to operate
the business activities smoothly negotiable instruments were introduced.
$ow as we have come across the term negotiable instruments and why it was
evolved1 lets now have a brief 5nowledge about negotiable instrument.
Negotiable instruments are particular type of documents used for ma5ing
payment in business transactions1 the ownership of which can be freely
transferred from one person to another.
T59es of Negotiable Instruments
- 'romissory note
- 0ill of exchange
- Che3ue
- ,undi
!" romissor5 note - "n instrument in writing containing an unconditional
underta5ing1 signed by the ma5er1 to pay a certain sum of money only to or to the
order of a certain person or to the bearer of the instrument.
." +ill of e8change - "n instrument in writing containing an unconditional order1
signed by the ma5er1 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.
/" Che?ue - #t is an order by the account holder of the ban5 directing his ban5er
to pay on demand the specified amount1 to or to the order of the person named
therein or to the
1" *undi - #t is form of a bill of exchange drawn in any local language in
accordance with the custom of the place.
&eatures of negotiable instruments are-
1. *ree transferability
-. "bsolute M good title
=. "lways in written form
>. &nconditional order or promise for payment
8. Certainty of payment
9. 'ayee
:. %ignature of the ma5er
D. 7elivery of the instrument
K. %tamping of 0) M 'romissory notes mandatory
Negotiation of Commercial 9a9er
1. "ssignment
-. $egotiation
=. ndorsements
1. (etters of Credit T "rticle8
-. 0ills of (ading and other documents of title T"rticle:
=. %ecurities T"rticleD
>. 7eeds M other documents conveying interests in real estate T"rticle=
8. #)&s