T.Y.

BBI NEGOTIABLE INSTRUMENTS

1. INTRODUCTION
Banking activity is undertaken in our country from ancient items. The era of joint
stock banks had been started in 1809, when first joint stock bank, Bank of Bengal
was established. Bank of Bombay &bank of madras were also established in 1840,
and 1843, respectively these three were called "Presidency Bank" number of
banking institution came up during those years and most of them failed due to
mismanagement, frauds and speculative activities.
The first bank of India with limited liabilities was Oudh commercial bank,
established in the year 1881.
Negotiable Instruments were originated to cater to needs of trade and business.
Bill of Exchangewere first used in 12n century in England. Eater on,
promissorynotes came into existence. Negotiability of promissory notes was
recognized by the British judiciary in [Link] the 18th century, bill of exchange and
promissory notes acquired the status of commercial documents of title,
negotiability of these instruments was also recognized in the 18th century.
In the year 1860, British courts accepted the cheque as negotiable instrument in the
historical case of keene vs beard.
In India the negotiable instrument Act was passed in 1881 and bill of exchange Act
in 1882. Subsequently in 1957, a Cheque Act was also passed.
The Negotiable Instrument Act, 1881, the Cheque, Bill of Exchange & Promissory
Notes are Negotiable Instrument.

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A Negotiable Instrument, the property which can be acquired by any one as a

bearer or endorsee who takes it in good faith and for value, notwithstanding any
defect to the title of person from whom he took it is a negotiable instrument.

A) Property in the Negotiable Instrument passes to the holder by mere delivery or

by endorsement coupled with delivery.
B) Title of a bonafide beholder is not affected due to the defect in the title of the
transferor.
C) The holder can sue or be sued in his own name.
It is a general rule that no person can transfer to another better title than he himself
has.
e.g. transferee of a stolen cycle cannot get a defect free title even though he has
paid value for it. A bonafide holder of a Negotiable Instrument owns a defects free
title not affected by deeds and misdeeds of the previous holders of the instruments.

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1.1 DEFINITION OF NEGOTIABLE INSTRUMENT

According to section 13 of the Negotiable Instruments Act, 1881, a negotiable
instrument means “promissory note, bill of exchange, or cheque, payable either to order
or to bearer”.

Explanation

(i).-A promissory note, bill of exchange or cheque is payable to order which is expressed
to be so payable or which is expressed to be payable to a particular person, and does not
contain words prohibiting transfer or indicating an intention that it shall not be
transferable.

(ii).-A promissory note, bill of exchange or cheque is payable to bearer which is

expressed to be so payable or on which the only or last endorsement is an endorsement in
blank.

(iii).-Where a promissory note, bill of exchange or cheque, either originally or by

endorsement, is expressed to be payable to the order of a specified person, and not to him
or his order, it is nevertheless payable to him or his order at his option.

A negotiable instrument may be made payable to two or more payees jointly, or it

may be made payable in the alternative to one of two, or one or -some of several payees.

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[Link] NEGOTIABLE INSTRUMENTS:

1) Payable to bearer or order:-
The negotiable instrument must be payable either to order or to bearer.

2) Freely transferable:-
An instrument payable to order is negotiable by endorsement and delivery but an
instrument payable to bearer is negotiable by mere delivery.

3) Presumption to holder:-
Every holder of a negotiable instrument is presumed to be holder in due course.
Holder means the bearer of the bearer instrument and the payee of the order
instrument. The holder should be the owner there of a law.

4) Consideration:-
Every negotiable instrument is presumed to have made been drawn. Accepted
endorsed and negotiated for consideration. (Exchange value)

5) Defects free title:-

A holder in due course gets the instrument free from all effects in the title of the
transferor.

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[Link] WAS IT NECESARRY TO INTRODUCE

NEGOTIABLE INSTRUMENTS?
Historically business developed by stages.

(1) Pastoral stage (2) Agricultural stage (3) Handicrafts stage (4) Guild stage
(5) Domestic stage and (6) Factory stage.
Pastoral stage: In primitive society man used things just as they were found in
nature. With time, he learned to domesticate animals and breed them for food
and clothing. Since he had to find pastures for his animals, he tended to lead a
wandering life. But in this stage his work served mainly to support only him
with his own needs and left very little surplus available foe exchange on a
business basis.

Agricultural stage: In course of time, the nomadic tribes settled permanently at

fixed places, built up the huts and shelters for their residences and began
cultivating the land in common. Growing corns, grasses etc. became the main
occupation. Agriculture emerged as the basic feature of economic living of
man. He gradually produced more and then started to exchange it with other
commodities. This was known as barter system.

Handicraft stage: In this stage manufacturing was limited to the human efforts
to transform raw materials into finished goods. It included candle and soap
making, spinning, weaving, making of clothes and shoes, blacksmithing, leather
dressing, carpentry etc.

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Guild stage: A 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.

Domestic stage: A new class entrepreneur emerged as a link between producer

and consumer. Now entrepreneur purchased the raw materials for the purpose
of manufacture and sale nut did not do the processing himself. He took the risk
of productions and sale. Out of the proceeds of his undertaking, he paid for the
materials and labour. The amount left was his profit

Factory stage: In this stage an organized system of production under a single

roof came to be identified as a factory. Large scale operations with the use of
mechanized production processes resulted in producing good quality products at
cheaper rates. However 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. However 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.

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2. ENDORSEMENT
When the maker or the holder of a negotiable instrument signs the same, otherwise
than as such maker, for the purpose of negotiation, on the back or face thereof on a
slip of paper annexed there to or so signs for same purpose on stamped paper, he is
said to endorsed the same and is called the "Endorser".
The literal meaning of 'Endorsement' is writing on the back of the instrument, but
as per the sec. 15 signature of the holder or the drawer of the instrument for the
purpose for negotiation is called 'Endorsement' person who endorses is called
'Endorser' and person in whose favor it is endorsed, is called 'Endorsee' on the
basis of above definition, we may say that essential of a valid endorsement are.

A) endorsement must be on the instrument itself, it may be on the face of the

instrument or on he back of instrument it can also be made on a slip of a paper
attached to the negotiable instrument which is called 'Allonge'.

B) Endorsement and delivery completes the negotiation of an order instrument.

C) No particular form of words are necessary to constitute a valid Endorsement.

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TYPES OF ENDORSEMENT
1) BLANK ENDORSEMENT: -
As per the section 16(l)if the endorser signs his only without adding any words of
directions the endorsement is said to blank. Blank Endorsement is no specify the
name of the endorsee. Therefore the instrument becomes payable to the bearer
even though originally it was payable to order.
2)ENDORSEMENT IN FULL:-
If an endorser signs his names and direction to the amount mentioned in the
instrument to, or to order of a specified person, the Endorsement is said in full. E.g.
a) Pay to ram.
b) Pay to ram or order.

3) RESTRICTED ENDORSEMENT:-
when an Endorsement prohibits and restricts the further negotiability of the
negotiable instrument, it is called "Restricted Endorsement" the Endorser may by
express word, restrict or exclude further right of negotiation or merely constitute
the endorsee an agent to endorse the instrument or to receive its content for the
endorser for some other specified person, E.g.
a)Pay to ram only.
b) Pay to ram for my use.

4) PARTIAL ENDORSEMENT:-

when an endorser transfer only a part of the amount of the amount of the
negotiable instrument to the endorsee it is called "Partial Endorse men"l.
[Link] holder of a cheque for Rs l000 endorses it for Rs 500 such endorsement is
called 'partial endorsement'.
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5) Conditional Endorsement:-
An endorsement which limits or negatives the liability of the endorser is called
"conditional endorsement" conditional endorsement may be of following types;
a) Sans Recourse:-
If the holder of a bill endorses it in a manner that he docs not incur any liabilities
as an endorser to the endorsee, endorsement is called "sans Recourse
Endorsement". E.g. "pay to ram or order ,sans Recourse"
"Pay to ram at his own risk"
"Pay to ram without recourse to me".
b) Contingent Endorsement: -
An endorsement in which liability of the endorser depends upon happening of an
event. E.g. "pay to ram or order on his marriage with sita".
c) Facultative Endorsement:-
If an endorser reduces or increases his liability by express word, it is "Facultative
Endorsement". E.g. "pay to ram or order, notice of dishonour waived"

DISCHARGE OF ENDORSERS LIABILITY:-

Where the holder of a negotiable endorsement witout the consent of the endorser
destroys or impairs the endorser is discharged from liability to the holder ti the
same extent as if the instrument has been at maturity. It amounts to cancellation of
the endorsement.

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TYPES OF NEGOTIABLE INSTRUMENTS

A negotiable instruments means o promissory note, a bill of exchange or a cheque

payable either order or bearer.(Section 12 of the Negotiable instruments Act,
1881). Therefore, there are three types of Negotiable Instrument as mentioned in
section 13.
A "PROMISSORY NOTES" is an instrument in writing containing an
unconditional undertaking, signed by the maker, to pay a certain sum of money
only to, or to the order of, certain person, or to the bearer of the instrument.
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.
A "CHEQUE" is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand.
A part from these three types of Negotiable Instruments, as mentioned in the
negotiable instrument Act, 1881. some other instrument are also have acquired
character of negotiability because of costumes and practice, such document of title
to goods, government, promissory notes, hundies etc. document of title to goods
are also referred as quasi-negotiable instrument.

A “Hundi” is a negotiable instrument by usage. It is often in the form of a

drawn inany local language in accordance with the custom of the place. Some
times it can also be in theform of a promissory note. A hundi is the oldest
known instrument used for the purpose oftransfer of money without its actual
physical movement. The provisions of the NegotiableInstruments Act shall
apply to hundis only when there is no customary rule known to the people.
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“A LETTER OF CREDIT”L/c also known as Documentary Credit is a widely

used term to make payment secure in domestic and international trade. The
document is issued by a financial organization at the buyer request. Buyer also
provide the necessary instructions in preparing the document.

A key principle underlying letter of credit (L/C) is that banks deal only in
documents and not in goods. The decision to pay under a letter of credit will be
based entirely on whether the documents presented to the bank appear on their face
to be in accordance with the terms and conditions of the letter of credit.

“An American Depository Receipt (ADR)”is a stock which trades in

the United States (US) but represents a specified number of shares in a
non-US corporation (like Infosys, etc.). ADRs are bought and sold on
American stock markets just like regular stocks, and are
issued/sponsored in the U.S. by a bank or brokerage. ADRs were
introduced because of the difficulty in buying shares from other non-US
countries which trade at different prices and currency values. U.S. banks
simply purchase a large lot of shares from a foreign company, bundle the
shares into groups and reissue them on either the NYSE, AMEX, or
Nasdaq. The depository bank sets the ratio of U.S. ADRs per home
country share. This ratio can be anything less than or greater than 1. For
example, a ratio of 4:1 means that 1 each ADR share represents 4 shares
in the foreign company.

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“Global Depository Receipt – GDR”:GDR's are similar to ADR's

except that they are issued and can be traded in more than one country
(globally). When the depository bank is in the USA, the instruments are
known as American Depository Receipts (ADR). European banks issue
European depository receipts, and other banks issue global depository
receipts (GDR).

Global Depository Receipts(GDR) / American Deposit Receipts (ADR)

- Foreign Investment through ADRs/GDRs, Foreign Currency
Convertible Bonds (FCCBs) is treated as Foreign Direct Investment.
Indian companies are allowed to raise equity capital in the international
market through the issue of GDR/ADRs/FCCBs. These are not subject
to any ceilings on investment. An applicant company seeking
Government's approval in this regard should have a consistent track
record for good performance (financial or otherwise) for a minimum
period of 3 years. This condition can be relaxed for infrastructure
projects such as power generation, telecommunication, petroleum
exploration and refining, ports, airports and roads.

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2. PROMISERY NOTE:
Suppose you take a loan of Rupees Five Thousand from your friend Ramesh.
You can make adocument stating that you will pay the money to Ramesh or
the bearer on demand. Or you can mention in the document that you would
like to pay the amount after three months. This document,once signed by you,
duly stamped and handed over to Ramesh, becomes a negotiable
instrumentNow Ramesh can personally present it before you for payment or
give this document to someother person to collect money on his behalf. He
can endorse it in somebody else’s name who inturn can endorse it further till
the final payment is made by you to whosoever presents it beforeyou. This
type of a document is called a Promissory NoteSection 4 of the Negotiable
Instruments Act, 1881 defines a promissory note as ‘an instrumentin writing
(not being a bank note or a currency note) containing an unconditional
undertaking,signed by the maker, to pay a certain sum of money only to or to
the order of a certain person orto the bearer of the instrument’.
Specimen of a Promissory Note

Rs. 10,000/- New Delhi

September 25, 2012
On demand, I promise to pay Ramesh, s/o RamLal of Meerut or order a
sum of Rs 10,000/- (Rupees Ten Thousand only), for value received.

To , Ramesh Sd/Sanjeev
Address… Stamp

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2.1. Parties to a Promissory Note

There are primarily two parties involved in a promissory note. They are-
i. The Maker or Drawer –the person who makes the note and promises to
pay the amountstated therein. In the above specimen, Sanjeev is the maker or
drawer.
ii. The Payee –the person to whom the amount is payable. In the above
specimen it is Ramesh.

In course of transfer of a promissory note by payee and others, the parties

involved may be –
a. The Endorser –the person who endorses the note in favour of another
person. In theabove specimen if Ramesh endorses it in favour of Ranjan and
Ranjan also endorses it infavour of Puneet, then Ramesh and Ranjan both are
endorsers.
b. The Endorsee –the person in whose favour the note is negotiated by
endorsement. In the above, it is Ranjan and then Puneet

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2.2 Features of a promissory note

i. A promissory note must be in writing, duly signed by its maker and
properly stamped as per Indian Stamp Act.

ii. It must contain an undertaking or promise to pay. Mere

acknowledgement of indebtedness is not enough. For example, if
some one writes ‘I owe Rs. 5000/- to SatyaPrakash’, it is not a
promissory note.

iii. The promise to pay must not be conditional. For example, if it is

written ‘I promise to pay Suresh Rs 5,000/- after my sister’s
marriage’, is not a promissory note.

iv. It must contain a promise to pay money only. For example, if some
one writes ‘I promise to give Suresh a Maruti car’ it is not a
promissory note.

v. The parties to a promissory note, i.e. the maker and the payee must
be certain.
vi. A promissory note may be payable on demand or after a certain date.
(Seespecimen below).

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Rs. 10,000/- New Delhi

November 14, 2012
I, Ramesh , s/o Sadanand of Surat, Gujarat promise to pay Sashikant, s/o Sunil
Kumar ofAhmedabad, Gujarat or order, on demand, the sum of Rs 10,000/-
(Rupees Ten Thousand only) with interest at the rate of 10 percent per annum,
for value received.

Sd/- Ramesh
Stamp
To
Sashikant
Ahmedabad, Gujarat

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[Link] OF EXCHANGE:
Bill of exchange is very famous negotiable instrument. A 'Bill of exchange' is an
instrument in writing an containing 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. The maker of bill exchange is
called the 'drawer'. The person thereby directed to pay is called the 'drawer'.
The negotiable instrument is a very famous. Cheque, Bill of exchange and
promissory ante is a negotiable instrument. The negotiable instrument is a payable
to bearer or order. Negotiable Instrument freely transferable.

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Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which
Sameer has to [Link], Rajiv also has to give some money to Tarun. In
this case, Rajiv can make a document directing Sameer to make payment up
to Rupees Ten Thousand to Tarun on demand or afterexpiry of a specified
period. This document is called a Bill of Exchange, which can be transferred
to some other person’s name by Tarun.
Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange
as ‘an instrument inwriting containing an unconditional order, signed by the
maker, directing a certain person to paya certain sum of money only to or to
the order of a certain person, or to the bearer of theinstrument’.

Rs. 10,000/- New Delhi

May 2, 2001
Five months after date pay Tarun or (to his) order the sum of Rupees Ten
Thousandonly for value received.
To Accepted Stamp
Sameer Sameer S/d Rajiv
Address

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[Link] TO A BILL OF EXCHANGE:

There are three parties involved in a bill of exchange. They are:-
i. The Drawer –The person who makes the order for making payment. In the
above specimen,Rajiv is the drawer.
ii. The Drawee –The person to whom the order to pay is [Link] is generally
a debtor of the drawer. It is Sameer in this case.
iii. The Payee –The person to whom the payment is to be made. In this case it
is [Link] drawer can also draw a bill in his own name thereby he himself
becomes the payee. Here thewords in the bill would be Pay to us ororderIn a
bill where a time period is mentioned, just likethe above specimen, is called
aTime BillBut a bill may be made payable on demand also. Thisis called
aDemand Bill

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[Link] of Bills of Exchange

Requirements of bills of exchange are regulated by eight paragraphs of Article I,

Section 1, BECA. The following elements can never be omitted: the term "bill of
exchange" inserted in the text of the instrument (Article I, Section 1, Paragraph 1),
an unconditional order to pay a certain sum of money (Article I, Section 1,
Paragraph 2), the name of the person who is to pay (Article I, Section 1, Paragraph
3), the name of the person to whom or to whose order payment is to be made
(Article I, Section 1, Paragraph 6), the date of the drawing of the bill of exchange
(Article I, Section 1, Paragraph 7) and the signature of the drawer (Article I,
Section 1, Paragraph 8). On the other hand, maturity need not be stated at all in the
bill of exchange (Article I, Section 1, Paragraph 4). The place of payment (Article
I, Section 1, Paragraph 5) and the place of the drawing of the bill of exchange
(Article I, Section 1, Paragraph 7) need not result from the bill directly but they
may be indirectly deduced from other pieces of information in the bill.

Notes on individual essential elements of the bill of exchange following the order
of Article I, Paragraph 1, BECA:

a) Stipulation relating to bills of exchange

A bill of exchange must primarily include a designation that it is a bill of

exchange, the so-called stipulation relating to bills of exchange. The stipulation
must meet two cumulative preconditions: first, it must be part of the text of the bill
of exchange. Therefore it is not enough to insert the term of "bill of exchange" only
in the heading or as a decorative printed form on the margin of the form or in
watermark. It is always necessary for the designation to be inserted directly in the
text of the bill.

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The second precondition is that the designation of bill of exchange must be written
in the language in which the whole document is written. The bill should be drawn
only in one language. The bill may be written in any of the existing languages and
the participants are not restricted in any way as far as this is concerned. It does not
matter who has drawn the bill and where it has been drawn, or when the bill is
payable.

b) Unconditional payment order

The essence of the bill of exchange is a payment order of the drawer addressed to
the drawee. The use of a certain form for this order is not prescribed but it must be
clear from the text of the bill. In practice, we usually come across the mere
imperative "Pay".

Pursuant to Article I, Section 1, Paragraph 2, BECA, this order must be

unconditional and must be expressed in a certain sum of money. The amount
requirement is important to the negotiability of draft and notes because they
usually are sold at a discount, or less than face value.

The money relating to bills of exchange must be expressed in words or figures, or

in both ways (it is actually required by all bill forms for security reasons). If the
sum of money relating to bills of exchange is expressed differently in figures and
words (for example, 100,000 and "one hundred and ten thousand") the bill of
exchange is not invalid for the reason of contradicting pieces of information. In
such cases the law reasonably states that if there are divergent data concerning the
sum, it is the one expressed in words that holds. In case of the sum of money

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expressed several times in words or several times in figures, it is the sum that is the
lowest one that holds and in no case the amounts may be added up.

The certainty of the sum of money relating to bills of exchange is also required by
the statement of currency. It is not possible to pay interest on the sum of money
relating to bills of exchange except for sight bills. When a bill of exchange is
payable at sight, or at a fixed period after sight, the drawer may stipulate the sum
payable shall bear interest. In the case of any other bill of exchange, this stipulation
is deemed not to be written. The rate of interest must be specified in the bill of
exchange; in default of such specification, the stipulation shall be deemed no to be
written. Interest runs from the date of the bill of exchange, unless some other date
is specified.

c) Name of the drawee

As already mentioned above, the drawee is a mere addressee of the payment order of the drawer.
An obligation arises for him only by his acceptance (comp. Article I, Sections 21 - 29, BECA).
The drawer may designate himself as the drawee (the so-called disguised bill of exchange). It is
quite enough to state the name (designation, trade name) of the drawer. Other complementary
data (birth identification number, residence, company registration number, seat, etc.) are only
desirable from the practical point of view but the law does not require them for validity of the
bill of exchange.

d) Indication of maturity

Maturity need not be indicated in the bill of exchange as such a bill is payable at
sight pursuant to Article I, Section 2, BECA. Pursuant to Article I, Section 33,
Paragraph 1, the bill of exchange may be payable at sight, at a fixed period after
sight, at a fixed period after the date of drawing and on a fixed day. Bills of

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exchange with another type of maturity are invalid. Bills of exchange payable by
installments are also null and void.

Bills of exchange payable at sight (sight drafts)

Maturity at sight is formally based on expressly using words "at sight", "at
presentation", "after sight", etc. Another option consists in not stating the day of
maturity as mentioned above. With bills of exchange at sight the due day is not
determined clearly in advance. The due day is the day when the bill of exchange is
presented to the respective person for payment.

Bills of exchange payable at a fixed period after sight (time drafts)

An example of time draft is a bill of exchange which is due "one month after sight". The time
stated in the bill runs from the day of acceptance of the bill or the protest. Therefore acceptance
must bear a date. If the bill was not accepted, or the date of acceptance was not stated the bill
must be protested.

Bills of exchange payable at a fixed period after the date of drawing

(time drafts)

These are bills in which maturity is stated at a fixed period after the day of
drawing, for example, "pay in a month after drawing".

Bills of exchange payable on a fixed day (fixed time drafts)

It is the usual determination of maturity date, for example, "on 21 st August 2001".
Maturity of the bill of exchange may only be determined by the four methods
mentioned above. Bills of exchange with a different maturity date are inadmissible.
Now a few notes on various cases of invalid bills of exchange because of a

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defective determination of their maturity. The law expressly declares as invalid

bills of exchange with successive maturity (installment bills of exchange). The
maturity date must be existing; otherwise the bill is invalid (for example, "on 31 st
November 2001"). A year must be unconditionally stated. Also, there must be only
one maturity date clear from the bill. Therefore it is inadmissible to state the
maturity date so that it will be more days, for example, "pay in August 2005", as
such a bill would have 31 days of maturity in total. Also, bills of exchange with
maturity "until 22nd August 2005" or "during ten days since the day of drawing"
will be invalid. These data are defective because of the prepositions "until" and
"during" as it is not clear on which concrete day from the remaining time such a
bill would be mature. Inadmissible are also alternative determinations of maturity
("pay on 2/7/2001 or 5/11/2001", "pay at sight or in two weeks after sight") and
also bills of exchange in which the maturity is determined not only by a concrete
day but also by an hour ("pay on 4th January 2005 at 13.00").

Table: Indication of Maturity

Maturity Legal Regulations in Model Clause

(Draft for Promissory Note Article I BECA

Payable)
At sight Section 34 “At sight”, “At presentation”,
”after sight”, “On Demand”

At a fixed period after sight Section 35 “One month after sight”

At a fixed period after date of Section 33 “Pay in month after drawing”
drawing
On fixed day Section 33 On “4th January 2005”

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e) Place of payment

The place of payment may be stated in the bill of exchange in two manners. Firstly,
the drawer may determine it expressly. However, if the drawer omits to state the
place in the bill it does not follow that the bill is invalid. In such a case the legal
place of payment pursuant to Article I, Section 2, Paragraph 3, BECA, is the place
stated with the name of the drawer. This second possibility of determining the
place of payment presupposes, of course, that there is a certain place stated with
his name (and not more different places). Otherwise, it is an invalid bill of
exchange.

The place of payment may be stated in the bill also through the domicile, for
example, "Payable at the Deutsche Bank, Brno branch".

f) Designation of the payee

As mentioned above, the bill of exchange cannot be issued as a security on bearer.

The bill must always include the name of its first acquirer (payee).

The drawer and the payee may be identical (draft to one's own order).

g) Day and place of drawing

The bill of exchange must include the day and the place of drawing. As for the day
of drawing, the same rules as mentioned about the maturity date apply, especially
the rule that the day must be existing and must be clear enough (day, month, year).
The date of drawing must always precede the date of payment. If the place of
drawing is not stated in the bill, it is considered to be drawn in the place stated with

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the name of the drawer (comp. Article I, Section 2, Paragraph 4, BECA). If no

certain place is stated there, the bill is invalid.

h) Signature of the drawer

The last essential element of bill of exchange stated by the law is the signature of
the drawer. It is the only element of bill of exchange stated in Article I, Section 1,
BECA, for which it holds that the signature of the drawer must be made in one's
own hand.

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[Link] NEGOTIABLE INSTRUMENTS

[Link] OF BILL OF EXCHANGE:-

Let us know the various features of a bill of exchange.
i. A bill must be in writing, duly signed by its drawer, accepted by its
drawee and properly stamped as per Indian Stamp Act.

ii. It must contain an order to pay. Words like ‘please pay Rs 5,000/- on
demand and oblige’ 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.

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[Link] NEGOTIABLE INSTRUMENTS

[Link] OF BILLS OF EXCHANGE

INLAND AND FOREIGN BILLS :-
A promissory notes, bill of exchange or cheque drawn one made in India and made
payable in or drawn upon any person resident of India shall be deemed to be an
inland instrument.
It means any bill drawn and made payable in India or drawn upon any person
resident of India, is on inland bill.
Any such instrument not so drawn, made or made payable shall be deemed to be a
foreign instrument.
Foreign bill of exchange must be protested is required by law of the place where
they are drawn.

BILLS IN SET:-

A) A bill of exchange may be drawn in two, three or four parts. All the parts, when
combined, make a set and a complete set constituent a bill.

B) Each part of the set must be number and must contain a provision that it shall be
payable only when other parts remain unpaid.

C) Different parts of the bill must contain reference to other parts. Otherwise a part
containing reference it gets into the hand of the holder in due course, will become a
separate bill.
D) On payment of one part of the bill, the entire bill is extinguished. E) All the
parts must be signed by the drawer and be delivered. If only one part is stamped
only that parts needs acceptance.

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2) TIME AND DEMAND BILL:-

Demand bill:-
Where no time for the payment of a bill of exchange is specified. It is deemed as
payable on demand payable on 'demand' or 'sight' or on also presentment indicates
that the bill is payable on demand.
Time bill:-
A bill which is expressed to be payable after a fixed period or after sight or on a
specified day or on the happening of an event which is certain to happen, is a time
bill.
Maturity :-
The maturity of bill of exchange is the date at which it falls due maturity can be
calculated in the following manner.

A) if a promissory notes or bill of exchange is made payable after stated number of

months after date or sight or after a certain event. It becomes payable three days
after the corresponding date of month after stated number of month.

B) If the month in which the period would terminate has no

corresponding day, the period shall be held to terminate on the last day of such
month.
C) The day on which instrument is drawn or presented for acceptance on sight, or
the day on which the event happens shall be excluded.
D) When the day on which a promissory note or bill of exchange matures is a
public holiday, the instrument shall be deemed to be due on the next proceeding
business day.

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3) CLEAN BILLS & DOCUMENTARY BILLS:-

Clean bills:-
When no documents title to goods are enclosed, the bill is termed as a clean bill.
Documentary bill:-
When a bill is supported by documents of title to goods and other documents (E.g.
invoice, insurance policy.) it is treated ads a documentary bill.
4) TRADE BILL& ACCOMODATION BILL:-
Trade bill;-
When a bill is drawn, accepted or endorsed or endorsed for consideration in a
genuine trade transaction, it is called 'trade bill.'

Accommodation bill:-

When a bill is drawn, accepted or endorsed without any consideration with any
intension to accommodate a party, it is called 'accommodation bill.'
E.g. 'A' is need of money, he draws a bill of exchange on 'B' who accept. It
discounts this accepted bill from his bank and utilise the money till its maturity.
Before maturity, a remits the amount of bill on maturity to banker. Here 'B is the
accommodating' party and 'A' is the accommodated party.

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[Link] NEGOTIABLE INSTRUMENTS

[Link] RAGARDING ACCOMMODATION BILLS

ARE AS FOLLOWS:-
A) The accommodated party cannot recover the amount from the accommodating
party after he has paid the bill.

B) After maturity, an accommodation bill can be negotiated provided the person

receiving it takes it in good faith and for consideration.

C) The drawer of an accommodation bill is not discharged by non presentment to

the acceptor.

D) Prior parties to an accommodation bill are not discharged if notice of dishonour

has not been given.

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3.6 PRESENT OF BILLS AND PROMISSORY NOTES

When a negotiable instrument is shown to its drawee acceptor and maker for
acceptance at site for payments, it is called presentment, presentment may be of
following types.
A) Presentment for acceptance.
B) Presentment for site.
C) Presentment for payment.
1)PRESENT MENT FOR ACEPTANCE:-
Presentment for acceptance is required in case of bill of exchange only.
Acceptance means, signing the bill by the drawee showing his assent to the order
of the drawer that he will pay the bill when it is due. Liabilities of a drawee arise
only when the bill is accepted, once the bill is accepted , the drawee is known a
acceptor.
A valid acceptance must fulfill following conditions.
A) Acceptance must be written on the bill normally the word "ACCEPTED" is
added on the face or on the back of the bill and signed by the drawee.
B) Acceptance must be signed by the drawee himself or by his duly authorised
agent.
C) After acceptance the bill must be handed over the holder

[Link] OF ACCEPTANCE:

A) GENERAL ACCEPTANCE :-

When a bill accepted unconditionally by a drawer the acceptance is said general or

absolute unless a bill is accepted generally, the holder may treat the bill as
dishonoured by non acceptance.

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[Link] NEGOTIABLE INSTRUMENTS

B) QUALIFIED ACCEPTANCE:-
When acceptance to the bill is subject to some condition. It is called 'QUALIFIED
ACCEPTANCE.' But if the holders agree to the qualified acceptance all the
pervious parties not consenting to it are discharged.
[Link] FOR SIGHT:-
Where a promissory note is payable at a certain period after sight, it is required to
be presented by the holder to its maker for sight. Promissory notes payable on
demand or at sight or at a specified date need not be presented for sight.
Promissory notes which is required to be presented for sight, if not presented on
party to the not shall be liable thereon to the person making such default.
[Link] FOR PAYMENT:-
Promissory notes, bill of exchange and cheque must be presented for payment to
the maker acceptor or drawee there of there of respectively by or on behalf of the
holders has here in after provided. In default of such presentment the other parties
there to are not liable there on to such holder where authorised by agreement or
usage, a presentment through the post office by means of a registered letter is
sufficient.

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[Link] NEGOTIABLE INSTRUMENTS

[Link]
A Hundi is a negotiable instrument by usage. It is often in the form of a drawn
inany local language in accordance with the custom of the place. Some times
it can also be in theform of a promissory note. A hundi is the oldest known
instrument used for the purpose oftransfer of money without its actual
physical movement. The provisions of the NegotiableInstruments Act shall
apply to hundis only when there is no customary rule known to the people.

[Link] OF HUNDIS
There are a variety of hundis used in our country. Let us discuss some of the
most common [Link]-jog Hundi:is drawn by one merchant on another,
asking the latter to pay the amountto a Shah. Shah is a respectable and
responsible person, a man of worth and known in thebazaar. A shah-jog hundi
passes from one hand to another till it reaches a Shah, who, afterreasonable
enquiries, presents it to the drawee for acceptance of the payment.
Darshani Hundi:This is a hundi payable at sight. It must be presented for
payment within areasonable time after its receipt by the holder. Thus, it is
similar to a demand bill.
Muddati Hundi:A muddati or miadi hundi is payable after a specified period
of time. This issimilar to a time bill.
There are few other varieties like Nam-jog hundi, Dhani-jog hundi, Jawabee
hundi, Jokhamihundi, Firman-jog hundi, etc.

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[Link] NEGOTIABLE INSTRUMENTS

[Link]
Banks provides cheque facilities. Cheque is negotiable instrument. Cheque is a
document of negotiable. A cheque is bail of exchange drawn on specific banker
and not expressed to be payable otherwise than on demand. The maker of cheque is
called the "drawer". The person there by directed to pay is called the "drawee"
cheque is easily transfer or endorsed any person.

[Link] OF CHEQUE
When two transverse parallel lines are drawn across the face of the cheque, with or
without writing any words or abbreviation thereof, between the lines, it shall be
deemed as a crossing. Lines drawn on the cheque must be parallel, transverse and
on the face of the cheque.
A banker on whom a crossed cheque is drawn shall not pay it otherwise than to the
banker.
A cheque which is not a crossed one can be presented to the banker and can be
paid at the counter is called upon a cheque.
Crossing may be hand written, typed, printed or perforated.
TYPES OF CROSSING:-
There in two types crossing.
1) General crossing.
2) Special crossing

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[Link] NEGOTIABLE INSTRUMENTS

[Link] CROSSING:-SEC.123 defines general crossing as where a cheque

bears a cross it face on addition of the words and company or any abbreviation
there of two parallel transverse lines or of two parallel transverse lines simply
either with or without the words not 'not negotiable' the addition be deemed as
crossing and the cheque shall be deemed crossed to be generally.
Where cheque us crossed generally the bank on who, it is drawn shall not pay it
otherwise than to a banker.

2. SPECIAL CROSSING;-

sec. 124 of the Negotiable Instrument Act. 1881, defines special crossing as:
"Where a cheque bears, across its face an addition of the name of the banker either
with or without the words ' not Negotiable' that addition shall be deemed as
crossing, and the Cheque shall be deemed to be cross specially and to be crossed to
that banker"
Where a cheque is crossed specially the banker on whom kit is drawn shall not pay
it otherwise then to the banker to whom it is crossed or to his agent for collection.
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 be
refuse payment there of in other words, cheque crossed specially to the two banks
should not be paid unless one bank is acting as a collecting agent to other. A
cheque crossed to two branches of the same bank should not be treated as crossed
to two banks.
Drawing of two transverse parallel lines is not essential in case of special crossing.
But special crossing with two transverse parallel lines is also valid.

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[Link] NEGOTIABLE INSTRUMENTS

[Link] BETWEEN GENERAL & SPECIAL CROSSING

1) Drawing of two transverse parallel lines across the face to the cheque is
essential in case of general crossing. Whereas special crossing without the
transverse parallel lines is also valid.
2) Adding name of the bank is essential in case of special crossing. It is not so in
case of general crossing.
1) NOT NEGOTIABLE CRQSSING:-
A person taking a cheque crossed generally or specially bearing in either case the
words 'Not Negotiable' shall not have and shall not be capable of giving a better
title to the cheque than the person from whom he took it.
A person who receives a cheque crossed with the words 'Not Negotiable' should
receive it with great caution because these words destroyed the character of
negotiability of the instrument. No transferee can claim the right of a 'holder in due
course.'
'Not Negotiable' crossing does not effect the transferabihty of the instrument. It
only deprives negotiability. If the holder has got a good title he can still transfer if
with a good title. But if the holder's title is defective.
[Link] has obtained the instrument by theft, fraud etc. the receiver of which does
not got a better title that of the thief.

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[Link] NEGOTIABLE INSTRUMENTS

2) ACCOUNT PAYEE CROSSING:-

A cheque crossed with the words "Account Payee" or "Payees Account only" has
great significance from the banker's point of view.

These are words are the direction for the collecting bank that the cheque should be
collected only for the named payee and suggest as to how to proceeds of the
cheque be applied after receipt.

"Account Payee" receipt is not recognized by the negotiable instruments Act, 1881,
or by the Bill of Exchange Act. But it has assumed the force of law due to long
established practice and legal decision given by the various courts In India and
England. Therefore addition of words 'Account Payee' cannot be treated an
unauthorized addition.
An account payee crossing does not affect the negotiability or transferability of the
cheque, so far as law is concerned but banks normally do not collect such a cheque
for a person who is not payee. Therefore in practice "ACCOUNT PAYEE
CROSSSING" restricts and transferability of the instrument.
3) NOT NEGOTIABLE AND ACCOUNT PAYEE CROSSING:-
1) Not negotiable crossing restricts not negotiability of the instrument but 'Account
Payee Crossing' does not as law.
2) No one can be a 'holder in due course' of a cheque already crossed 'NOT
NEGOTIABEE' transfer of an account payee cheque can be a 'holder in due
course.'
3) 'Account Payee' crossing is a direction for collecting banker. Not negotiable
crossing puts transferee/endorsee at caution.

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[Link] NEGOTIABLE INSTRUMENTS

4) NOT NEGOTIABLE ACCOUNT PAYEE CROSSING IS THE SAFEST

CROSSING:-

A cheque bearing no Not negotiable account payee crossing is considered as the

safest because its prohibits Not negotiable the negotiability of the cheque and gives
direction to the collecting banker to the cheque for the named payee only failing
which the collecting banker can be held liable for damages.

CANCELLATION OF CROSSING:-
Only the drawer of the cheque can cancel its crossing by adding words 'crossing
cancelled' duly authenticated by his full signature.
Bank should pay such cheque very carefully because if it transpires that the
drawers signature its forget, the bank will incur the liability towards the true owner
of the cheque.

PAYMENT IN DUE COURSE:-

Payment in due course means payment in accordance with the apparent tenor of the
instrument in good faith and without negligence to any person in possession
thereof under circumstances which do not afford a reasonable ground for believing
that he is not entitled to receive payment of the amount mentioned therein (sec. 10)
As per sec. 10 requisites of payment in due course are.
a) Payment must be made in accordance with the apparent tenor of the instrument
as per the intension of the drawer which appears from the instruments.
b) Payment must be made in good faith and without negligence.

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[Link] NEGOTIABLE INSTRUMENTS

PROPER FORM OF THE CHEQUE:-

The Negotiable Instrument Act, 1881, does not prescribe any format of cheque but
every bank has devised their own forms of cheque and withdrawal slip. The banker
may require it customer to put up their demands of withdrawal of money through
prescribed form of cheques/withdraw! only.
A customer should draw a cheque on the cheque leaf issued to him. Cheque leaf
issued to the customer should not be utilised by another customer.
DATE OF CHEQUE :-
Undated cheque:-A cheque must bear a date if cheque is issued undated. The
payee/the holder of the cheque may fill up the date. It willno it amount to a
material alteration. If a cheque is undated it does not become invalid. The banker is
not bound to honour an undated cheque.
POST DATED CHEQUE:-
A cheque which bears a date sub sequent to the date on which it is drawn is called
"POST DATED CHEQUE."
Ilg. A cheque drawn on a 1st April 1993, bearing the date 30th April [Link]
dated cheque are not valid. It does not attract stamped duty as a usuance bill.
A post dated cheque becomes effective on the date mentioned therein. The drawer
of a such a cheque can be sued by the holder after the mentioned date only. The
banker should not pay post dated cheque because of following risks.

A) The drawer may stop the payment of the cheque before given the date.

B) There may be death/insolvency of the customer.

C) Another cheque of the customer may bounce due to insuffiency of the funds
during the period and the banker may be held liable therefore.
D) Payment of post dated cheque is not a payment in due course. Therefore the
banker may lose statuary protection.

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[Link] NEGOTIABLE INSTRUMENTS

VALID PERIOD OF CHEQUE:-

A cheque is valid for up to six months from the date of its issues, e.g. a cheque
bears a date the 1st April 1993, it valid period shall be up to 30thsep 1993.
Validity period as discussed above has no statuary sanction in India but due to the
long established practice it has assumed the force of law.
Banker should not pay a cheque after its validity period is over unless it is
revalidated by the drawer of the cheque.
SAFE CHEQUE: -
A cheque becomes state after six months of its issue. If bankers pay a state cheque
without revalidation of the drawer, such payment shall not be treated as a payment
in due course.
PAYEE:-
The person named in an instrument to whom and to whose order the amount is to
be paid is called 'payee' if the payees name is miss pelt the validity of the
instrument is not affected.

Cheque payable to impersonal payee like cash or order income tax etc. shall be
paid to the drawer or his agent only. In such instrument payee is nor certain, these
cannot be treated as cheque.

BEARER OR ORDER CHEQUES:-

A cheque drawn on payable to a named payee or bearer can be paid by the bank to
the holder thereof. If the banker has paid such cheque in due course to the holder
thereof, he is discharged from his liability. Any endorsement on a bearer cheque
drawn in a favor of companies, corporation should not be paid in cash to the holder
unless it has been inquired from the concerned company/corporation that the
person receiving payment is essential to receive the payment. Payment of an 'order'
cheque should be made to its payee only after his identification.

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[Link] NEGOTIABLE INSTRUMENTS

AMOUNT:-
If the amount of a cheque is stated differently in figures and words the amount
stated in words shall be the amount under taken or order to be paid. Where the
amount of a cheque written in the words and figures is different the banker should
pay the amount is stated in words.
If the amount is written in figures only, cheque should be returned to the drawer
for necessary correction.
SIGNATURE: -
The paying banker has to ascertain that the signature appearing on the cheque is
the genuine signature of the drawer. The banker may ascertain the fact by
comparing it with the signature available on specimen signature card. If signature
on the cheque does not tally with the specimen signature, the banker must refuse
payment of the [Link] of a cheque with forged signature of the drawer is
treated as payment made with out the authority of the customer as such , the banker
cannot be debit the customers account with the amount of the cheque no statutory
protection available in case of payment of cheque having forged signature.

DISHONQUR:-
When banker is justified in dishonoring the cheque.
a) When payment t of cheque has been stopped by the drawer.
b) When notice of the death of the customer is received by the baker,.
c) When the drawer has become an insolvent.
d) When the customers has become lunatic.
e) When there is no sufficient balance in the customers account.
f) When the cheque is not in order.
g) When the signature of the customers does not tally with the specimen signature
of the customers in the bank account.

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[Link] NEGOTIABLE INSTRUMENTS

COLLECTION OF CHEQUES :-BANK COLLECT CHEQUES:-

Banker is under no legal obligation to collect the cheque of its constituents but
banker undertake this function because.
a) As per law of negotiable instrument, a crossed cheque is payable to banker only.

b) Collection of cheques is an important traditional function of banker. He cannot

deny this facility to the customer especially in the modern age of server
compittiion.

DUTIES OF THE COLLECTING BANKER:-

A collecting agent, a banker owes following duties to his customers.
A)DUTY TO PRESENT CHEQUES IN REASONABLE TIMES:-
Banker should present the cheque has customers with in reasonable time otherwise
he may be held liable for damages under SEC 72 and 84 under the negotiable
instrument Act 1881, if customers put to loss for his delayed presentation.
B)DUTY TO SERVE NOTICE OF DISHONOUR:-
When a customer's cheque is returned unpaid to the collecting bank, it is the duty
of the collecting bank, it is the duty of the collecting bank to serve notice of
dishonour to his customers. This will enable to him to claim the amount from
previous parties, if the customers incurs any loss as consequence of non receipt of
notice from the collecting bank, it may be held liable. In practice however bank
does not give notice to the customers but returns the cheque to him in forming that
the cheque has been dishonoured. It is in fact an enough notice for the customers.
If the cheque has been returned unpaid to the collecting bankers for presenting
again and confirming the endorsement of the payee, it is not treated as dishonour to
all the parties of the parties of the cheque including the customers.

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[Link] NEGOTIABLE INSTRUMENTS

C) DUTY TO HANDOVER PROCEEDS AFTER REAEISATION

WITHOUT DELAY:-

After realisation of cheque, the proceeds there of should be handed over the
customers quickly. If the proceeds are to be sent by demand draft. It must be sent
by registered as per the instruction of the customer.
D)DUTY TO GIVE IMMEDIATE CREDIT OF OUTSTATION CHEQUES
:-
If the banker has been gives on out station cheques for collection the by customer,
he may credit the customers account immediately provided.
a) The amount of the cheque is not exceeding Rs 5000.
b) The customer is an individual.
c) No adverse experience has been there in the past in the account.
d) The account should have been maintained for less than six months period.
e) Facility can be granted in case of one cheque at a time.
No interest should be charged from the customers if the cheque is dishonored for
the period between date of credit and return. Thereafter interest will be chargeable
except when the amount was credited in the saving bank account. In case of saving
bank account holder, no interest will be chargeable.

E) DUTY TO PAY INTREST FOR DEEAYED COOLECTION OF OUT

STANDING CHEQUES:-

Banks should pay interest at two percent above the saving bank rate for delayed
collection of outstanding cheques provided cheque draft bill and other instrument
are delayed for the period beyond.

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[Link] NEGOTIABLE INSTRUMENTS

CLEARING HQUSE:-
In a big city or a town there may be a number of a banks branch. All of them may
be receiving cheque drawn on each other from their customers. To collect these
cheques, two options are available to the bank. First option is that they may be
send their own representative, to the entire bank fore collection. Another option is
that all the representative of different banks may sit together and exchange their
cheques and arrive of a final debit or credit entry. Since the first option involves a
lot of manpower, expenses and time, second option is preferred by the banks. The
place where representatives of local banks branches meet to exchange cheques is
called" clearing house".
Clearing houses are autonomous bodies formed by the bank which rub as per the
rules and regulation fixed by the them selves. Reserve bank of India looks after the
functioning of clearing house. Where RBI has its branch, clearing house is
conducted by it, in other places, state Bank of India or its associates conduct the
clearing house.

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[Link] NEGOTIABLE INSTRUMENTS

[Link] OF CREDIT
Letter of Credit L/c also known as Documentary Credit is a widely used term to
make payment secure in domestic and international trade. The document is issued
by a financial organization at the buyer request. Buyer also provide the necessary
instructions in preparing the document.

The International Chamber of Commerce (ICC) in the Uniform Custom and

Practice for Documentary Credit (UCPDC) defines L/C as:

"An arrangement, however named or described, whereby a bank (the Issuing bank)
acting at the request and on the instructions of a customer (the Applicant) or on its
own behalf :

1. Is to make a payment to or to the order third party ( the beneficiary ) or is to

accept bills of exchange (drafts) drawn by the beneficiary.
2. Authorised another bank to effect such payments or to accept and pay such
bills of exchange (draft).
3. Authorised another bank to negotiate against stipulated documents provided
that the terms are complied with.

A key principle underlying letter of credit (L/C) is that banks deal only in
documents and not in goods. The decision to pay under a letter of credit will be
based entirely on whether the documents presented to the bank appear on their face
to be in accordance with the terms and conditions of the letter of credit.

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[Link] NEGOTIABLE INSTRUMENTS

[Link] to Letters of Credit

 Applicant (Opener): Applicant which is also referred to as account party is

normally a buyer or customer of the goods, who has to make payment to
beneficiary. LC is initiated and issued at his request and on the basis of his
instructions.

 Issuing Bank (Opening Bank) :The issuing bank is the one which create a
letter of credit and takes the responsibility to make the payments on receipt
of the documents from the beneficiary or through their banker. The
payments has to be made to the beneficiary within seven working days from
the date of receipt of documents at their end, provided the documents are in
accordance with the terms and conditions of the letter of credit. If the
documents are discrepant one, the rejection thereof to be communicated
within seven working days from the date of of receipt of documents at their
end.

 Beneficiary :Beneficiary is normally stands for a seller of the goods, who

has to receive payment from the applicant. A credit is issued in his favour to
enable him or his agent to obtain payment on surrender of stipulated
document and comply with the term and conditions of the L/c.
If L/c is a transferable one and he transfers the credit to another party, then
he is referred to as the first or original beneficiary.

 Advising Bank :An Advising Bank provides advice to the beneficiary and
takes the responsibility for sending the documents to the issuing bank and is
normally located in the country of the beneficiary.

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[Link] NEGOTIABLE INSTRUMENTS

 Confirming Bank :Confirming bank adds its guarantee to the credit opened
by another bank, thereby undertaking the responsibility of
payment/negotiation acceptance under the credit, in additional to that of the
issuing bank. Confirming bank play an important role where the exporter is
not satisfied with the undertaking of only the issuing bank.

 Negotiating Bank: The Negotiating Bank is the bank who negotiates the
documents submitted to them by the beneficiary under the credit either
advised through them or restricted to them for negotiation. On negotiation of
the documents they will claim the reimbursement under the credit and makes
the payment to the beneficiary provided the documents submitted are in
accordance with the terms and conditions of the letters of credit.

 Reimbursing Bank :Reimbursing Bank is the bank authorized to honor the

reimbursement claim in settlement of negotiation/acceptance/payment
lodged with it by the negotiating bank. It is normally the bank with which
issuing bank has an account from which payment has to be made.

 Second Beneficiary :Second Beneficiary is the person who represent the

first or original Beneficiary of credit in his absence. In this case, the credits
belonging to the original beneficiary is transferable. The rights of the
transferee are subject to terms of transfer.

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 [Link] NEGOTIABLE INSTRUMENTS

6.2. Steps in the Letter of Credit Process

I. Buyer and seller agree to terms including means of transport, period of credit
offered (if any), and latest date of shipment acceptable.
II. Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer's
credit standing, and may require cash cover and/or reduction of other
lending limits.
III. Issuing bank issues LC, sending it to the Advising bank by airmail or
electronic means such as telex or SWIFT.
IV. Advising bank establishes authenticity of the letter of credit using signature
books or test codes, then informs seller (beneficiary).
V. Seller should now check that LC matches commercial agreement and that all
its terms and conditions can be satisfied.
VI. Seller ships the goods, then assembles the documents called for in the LC
(invoice, transport document, etc.).
VII. The Advising bank checks the documents against the LC. If the documents
are compliant, the bank pays the seller and forwards the documents to the
Issuing bank.
VIII. The Issuing bank now checks the documents itself. If they are in order, it
reimburses the seller's bank immediately.
IX. The Issuing bank debits the buyer and releases the documents (including
transport document), so the buyer can claim the goods from the carrier.

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[Link] NEGOTIABLE INSTRUMENTS

[Link] of Letter of Credit

1. Revocable Letter of Credit L/c

A revocable letter of credit may be revoked or modified for any reason, at any time
by the issuing bank without notification. It is rarely used in international trade and
not considered satisfactory for the exporters but has an advantage over that of the
importers and the issuing bank.

There is no provision for confirming revocable credits as per terms of UCPDC,

Hence they cannot be confirmed. It should be indicated in LC that the credit is
revocable. if there is no such indication the credit will be deemed as irrevocable.

2. Irrevocable Letter of CreditL/c

In this case it is not possible to revoked or amended a credit without the agreement
of the issuing bank, the confirming bank, and the beneficiary. Form an exporters
point of view it is believed to be more beneficial. An irrevocable letter of credit
from the issuing bank insures the beneficiary that if the required documents are
presented and the terms and conditions are complied with, payment will be made.

3. Confirmed Letter of Credit L/c

Confirmed Letter of Credit is a special type of L/c in which another bank apart
from the issuing bank has added its guarantee. Although, the cost of confirming by
two banks makes it costlier, this type of L/c is more beneficial for the beneficiary
as it doubles the guarantee.

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4. Sight Credit and Usance Credit L/c

Sight credit states that the payments would be made by the issuing bank at sight,
on demand or on presentation. In case of usance credit, draft are drawn on the
issuing bank or the correspondent bank at specified usance period. The credit will
indicate whether the usancedraft are to be drawn on the issuing bank or in the case
of confirmed credit on the confirming bank.

5. Back to Back Letter of Credit L/c

Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is

known as backtoback credit when a L/c is opened with security of another L/c.

A backtoback credit which can also be referred as credit and countercredit is

actually a method of financing both sides of a transaction in which a middleman
buys goods from one customer and sells them to another.

The parties to a BacktoBack Letter of Credit are:

1. The buyer and his bank as the issuer of the original Letter of Credit.
[Link] seller/manufacturer and his bank,
3. The manufacturer's subcontractor and his bank.

The practical use of this Credit is seen when L/c is opened by the ultimate buyer in
favour of a particular beneficiary, who may not be the actual supplier/
manufacturer offering the main credit with near identical terms in favour as
security and will be able to obtain reimbursement by presenting the documents
received under back to back credit under the main L/c.

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The need for such credits arise mainly when :

1. The ultimate buyer not ready for a transferable credit

2. The Beneficiary do not want to disclose the source of supply to the openers.
3. The manufacturer demands on payment against documents for goods but the
beneficiary of credit is short of the funds

6. Transferable Letter of Credit L/c

A transferable documentary credit is a type of credit under which the first

beneficiary which is usually a middleman may request the nominated bank to
transfer credit in whole or in part to the second beneficiary.

The L/c does state clearly mentions the margins of the first beneficiary and unless
it is specified the L/c cannot be treated as transferable. It can only be used when
the company is selling the product of a third party and the proper care has to be
taken about the exit policy for the money transactions that take place.

This type of L/c is used in the companies that act as a middle man during the
transaction but don’t have large limit. In the transferable L/c there is a right to
substitute the invoice and the whole value can be transferred to a second
beneficiary.

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The first beneficiary or middleman has rights to change the following terms and
conditions of the letter of credit:

1. Reduce the amount of the credit.

2. Reduce unit price if it is stated
3. Make shorter the expiry date of the letter of credit.
4. Make shorter the last date for presentation of documents.
5. Make shorter the period for shipment of goods.
6. Increase the amount of the cover or percentage for which insurance cover
must be effected.
7. Substitute the name of the applicant (the middleman) for that of the first
beneficiary (the buyer)

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[Link] DEPOSITERY RECEIPT (ADR):

An American Depository Receipt (ADR) is a stock which trades in the

United States (US) but represents a specified number of shares in a non-
US corporation (like Infosys, etc.). ADRs are bought and sold on
American stock markets just like regular stocks, and are
issued/sponsored in the U.S. by a bank or brokerage. ADRs were
introduced because of the difficulty in buying shares from other non-US
countries which trade at different prices and currency values. U.S. banks
simply purchase a large lot of shares from a foreign company, bundle the
shares into groups and reissue them on either the NYSE, AMEX, or
Nasdaq. The depository bank sets the ratio of U.S. ADRs per home
country share. This ratio can be anything less than or greater than 1. For
example, a ratio of 4:1 means that 1 each ADR share represents 4 shares
in the foreign company.

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7.1 How ADR Operates

Indian companies have direct access to raise funds from Indian public by way of
issuing Shares, Debentures etc. However Indian companies cannot do so, in such a
direct manner, when it comes to raising funds from American people. That would
entail the Indian companies to adopt US Accounting Norms which is also called as
GAAP, maintain accounting practices as per American Financial Year (Which
starts in January and ends in December of any particular year), as also follow
variety of stringent standards as per American norms. Effectively, it would mean
that the Indian company would have to follow two different set of rules
simultaneously, one to comply with the laws of Indian Companies Act, and the
other to comply with the American Laws.

The method to circumvent the American norms, but still raise funds from
American people is available by way of ADR or American Depository Receipts. In
this system, the Indian company deposits certain amount of its Indian shares with
designated American Banks. The banks, in turn, issues receipts that are equivalent
in values (And also based on the intrinsic value the Indian Company’s shares
would fetch in the American market) to the Indian Company. These receipts
essentially would be in number of receipts. Then these Indian Companies can trade
these ADRs or American Depository Receipts with the American public. These
ADRs can be purchased and traded freely without any encumbrances in the
American Stocks and Shares Market. This way the Indian company is able to enter
into the American Stocks and Shares market, and raise funds from the American
public.

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The role of the American bank which has issued these receipts is very crucial,
since it is they who stand guarantee to the issued receipts. Hence they do
exhaustive study of the Indian company from all perspectives, and only then issue
the ADR to the Indian company

[Link] DEPOSITORY RECEIPT(GDR):

“Global Depository Receipt – GDR”:GDR's are similar to ADR's except

that they are issued and can be traded in more than one country
(globally). When the depository bank is in the USA, the instruments are
known as American Depository Receipts (ADR). European banks issue
European depository receipts, and other banks issue global depository
receipts (GDR).

Global Depository Receipts(GDR) / American Deposit Receipts (ADR)

- Foreign Investment through ADRs/GDRs, Foreign Currency
Convertible Bonds (FCCBs) is treated as Foreign Direct Investment.
Indian companies are allowed to raise equity capital in the international
market through the issue of GDR/ADRs/FCCBs. These are not subject
to any ceilings on investment. An applicant company seeking
Government's approval in this regard should have a consistent track
record for good performance (financial or otherwise) for a minimum
period of 3 years. This condition can be relaxed for infrastructure

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projects such as power generation, telecommunication, petroleum

exploration and refining, ports, airports and roads.

[Link] ADR Operates

The G DR is created when a foreign company wishes to list its already publicly
traded shares or debt securities on a foreign stock exchange. Before it can be listed
to a particular stock exchange, the company in question will first have to meet
certain requirements put forth by the exchange. Initial public offerings, however,
can also issue a DR. DRs can be traded publicly or over-the-counter. Let us look at
an example of how an ADR is created and traded:

Example
Say an oil and gas company in Nigeria has
fulfilled the requirements for DR listing and
now wants to list its publicly-traded shares on
the LSE in the form of a GDR. Before the gas
company’s shares are traded freely on the
exchange, a U.K. broker, through an
international office or a local brokerage house in
Nigeria, would purchase the domestic shares
from the Nigerian market and then have them
delivered to the local (Nigerian) custodian bank
of the depository bank. The depository bank is
the London institution that issues the GDRs in
London. In this example, the depository bank is
the Standard Chartered Bank, U.K. Once the

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Standard Chartered Bank’s local custodian bank

in Nigeria receives the shares, this custodian
bank verifies the delivery of the shares by
informing Standard Chartered Bank of England
that the shares can now be issued in London.
Standard Chartered Bank U.K then delivers the
GDRs to the broker who initially purchased
them.

Based on a determined GDR ratio, each GDR

may be issued as representing one or more of the
Nigerian local shares, and the price of each
GDR would be issued in U.S. dollars converted
from the equivalent Nigerian price of the shares
being held by the depository bank. The GDRs
now represent the local Nigerian shares held by
the depository, and can now be freely traded
equity on the LSE.

After the process whereby the new GDR of the

Nigerian oil and gas company is issued, the
GDR can be traded freely among investors and
transferred from the buyer to the seller on the
LSE, through a procedure known as intra-market
trading. All GDR transactions of the Nigerian oil
and gas company will now take place in U.S.

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dollars and are settled like any other U.K.

transaction on the LSE. The GDR investor holds
privileges like those granted to shareholders of
ordinary shares, such as voting rights and cash
dividends. The rights of the GDR holder are
stated on the GDR certificate.

[Link] between GDR and ADR

1. Global depository receipt (GDR) is compulsory for foreign company to
access in any other country’s share market for dealing in stock. But
American depository receipt (ADR) is compulsory for non –us companies to
trade in stock market of usa .

2. ADRs can get from level -1 to level –III. GDRs are already equal to high
preference receipt of level –II and level –III.

3. Indian companies prefer to get GDR due to its global use for getting foreign
investment for own business projects

4. ADRs up to level –I need to accept only general condition of SEC of USA

but GDRs can only be issued under rule 144 A after accepting strict rules of
SEC of USA .

5. GDR is negotiable instrument all over the world but ADR is only negotiable
in USA .

6. Many Indian Companies listed foreign stock market through foreign bank’s
GDR. Names of these Indian Companies are following :- (A) Bajaj Auto (B)
Hindalco (C) ITC ( D) L&T (E) Ranbaxy Laboratories (F) SBI Some of
Indian Companies are listed in USA stock exchange only through ADRs :-
(A) Patni Computers (B) Tata Motors

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7. Even both GDR and ADR is the proxy way to sell shares in foreign market
by India companies ADRs is not substitute of GDRs but GDRs can use on
the place of ADRs .

8. Investors of UK can buy GDRs from London stock exchange and luxemberg
stock exchange and invest in Indian companies without any extra
responsibilities. Investors of USA can buy ADRs from New york stock
exchange (NYSE) or NASDAQ (National Association of Securities Dealers
Automated Quotation).

9. American investors typically use regular equity trading accounts for buying
ADRs but not for GDRs.

[Link] US dollar rate paid to holders of ADRs is calculated by applying the

exchange rate used to convert the foreign dividendpayment (net of local
withholding tax) to US dollars, and adjusting the result according to the
ordinary share but GDRs is calculated on numbers of Shares. One GDR's
Value may be on two or six shares

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[Link] COMPANIES USING ADR/GDR

COMPANY
ADR GDR
Bajaj Auto No Yes
Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes
Infosys Technologies Yes Yes
ITC No Yes
L&T No Yes
MTNL Yes Yes
Patni Computers Yes No
Ranbaxy Laboratories No Yes
Tata Motors Yes No
State Bank of India No Yes
VSNL Yes Yes
WIPRO Yes Yes

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CONCLUSION:
Negotiable instruments are particular type of documents used for making
payment in business transactions, the ownership of which can be freely transferred
from one person to another.

Exchange of goods and services is the basis of every business activity. Goods are
bought and sold for cash as well as on credit. All these transactions require flow of
cash either immediately or after a certain time. In modern business, large number
of transactions involving huge sums of money takes place every day. It is quite
inconvenient as well as risky for either party to make and receive payments in
cash. Therefore, it is a common practice for businessmen to make use of certain
documents as means of making payment. Some of these documents are called
negotiable instruments.

Negotiable instruments are used for easy financial transaction, now day’s
negotiable instruments are widely using in financial markets and making
transactions easy and simple, it also safe to transact through the negotiable
instruments.

There are so many negotiable instruments in the market, but for my project work i
explained some of the instruments.

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BIBLIOGRAPHY:-

BOOKS: -

1) INTERNATIONAL BANKING AND FINANCE -

WEBLIOGRAPHY: -

 WWW. Management [Link]

 [Link]
 [Link]

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