NEGOTIABLE INSTRUMENTS ACT

NEGOTIABLE INSTRUMENTS ACT-1881

• A negotiable instrument acts as a ‘substitute for money’. To facilitate commercial transactions, it is essential that the ‘instrument’ be easily transferable without danger of being uncollectible. This is an essential function of negotiable instruments.
• These instruments can be transferred by way of endorsement and delivery. The person to whom the instrument is endorsed, becomes the complete and lawful owner of the instrument. The transfer of negotiable instruments does not attract stamp duty.
• The NI Act sets out all the rules and regulations regarding negotiable instruments.

The act defines only 3 types of negotiable instruments:

Promissory Note, Bill of Exchange and Cheque.

• Promissory Note: Promissory Note has two parties – promiser (maker) and promise (beneficiary). A currency note is a bearer promissory note.
• Bill of Exchange: Bill of Exchange has 3 parties – Drawer, Drawee and Payee.
• Cheque: A cheque is a variation of Bill of Exchange where he drawee is always a bank.

In practice, however, several other instruments like railway receipt, lorry receipt, bill of lading warehouse receipt, certificate of deposit, commercial paper etc. are also recognized as negotiable instruments.

CHEQUE

The cheque has 3 main parties to it. Drawer is the one who draws the cheque, i.e. the account holder. Payee or Beneficiary is the person who is named in the cheque to receive the payment. Drawee is always a bank, who makes the payment of the cheque. The NI Act does not prescribe any standard format or design for the cheque. However, RBI has now prescribed uniform standard size (78mm x 202mm) and format of the cheques to be used by all the banks, unde Cheque Truncation System 2010 guidelines.

BEARER / ORDER CHEQUE

These are 2 main types of cheques: i) Bearer Cheque, ii) Order Cheque

Bearer Cheque: The payment of this cheque can be taken by any person who is in possession of the cheque. The banker is not duty bound to identify the payee of the cheque. Anybody can convert a bearer cheque into an ‘order’ cheque, simply by cutting the words ‘bearer’ and this need not be confirmed by drawer.

Order Cheque: The payment of the cheque can be made to the person who is named as the payee on the face of the cheque or to his order, only after establishing his identity.

A cheque on which neither bearer nor order is mentioned, is treated as ‘order’ cheque. An order cheque can be endorsed to any other person.

STALE CHEQUE

Date appearing on cheque is called its date of issue. As per recent RBI guidelines, w.e.f. 1^st April, 2012, validity of cheque has been reduced to 3 months. A cheque presented to the bank for payment after 3 months from the date of issue will not be paid in view the instructions of RBI. Such cheque is called ‘Stale cheuqe’.

POST DATED CHEQUE (PDC)

A cheque cannot be paid, under any circumstances, before the date mentioned on the cheque. For example, a cheque dated 26^th January, cannot be paid on 25^th January. If 27^th January is also a public holiday, the cheque can be paid on 28^th January or afterwards. A cheque presented before the date mentioned on the cheque shall be returned by the banker as the cheque is post dated.

ENDORSEMENT

The act of transferring the amount mentioned in the cheque to another party by writing the instructions overleaf the cheque, mentioning the name of beneficiary and duly signed by the payee or drawer of the cheque , is called endorsement. The person in whose favour endorsement is made is called endorsee and the person whose signs the endorsement is called endorser. The endorsee can further endorse the instrument to any other next person and so on. Thus, a cheque can be endorsed any number of times. In case more space is required for making endorsements, a plain paper can be affixed to the cheque for this purpose. This paper is called Allonge.

CROSSING

NI act defines ‘crossing’ as putting of two transverse parallel lines on the face of cheque. It is called General Crossing. Once a cheque is crossed, it cannot be paid in cash across the counter; instead it can only be deposited in a bank account. Thus, the crossing acts as a safety feature. By practice, some people started writing the words – “payee account only” in between the lines of crossing. This came to be known as “account payee crossing” and is now recognized by law. Impact of this crossing is that such a cheque can be deposited only in the account of the payee and it cannot be endorsed in favour of any other party.

SPECIAL CROSSING

Whenever, name of a particular bank is mentioned between the crossing lines, it is called special crossing. In fact, in special crossing, even if parallel lines are not drawn, still it is recognized as crossing. Impact of special crossing is that this cheque cannot be paid to any bank other than to the bank whose name is mentioned in the crossing.

DEFFERENCE IN AMOUNT

If there is a difference in the amount mentioned in words and figures in a cheque, in practice, usually such cheques are returned unpaid with the objection that “amount in words and figures differs”. However, NI Act says that in such case, amount in words is payable.

INCHOATE INSTRUMENT

If a cheque is incomplete in any respect, say, date is not mentioned or name / amount is not mentioned, then such a cheque is called ‘inchoate’. Such gaps can be filled by any person in any manner.

MATERIAL ALTERATION

Making any such change in a cheque that may affect its value or intention of the maker of the cheque, is called Material Alteration, e.g. change in date, name, amount etc. Any such change renders the cheque as invalid. Any material alteration made in the cheque has to be confirmed under full signatures of the drawer.

MUTILATED CHEQUE

If a cheque is torn into two or more pieces or is partly torn or mutilated in any other manner, it is termed as mutilated cheque. Mutilated Cheque is not valid for payment.

COLLECTING / PAYING BANK

The bank which accepts the cheque for collection on behalf of the payee is called “collecting bank” and the bank, where the cheque is actually paid, i.e. where account is debited, is called “paying bank”.

CHEQUE BOUNCING

Whenever a cheque is returned unpaid by a bank, for any reason, it is called cheque bouncing or cheque dishonor. However, if the cheque is returned due to insufficiency of funds in the account, it is treated as a criminal offence as per section 138 of NI act. For this offence, a person can be fined up to double the amount of cheque and / or may be imprisoned for upto 2 years.

STOP PAYMENT OF CHEQUE

It refers to instructions given by the issuer (drawer) of the cheque to the bank for stopping the payment of cheque for any reason. It is also called ‘countermanding’ of mandate.

MAGNETIC INK CHARACTER RECOGNITION (MICR)

MICR is a character recognition technology used primarily by the banking industry to facilitate the mechanical processing of cheques. It is 9 digit number printed in a white strip at the bottom of the cheque. MICR characters are printed in special typefaces with a magnetic ink or toner, usually containing iron oxide. A decoder machine is able to read the MICR text.

123 (First 3 digits of city PIN) – 456 (Bank) – 789 (Branch)

CHEQUE TRUNCATION

To collect interbank payments of cheques, banks follow the system of local clearing house to physically exchange cheques of each and every bank. To convert this system in to digital form for increased efficiency, RBI has developed Cheque Truncation System 2010 whereby instead of physical cheques, their digital image will be sent to clearing house and the same will be forwarded to the paying banker, who will make the payment on the basis of image only and the physical cheque will remain with the presenting bank (collecting bank). The new system has been implemented w.e.f April 1, 2004.

This system truncates (restricts) the physical movement of the cheque. It also truncates (reduces) the time taken for clearance of cheques. Under CTS all banks will have uniform standard size and format of the cheque. For security reasons, cutting and alterations are not allowed in CTS cheques. To avoid fake cheques, CTS compliant cheques will have embedded optical security features, hence known as ‘High Security Cheques’.

REMITTANCES

One of the major functions of the bank is to arrange transfer of funds from one place to another place and from one account to another account, either in cash or through accounts. The word ‘Remittance’ refers to interbank or inter-branch transfer of funds or cash in India. As per Payment and Settlement System Act, 2007, no person other than the Reserve Bank can operate or commence a payment system unless authorized by the Reserve Bank.

MODES OF REMITTANCES

• Cheque
• Draft
• Pay order
• NEFT
• RTGS
• ECS

The mode of remittance is undergoing a big change with more and more persons opting for Electronic Fund Transfer systems – NEFT & RTGS. Both these systems are being managed by RBI and function on online banking platform. Banks take normal service charges for transferring the funds through RTGS & NEFT. Both systems are very popular with individuals and business parties for remitting their payments through banking system.

REAL TIME GROSS SETTLEMENT SYSTEM (RTGS)

As the name suggests, it is a ‘real time’ system where transactions are settled on ‘gross’ basis, i.e. netting of transactions is not done. RTGS offers the fastest method to transfer funds from one bank to another bank or from one branch to another branch. As per RBI norms the funds must be transferred within two hours of the deposit of funds by the customer. In case of delay, penalty at the rate of 2% over repo rate is payable.

RTGS is aimed at safe and fast transfer of funds and is used for transfer of funds above Rs. 2 Lac. Customers can use RTGS facility from 8:00 am to 7:00 pm on week days and from 8:00 to 1:00 pm on Saturdays.

NATIONAL ELECTRONIC FUND TRANSFER SYSTEM (NEFT)

This system is similar to RTGS with the difference that there is no minimum limit regarding transfer of funds i.e. any amount can be remitted and there is also no time limit like two hours for completion of transaction. In this system transitions are bunched together and inter bank settlement form 8:00 am to 7:00 pm on week days and six on Saturdays, from 8:00 am to 1:00 pm.

	Min. Amount	Max. Amount	Time Limit
NEFT	No Minimum	No Maximum	Roughly 24 hours
RTGS	Rs. 2 Lac	No Maximum	Max. 2 hours

INDIAN FINANCIAL SYSTEM CODE (IFSC)

It is 11 digits ‘alpha numeric code’ which is used for sending remittance through RTGS and NEFT. First four digits are ‘alpha’ denoting the bank name, fifth is zero and next six digits are numeric, denoting the branch. Example: ABCD 0 123456

ELECTRONIC CLEARING SERVICE (ECS)

ECS is used for making either multiple credits against one debit as in the case of a company distributing dividends, or making multiple debits for one credit, as in the case of Telephone Company collecting bills from the customers. To bring uniformity in the system, the ECS functions have been consolidated by National Payment Corporation of India under National Automated Clearing House – (NACH)

SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATION (SWIFT)

SWIFT is a member-owned cooperative based at Brussels, Belgium, through which the financial world conducts its business operations with speed, certainty and confidence. More than 9,700 banking organizations, securities institutions and corporate customers in 209 countries use SWIFT every day to exchange millions of standardized financial messages. It does not undertake physical transfer of funds but only facilitates transmission of message in highly secure manner.