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A study on NEGOTIABLE INSTRUMENTS

Submitted in partial fulfillment of the requirements for the award


of
MASTER OF BUSINESS ADMINISTRATION IN
BUSINESS LAW
Submitted by
Sunil B
to
Affiliated to

ACKNOWLEDGEMENT
First and foremost, I thank the Almighty God,my parents,teachers and
friends.

This project bears imprint of all those who have directly


or indirectly helped and extended their kind support in
completing this project. At the time of making this
project I express my sincere gratitude to all of them.

I express my profound gratitude to my project guide


Prof., my College Dean Mr.NEHERUJI for their constant
guidance and encouragement and very kind support and
valuable guidance in completing my project.

At this moment I also thank almighty, my Parents and


God for the blessings showed upon me and also my
Friends for their valuable suggestions.
I express my sincere thanks to the concerned people for granting
permission to conduct my project work in his esteemed concern
and for helping and providing various information and data.

STUDENTS DECLARATION
I, Mr.Sunil B hereby declare that the Project Work titled
NEGOTIABLE INSTRUMENTS is the original work of mine
and submitted to the South Asian University in partial fulfillment
of requirements for the award of Master of Business
Administration in BUSINESS LAW.
Date
Signature of
student

NEGOTIABLE INSTRUMENTS
Evolution & Revolution of Negotiable Instruments
which have Transformed the Commercial World into a
Virtual Single Global Peace

CONTENTS
Evolution Of Negotiable Instruments
What Are Negotiable Instruments
Types Of Negotiable Instruments
Difference Between Negotiable Instruments
Features Of Negotiable Instruments
Negotiation Of Commercial Paper
Exceptions Of Negotiable Instruments
E-Transfers
Indian Law Governing Foreign Instruments
Dishonor Of Negotiable Instruments
Negotiable Instruments Connects Global Peace
Case Studies
Fraud

Current Scenario
Summary
Bibliography

1. EVOLUTION OF TRADE AND COMMERCE LEADING TO


THE INTRODUCTION OF NEGOTIABLE INSTRUMENTS.

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- CERTAIN SURPLUS OF WEALTH
2- CERTAIN PROVISION FOR COMMUNICATION

Both of which are essential for growth of commerce. Unless there is a


surplus of wealth and provision for communication, commerce cannot
grow.
EXAMPLE- In the primitive economic society when each tribe or family
produced all that is needed and consumed all that it produced, need of
commerce did not and could not arise. Only after the division of labour
and consequent development of exchange, commerce began to grow.
Once it started growing, it spread its invisible thread throughout the
length and breadth of the world leading to its present day complex
mechanism. These stages may be summarized as follows:

1. NON EXISTENCE OF COMMERCE- In the early stage of economic life

of man division of labour scarcely existed. Man produced what he


needed and consumed all that he produced. Therefore commerce did
not exist in this stage.
2. TRADE IN THE FORM OF BARTER- In the second stage, 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
goods, i.e., Barter system. Thus this is the place from where commerce
may be said to have begun.
3. MONEY AS A MEDIUM OF TRADE AND TOWN AS THE CENTRE OF
TRADE- Commerce reached into its third stage of growth when money
was evolved as medium of exchange to remove the limitations of barter.
Introduction of money began led to the extension of division of labour
and specialization. People began to produce goods for certain local
markets. Thus, division of labour was extended to a locality. Gradually a
separate class of artisans and traders came into existence. They settled
down at fixed places which came to be known as towns.
Growth of these towns gave great stimulus to commerce. The
size of the market and the number of commodities exchanged in
the market, both increased. Traders from other countries brought
luxury articles, metals and ornaments for sale.

4. ECONOMY AND GROWTH OF COMMERCE- Commerce


continued to grow both in volume and space. After the decline of
Guild system, a new class of people, ENTERPRENEUR class, came
into existence. This class of people became a real intermediary
between the producers and consumers. Further, growth of
commercial enterprise took place. Trade began to assume fixed
forms. Production began to be undertaken for the markets extended
for the whole country. Division of labour received further impetus.
Production was divided into several branches and each branch

tended to be localized. Various economic activities came to be


clearly marked off into distinct groups:
A- AGRICULTURE
B- TRADE
C- COMMERCE.

WORLD ECONOMY AND THE WORLD MARKET- Commerce


entered into another stage of its growth when nations of the world
were brought into commercial relationships through the invisible
thread of trade. As a result of the geographical discoveries of the
late 15th, 16th and 17th centuries new trade routes were opened up
and commerce grew between nations. Now, in addition to the
local market and the trade extending over the whole area of a
single country, commodities came to be sold and purchased
between traders from different countries in the world. This gave
rise to an international world market and to the international
trade. Thus the nations of the world were linked together through
the medium of the world market.
Evolution of commerce is a never ending process. Almost every
day new experiments in its mechanism are made. New forms and
methods are being evolved in both socialist and capitalist
countries, in both developed and developing nations.

WHY WAS IT NECESARRY


INSTRUMENTS?

TO

INTRODUCE

NEGOTIABLE

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.

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

2.

WHAT ARE NEGOTIABLE INSTRUMENTS?


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.

Meaning of Negotiable Instruments


The concept of negotiability is one of the most important features of
commercial paper. A negotiable instrument is a written document, signed
by the maker or drawer, and containing an unconditional promise to pay (or
order to pay) a certain sum of money on delivery, or at a definite time, to
the bearer (or to the order).
To understand the meaning of negotiable instruments let us take a few
examples of day-to-day business transactions.

EXAMPLE
Suppose Pitamber, a book publisher has sold books to Prashant for Rs
10,000/- on three months credit. To be sure that Prashant will pay the
money after three months, Pitamber may write an order addressed to
Prashant that he is to pay after three months, for value of goods received
by him, Rs.10,000/- to Pitamber or anyone holding the order and
presenting it before him (Prashant) for payment. This written document has
to be signed by Prashant to show his acceptance of the order. Now,
Pitamber can hold the document with him for three months and on the due
date can collect the money from Prashant. He can also use it for meeting
different business transactions. For instance, after a month, if required, he
can borrow money from Sunil for a period of two months and pass on this
document to Sunil. He has to write on the back of the document an
instruction to Prashant to pay money to Sunil, and sign it. Now Sunil
becomes the owner of this document and he can claim money from
Prashant on the due date. Sunil, if required, can further pass on the
document to Amit after instructing and signing on the back of the
document. This passing on process may continue further till the final
payment is made.

In the above example, Prashant who has bought books worth Rs. 10,000/can also give an undertaking stating that after three month he will pay the
amount to Pitamber. Now Pitamber can retain that document with himself
till the end of three months or pass it on to others for meeting certain
business obligation (like with Sunil, as discussed above) before the expiry
of that three months time period.
You must have heard about a cheque. What is it? It is a document issued
to a bank that entitles the person whose name it bears to claim the amount
mentioned in the cheque. If he wants, he can transfer it in favour of
another person. For example, if Akash issues a cheque worth Rs. 5,000/ in favour of Bidhan, then Bidhan can claim Rs. 5,000/- from the bank, or he
can transfer it to Chander to meet any business obligation, like paying
back a loan that he might have taken from Chander. Once he does it,
Chander gets a right to Rs. 5,000/- and he can transfer it to Dayanand, if
required. Such transfers may continue till the payment is finally made to
somebody. In the above examples, we find that there are certain
documents used for payment in business transactions and are transferred
freely from one person to another. Such documents are called Negotiable
Instruments.

Thus, we can say negotiable instrument is a transferable document, where


negotiable means transferable and instrument means document. To
elaborate it further, an instrument, as mentioned here, is a document used
as a means for making some payment and it is negotiable i.e., its
ownership can be easily transferred.
Thus, negotiable instruments are documents meant for making payments,
the ownership of which can be transferred from one person to another
many times before the final payment is made.

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.

3.

Types of Negotiable Instruments

According to the Negotiable Instruments Act, 1881 there are just three
types of negotiable instruments i.e., promissory note, bill of exchange and
cheque. However many other documents are also recognized as
negotiable instruments on the basis of custom and usage, like hundis,
treasury bills, share warrants, etc., provided they possess the features of
negotiability. In the following sections, we shall study about Promissory
Notes (popularly called pronotes), Bills of Exchange (popularly called bills),
Cheques and Hundis (a popular indigenous document prevalent in India),
in detail.

i. Promissory Note
Suppose you take a loan of Rupees Five Thousand from your friend
Ramesh. You can make a document 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 instrument. Now Ramesh can personally present it before you
for payment or give this document to some other person to collect money
on his behalf. He can endorse it in somebody elses 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 Promissory
Note.
Section 4 of the Negotiable Instruments Act, 1881 defines a
promissory note as an instrument in 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 or to the bearer of the instrument.
Illustration
A signs instrument in the following terms
(a) "I promise to pay B or order Rs. 500."

(b) " I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on


demand, for value received."
(c) Mr. B, O U Rs. 1,000."
(d) I promise to pay B Rs. 500 and all other sums which shall be due to
him."
(e) I promise to pay B Rs. 500, first deducting there out any money which
he may owe me."
(f) " I promise to pay B Rs. 500 seven days after my marriage with C."
(g) " I promise to pay B Rs. 500 on D's death, provided D leaves me
enough to pay that sum."
(h) " I promise to pay B Rs. 500 and to deliver to him my black horse on 1st
January next."
The instruments respectively marked (a) and (b) are promissory notes. The
instruments respectively marked (c), (d), (e), (f), (g) and (h) are not
promissory notes.

Specimen of a Promissory Note


Rs. 10,000/-

New Delhi
September 25, 2002

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

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 amount stated 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 the above specimen if Ramesh endorses it in favour of
Ranjan and Ranjan also endorses it in favour 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.
(Endorsement means transfer of any document or instrument to another
person by signing on its back or face or on a slip of paper attached to it)

Features of a promissory note


Let us know the 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
someone writes I owe Rs. 5000/- to Satya Prakash, 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 sisters marriage, is not a
promissory note.
iv. It must contain a promise to pay money only. For example, if someone
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.
For example, if it is written three months after date I promise to pay
Satinder or order a sum of rupees Five Thousand only it is a promissory
note.
vii. The sum payable mentioned must be certain or capable of being made
certain. It means that the sum payable may be in figures or may be such
that it can be calculated.
(See specimen below).
Rs. 10,000/-

New Delhi
November 14, 2002

I, Ramesh , s/o Sadanand of Surat, Gujarat promise to pay Sashikant, s/o Sunil
Kumar of Ahmedabad, 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

ii. Bill of Exchange


Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer,
which Sameer has to return. Now, 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 after expiry
of a specified period. This document is called a Bill of Exchange, which can
be transferred to some other persons name by Tarun.
Section 5 of the Negotiable Instruments Act, 1881 defines a bill of
exchange as 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.

Specimen of a Bill of Exchange


Rs. 10,000/-

New Delhi
May 2,2001

Five months after date pay Tarun or (to his) order the sum of Rupees Ten
Thousand only for value received.
To

Accepted

Sameer

Sameer

Address

Stamp
S/d
Rajiv

Parties 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 made. He
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 Tarun.
The drawer can also draw a bill in his own name thereby he himself
becomes the payee. Here the words in the bill would be Pay to us or order.
In a bill where a time period is mentioned, just like the above specimen, is
called a Time Bill. But a bill may be made payable on demand also. This is
called a Demand Bill.

Features of a 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.
vi. The parties to a bill must be certain.

iii. Cheques

Cheque is a very common form of negotiable instrument. If you have a


savings bank account or current account in a bank, you can issue a
cheque in your own name or in favour of others, thereby directing the bank
to pay the specified amount to the person named in the cheque. Therefore,
a cheque may be regarded as a bill of exchange; the only difference is that
the bank is always the drawee in case of a cheque.
The Negotiable Instruments Act, 1881 defines a cheque as a bill of
exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand. Actually, a cheque is an order by the account
holder of the bank directing his banker to pay on demand, the specified
amount, to or to the order of the person named therein or to the bearer.

Specimen of a Cheque
......20.......
Pay..............................................................................................................
....................................................................................................... or
Bearer
Rupees

STATE BANK OF INDIA

Jawaharlal Nehru University, New Delhi 110067


MSBL

653003

110002056

Features of a cheque
Let us look into some important features of a cheque.

10

i. A cheque must be in writing and duly signed by the drawer.


ii. It contains an unconditional order.
iii. It is issued on a specified banker 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. It is always payable on demand.
vii. The cheque must bear a date otherwise it is invalid and shall not be
honoured by the bank.

Types of Cheque
Broadly speaking, cheques are of four types.
a) Open cheque, and
b) Crossed cheque.
c) Bearer cheque
d) Order cheque
Let us know details about these cheques.

a) Open cheque: A cheque is called Open when it is possible to get cash


over the counter at the bank. The holder of an open cheque can do the
following:
i. Receive its payment over the counter at the bank,
ii. Deposit the cheque in his own account
iii. Pass it to someone else by signing on the back of a cheque.

b) Crossed cheque: Since open cheque is subject to risk of theft, it is


dangerous to issue such cheques. This risk can be avoided by issuing
other types of cheque called Crossed cheque. The payment of such
cheque is not made over the counter at the bank. It is only credited to the
bank account of the payee. A cheque can be crossed by drawing two
transverse parallel lines across the cheque, with or without the writing
Account payee or Not Negotiable.
c) Bearer cheque: A cheque which is payable to any person who presents
it for payment at the bank counter is called Bearer cheque. A bearer
cheque can be transferred by mere delivery and requires no endorsement.
d) Order cheque: An order cheque is one which is payable to a particular
person. In such a cheque the word bearer may be cut out or cancelled
and the word order may be written. The payee can transfer an order
cheque to someone else by signing his or her name on the back of it.

There is another categorization of cheques which is discussed below:


Ante-dated cheques:- Cheque in which the drawer mentions the date
earlier to the date of presenting if for payment. For example, a cheque
issued on 20th May 2003 may bear a date 5th May 2003.
Stale Cheque:- A cheque which is issued today must be presented before
at bank for payment within a stipulated period. After expiry of that period,
no payment will be made and it is then called stale cheque. Find out from
your nearest bank about the validity period of a cheque.
Mutilated Cheque:- In case a cheque is torn into two or more pieces and
presented for payment, such a cheque is called a mutilated cheque. The
bank will not make payment against such a cheque without getting
confirmation of the drawer. But if a cheque is torn at the corners and no
material fact is erased or cancelled, the bank may make payment against
such a cheque.
Post-dated Cheque:- Cheque on which drawer mentions a date which is
subsequent to the date on which it is presented, is called post-dated

cheque. For example, if a cheque presented on 8th May 2003 bears a date
of 25th May 2003, it is a post-dated cheque. The bank will make payment
only on or after 25th May 2003.

iv. Hundis
A Hundi is a negotiable instrument by usage. It is often in the form of a bill
of exchange drawn in any local language in accordance with the custom of
the place. Sometimes it can also be in the form of a promissory note. A
hundi is the oldest known instrument used for the purpose of transfer of
money without its actual physical movement. The provisions of the
Negotiable Instruments Act shall apply to hundis only when there is no
customary rule known to the people.

Types of Hundis
There are a variety of hundis used in our country. Let us discuss some of
the most common ones.
1. Shah-jog Hundi: This is drawn by one merchant on another, asking the
latter to pay the amount to a Shah. Shah is a respectable and responsible
person, a man of worth and known in the bazaar. A shah-jog hundi passes
from one hand to another till it reaches a Shah, who, after reasonable
enquiries, presents it to the drawee for acceptance of the payment.
2. Darshani Hundi: This is a hundi payable at sight. It must be presented
for payment within a reasonable time after its receipt by the holder. Thus, it
is similar to a demand bill.

3. Muddati Hundi: A muddati or miadi hundi is payable after a specified


period of time. This is similar to a time bill.
There are few other varieties like Nam-jog hundi, Dhani-jog hundi,
Jawabee hundi, Jokhami hundi, Firman-jog hundi, etc.

4. A. Differences between Bill of Exchange & Promissory

Notes
Promissory Note
Bill of Exchange
1. It contains an unconditional promise.
1. It contains an unconditional order.
2. There are 2 parties the maker & the payee.

2. There are 3 parties the drawer, the drawee & the payee.
3. It is made by the debtor.
3. It is made by the creditor.
4. Acceptance is not required.
4. Acceptance by the drawee is a must.
5. The liability of the maker/drawer is primary & absolute.
5. The liability of the maker/drawer is secondary & conditional upon non-

payment by the drawee.

B. Distinction between a Cheque and a Bill of Exchange


Cheque

Bill of Exchange

1. It is drawn only on a banker.

1. It can be drawn on anybody including a banker.

2. The amount is always payable on

2. The amount is payable on demand or after a specif

demand.
3. It can be crossed to end its
negotiability.
4. Acceptance is not required.

5.

3. It cannot be crossed.
4. Acceptance is a must.

Features of Negotiable Instruments

After discussing the various types of negotiable instruments let us sum up


their features as under
i. A negotiable instrument is freely transferable. Usually, when we
transfer any property to somebody, we are required to make a transfer
deed, get it registered, pay stamp duty, etc. But, such formalities are not
required 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). Further, while
transferring it is also not required to give a notice to the previous holder.
ii. Negotiability confers absolute and good title on the transferee. It
means that a person who receives a negotiable instrument has a clear and
undisputable title to the instrument. However, the title of the receiver will be

absolute, only if he has got the instrument in good faith and for a
consideration. Also the receiver should have no knowledge of the previous
holder having any defect in his title. Such a person is known as holder in
due course. For example, suppose Rajiv issued a bearer cheque payable
to Sanjay. It was stolen from Sanjay by a person, who passed it on to
Girish. If Girish received it in good faith and for value and without
knowledge of cheque having been stolen, he will be entitled to receive the
amount of the cheque. Here Girish will be regarded as holder in due
course.
iii. A negotiable instrument must be in writing. This includes
handwriting, typing, computer printout and engraving, etc.
iv. In 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. For example, one cannot make a promissory note on
assets, securities, or goods.
vi. The time of payment must be certain. It means that the instrument
must be payable at a time which is certain to arrive. If the time is
mentioned as when convenient it is not a negotiable instrument. However,
if the time of payment is linked to the death of a person, it is nevertheless a
negotiable instrument as death is certain, though the time thereof is not.
vii. The payee must be a certain person. It means that the person in
whose favour the instrument is made must be named or described with
reasonable certainty. The term person includes individual, body corporate,
trade unions, even secretary, director or chairman of an institution. The
payee can also be more than one person.
viii. A negotiable instrument must bear the signature of its maker.
Without the signature of the drawer or the maker, the instrument shall not
be a valid one.
ix. Delivery of the instrument is essential. Any negotiable instrument
like a cheque or a promissory note is not complete till it is delivered to its

payee. For example, you may issue a cheque in your brothers name but it
is not a negotiable instrument till it is given to your brother.
x. Stamping of Bills of Exchange and Promissory Notes is mandatory.
This is required as per the Indian Stamp Act, 1899. The value of stamp
depends upon the value of the pronote or bill and the time of their
payment.

6.

Negotiation of Commercial Paper

Assignment
Negotiation
Endorsements
Four Common Types of Endorsements
Assignment Commercial paper that does not meet all of the requirements
of negotiability cannot be negotiated. It can only be transferred by
assignment, which is governed by the ordinary principles of contract law.

Negotiation Negotiation is the transfer of an instrument in such a form that


the transferee becomes a holder. A holder is a person who is in possession
of an instrument issued or indorsed to that person, to that person's order,
to bearer, or in blank.
Endorsements An instrument is endorsed when the holder signs it,
thereby indicating the intent to transfer ownership to another.
Endorsements may be written in ink, typewritten, or stamped with a rubber
stamp.
Blank Endorsements: A blank endorsement consists of the signature
alone written on the instrument.
Special Endorsements: A 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.

Restrictive Endorsements: A restrictive endorsement limits the rights of


the endorsee in some manner in order to protect the rights of the endorser.
An endorsement is restrictive if it is conditional.
Conditional Endorsement: A conditional endorsement, a type of
restrictive endorsement, makes the rights of the endorsee subject to the
happening of a certain event or condition.
Qualified Endorsements: A qualified endorsement is one in which words
have been added to the signature that limit the liability of the endorser.

7.

Exceptions

Under the Code, the following are not negotiable instruments, although the
law governing obligations with respect to such items may be similar to or
derived from the law applicable to negotiable instruments.
1.
2.
3.
4.

5.

8.

Letters of Credit, which are governed by Article 5 of the Code.


Bills of Lading and other documents of title, which are governed by
Article 7 of the Code.
Securities, such as Stocks & Bonds, which are governed by Article 8
of the Code.
Deeds & other documents conveying interests in real estate,
although a mortgage may secure a promissory note which is
governed by Article 3.
IOUs. relating to netting practices and domestic payments and
settlement systems.

E- Transfers

Electronic Funds Transfer Act


In 1995, the Reserve Bank had set up the Committee for Proposing
Legislation on Electronic Funds Transfer and other Electronic Payments
(Chairperson : Smt. K.S.Shere). The Shere Committee had recommended

a set of EFT Regulations by the Reserve Bank under the Reserve Bank of
India Act,1934 and amendment to the Bankers Books Evidence Act,1881
as short term measures and promotion of a few Acts like the Electronic
Funds Transfer Act, the Computer Misuse and Data Protection Act etc. as
long term measures. The Reserve Bank has already initiated steps for
framing of EFT Regulations. The Government of India have also initiated
steps for promoting Information and Technology Act, 1999 and
consequential amendments to the Reserve Bank of India Act, 1934, the
Bankers Books Evidence Act, 1881 etc.
The proposed Information Technology Bill, 1999 and Electronic Commerce
Bill, 1999 are intended to be general purpose legislation covering mainly
issues like secure electronic records and signatures, acceptance of digital
signatures, duties of certification authority, liability of network service
providers, computer crime and data protection. Both the bills deal with
electronic contracts and they are being promoted by the Government of
India primarily to facilitate introduction of Electronic Data Interchange in the
commercial sector. However, they are equally applicable for electronic
funds transfer already launched by the Reserve Bank and is going to be
increasingly resorted to by the user banks of the VSAT based network, the
INFINET. However, there is still a need for a separate Act for Electronic
Funds Transfer because certain transactional issues like payments finality,
rights and obligations of the parties involved in electronic funds transfer
etc. cannot be covered in general purpose bills like the proposed
Information Technology Bill or the proposed Electronic Commerce Bill. The
EFT Regulations being framed by the Reserve Bank would address only
the specific type of EFT system that the Reserve Bank would be involved
with as a service provider as also a regulator. The EFT Regulations would,
moreover, cover only credit transfer related transactions and not Debit
Clearing transactions. A separate legislation on the lines of Electronic
Funds Transfer Act of USA is, therefore, required which would be
consumer protection oriented and would at the same time address
transactional issues like execution of payment order, settlement finality,
etc.

The Reserve Bank has taken the help of a consultant in drafting a new
legislation on Electronic Funds Transfer System and proposing
amendment to the Reserve Bank of India Act 1934. The Committee, after a
careful examination of the issue, has endorsed the view that the proposed
Electronic Funds Transfer Act should cover all forms of electronic
payments. The Committee supports the view that the Reserve Bank, at an
appropriate time, considers operating the inter-bank payment systems
through an agency or subsidiary so that its regulatory role is rendered
distinct from its supervisory role. Retail payment systems such as the ECS
and the EFT Remittance Processing Scheme presently operational may be
managed by a group of large banks with country wide branch network and
technical capability, with settlement assistance from the Reserve Bank.
This would help the RBI to focus its efforts only on large value time critical
funds transfers to be settled on an RTGS basis. In the ongoing debate on
the role of central bank in payment systems, the trend is towards
distinguishing the central bank role as a regulator from that of service
providers which could be commercial banks themselves or the entities
under the control of commercial banks. The Committee has considered it
necessary that the legal framework for payment system takes into account
this international trend.
Admission of electronic files as evidence and preservation of
records:
The Shere Committee had discussed the issues of admitting electronic
files as evidence and of preserving electronic records and recommended
the need to amend the Bankers' Books Evidence Act, 1881 on the lines of
the Customs and Central Excise Laws (Amendment) Act, 1988 and Central
Excise and Salt Act, 1944 for the purpose. It is learnt that Government of
India is processing the draft Bill amending the Bankers Books Evidence
Act, 1881. This is a welcome development and would meet the legal
requirement of acceptance of contracts, documents etc. in electronic form
as evidence.
The Committee considered certain provisions of the proposed Electronic
Commerce Bill for admitting electronic records / signatures as evidence.
Clauses 9, 10, 11, 12 and 14 of this proposed Bill which are relevant in this

connection are given in Annexure 16 . It is worth mentioning that while


clauses 9, 10 and 11 of this Bill are based on the UNCITRAL Model Law,
clauses 12 and 14 are based on Singapore Electronic Transactions Act. As
and when the Electronic Commerce Bill is passed, these provisions will be
made applicable, ipso facto, to electronic funds transfer transactions as
well.
Funds Transfer through EFT Systems from Tax Compliance Angle
The Shere Committee had recommended that the Central Board of Direct
Taxes (CBDT) may be requested to take up the question of clarifying and,
if required, amending the relative provisions of the Direct Tax Laws like
Section 40A of the Income-Tax Act, 1961. The Committee however felt
that, for according the funds transfer under the EFT system the same
status of payment as one made by an A/c payee cheque, suitable
technology may have to be developed for treating such transfers as A/c
payee transfers. A mere recognition to that effect by the CBDT may not be
adequate to treat such transfer as A/c payee cheques. Legal provisions
need to be made if such recognition has to be given. The first test would
arise when paper instruments like cheques are used along with the use of
EFT system. So long as both the systems are in existence at the same
time, it would require either amendments to the Negotiable Instruments Act
or a separate legislation to deal with the matter.

Cheque Truncation
Cheque Truncation is a method of payment processing where under
movement of the paper instrument is truncated by substituting with
electronic transmission of the cheque details or data. The Shere
Committee had examined the legal issues pertaining to cheque truncation
and had indicated that the definition of presentment in the Negotiable
Instruments Act may have to be amended for adoption of cheque
truncation system in India. Under the Negotiable Instruments Act, 1881,
cheques would have to be presented for payment to drawee / drawer bank.

Without such presentment, no cause of action arises against the drawer. In


default of presentment of a cheque to the drawee for payment, other
parties to the cheque are not liable to the holder. It is by banking practice
and under the Uniform Rules and Regulations for Clearing Houses that
banks have agreed for presentment at any place other than the branch,
such as the clearing house. Besides, the implications of the definition of
payment in due course under the Negotiable Instruments Act, 1881 may
make it difficult for banks to introduce cheque truncation system simply by
agreement among themselves. The right of the paying bank to require
physical presentation and possession of the cheque are designed to
provide the bank with an opportunity to examine the signature and other
authentication of the cheque. This is meant essentially to protect the
interest of the drawer. Therefore, in UK, the cheque truncation system
started with customer consent agreements and was eventually introduced
after a fair degree of familiarization with imaging technology by the banks.
Thus, introduction of cheque truncation system may require adoption of a
fairly standardized imaging technology and appropriate amendments to the
Negotiable Instruments Act, 1881.

9.

Section 134 to 137 is of an International Law


and the said 4 sections read as follows:

134. Law governing liability of maker, acceptor or endorser of foreign


instrument.
In the absence of a contract to the contrary, the liability of the maker of
drawer of a foreign promissory note, bill of exchange or cheque is
regulated in all essential matters by the law of the place where he made
the instrument, and the respective liabilities of the acceptor and endorser
by the law of the place where the instrument is made payable.
Illustration
A bill of exchange was drawn by A California where the rate of interest is
25 per cent and accepted by B, payable in Washington where the rate of
interest is 6 per cent. The bill is endorsed in [India], and is dishonoured. An
action on the bill is brought against B in [India]. He is liable to pay interest
at the rate of 6 per cent, only; but if A is charged as drawer, A is liable to
pay interest at the rate of 25 per cent.
135. Law of place of payment governs dishonours.
Where a promissory note, bill of exchange or cheque is made payable in a
different place from that in which it is made or endorsed, the law of the
place, where it is made payable determines what constitutes dishonour
and what notice of dishonour is sufficient.
Illustration
A bill of exchange drawn and endorsed in [India], but accepted payable in
France, is dishonoured. The endorsee causes it to be protested for such
dishonour and gives notice thereof in accordance with the law of France
through not in accordance with the rules herein contained in respect of bills
which are not foreign. The notice is sufficient.

136. Instrument made, etc. out of India, but in accordance with the law of
India
If a negotiable instrument is made, drawn accepted or endorsed [outside
India], but in accordance with the [law of India], 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 subsequent
acceptance or endorsement made thereon [within India].
137. Presumption as to Foreign Law.
The law of any foreign country [***] regarding promissory note, bills of
exchange and cheques shall be presumed to be the same as that of
[India], unless and until the contrary is proved.

10
Dishonor
Instruments

Of

Negotiable

Complaints of cheque :
To answer in nutshell, a person desirous to initiate action under section
138 of Negotiable Instruments Act ("Complainant"), should ensure

following:
-The instrument is a cheque (and not any other instrument like bill of
exchange or promissory note)
-Complainant is a payee or holder in due course of a returned cheque
-The cheque should have been in discharge of debt or liability (and not gift
etc)
-The cheque should have returned for reasons "want of funds", a/c
closed or stopped payment
-Complainant should make out a prima facie case. Thereafter, the accused
has to prove absence of consideration
-Complainant should issue a demand notice within 30 days from the
Complainant's receiving information of return. the notice need not be
received by the accused (i.e. drawer of the cheque) within 30 days
-It is advisable to give demand notice only once by a single mode, say
registered ad letter
-Demand notice may cover more than one returned cheque
-Demand notice should demand the drawer to pay within 15 days from its
receipt by the drawer of the cheque
-Advisable to gather the date and evidence of receipt of demand notice by
the drawer of the cheque
-Cause of action arises on 16th day when the drawer of the cheque doesn't
pay within 15 days from the Drawers receiving or refusing demand notice

-Cause of action arises only once, though there can be several returns.
Hence advisable to give notice only when it is decided to file a complaint
-Complaint should be filed within 30 days from 16th day from the date of
receipt by Drawer of the Demand Notice
-If the last day of limitation for filing a complaint is a holiday, may file it on
the next working 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 cheque return of
their firm
-In case of a company, managing director/ deputy managing directors
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
-It is not necessary to make 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 Drawer.

BILLS OF EXCHANGE
Dishonor of the bill: when the bill of exchange is not accepted or not paid on
maturity the bill is said to have been dishonored. From the above it is clear that
the bill is dishonored on two accounts:
a. Dishonor by non-acceptance
b. Dishonor by non-payment
Dishonor by non-acceptance: when the drawee refuses to accept the bill, it
stands to be dishonored. The dishonor by-non-acceptance may have the
following reasons:
1. The drawee doesnt accept the bill within 24 hours of its receipt.
2. When the drawee is not entitled to accept it.
3. When the drawee is a fake person.

4. If the bill is to be conditionally accepted


5. When the drawee disappears.
6. In case there are many drawees, and all the drawees do not sign the bill.
Dishonor by Non-Payment: Another reason for the dishonor of a bill is its nonpayment at maturity the drawee may refuse to make the payment of the bill when
it is presented at maturity, this refusal gives rise to dishonor by nonpayment.
The dishonor affects all the parties to the bill. They include the drawer, all
endorse and endorse, who are all accountable and liable to the holder.

11.

Negotiable
peace

instruments

connects

global

A global world means different people, different culture, different


opinions, different understanding and different laws in every country. When
trade of goods and services started, problems also started taking up their
roles. The cases of payment problems were observed among the exporting
parties. Since the laws of different differ from each other, 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 making them go through stagnancy. A certain kind of
negotiation was required at an international level to make the road of trade
go smooth. There was indeed a need for a negotiable instrument which is
accepted by every law internationally.
Taking these factors into consideration The Negotiable Instrument
Act was passed. Negotiable instrument include promissory notes, Bills of
exchange and Cheque. These instruments had conditional and
unconditional undertakings signed by the maker. These instruments are
internationally accepted. It helped many countries who were going through
foreign exchange deficit.

Negotiable instrument helped exporters and importers of goods and

services to drag their defaulters to court.


A smooth flow of trade was observed after the introduction of

negotiable instruments.
Exporters 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.
Negotiable instruments play a vital role in the economic development of
every country with its significant features. One of the main features
includes that Negotiable instruments are freely transferable and while
transferring it is also not required to give a notice to the previous holder.
Negotiable instrument is always in writing so there is no fear of the drawee
backing off the instrument. Whereas 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. So it helps the complainant to get its judgment at the
earliest. The grievances regarding the negotiable instruments are taken at
the top priority as it directly affects the economy of the country. Each
country is trying hard to do the necessary amendments for making these
negotiable instruments run more smoother and efficiently so that the
growing economy grows with more pace and peace.

12.

Case studies

THE JVG SCANDAL


JVG's troubles started in June 1997, after the Securities and
Exchange Board of India (SEBI) asked JVG Finance to refund the
Rs 45 crore it had raised from a public issue in March 1997. A day
after the issue had opened, RBI issued a show-cause notice asking
why JVG Finance should not be barred from accepting deposits as
the group companies had already exceeded their deposit limits. By
the time RBI conditionally cleared the issue after assurances from
Sharma, the 70-day stipulated period for listing the shares had
passed. Because of the time-lapse, SEBI intervened and ordered
the refund of the public's money according to the allotment rules.
Sharma refused to refund the money to the investors and appealed
against the order to the Finance ministry.
He admitted that JVG had exceeded its limits while accepting
deposits but claimed that since December 1996 (much before the
RBI ban) it had stopped accepting deposits on its own and had even
given RBI an undertaking. RBI did not accept the argument and
barred the group from accepting any more public deposits. In
September 1997, post-dated cheques issued for principal as well as
interest on JVG's deposits bounced. Investors then complained to
the civil courts, consumer courts, Company Law Board and criminal
courts under the Negotiable Instruments Act 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 JVG group.
On a complaint filed by the RBI, the Delhi High Court ordered the
winding up of the company. The court also appointed an official
liquidator and said that the RBI did not consider the revival scheme
filed by the company viable. The RBI also filed criminal prosecution
petitions in the Metropolitan Magistrates' Courts in New Delhi.
RBI alleged that the company had accepted deposits worth Rs 88.82
crore which was 756.68% of its net owned fund. This was much

higher than the permissible limit of 25% [1]. Similarly, JVG Leasing
had received deposits worth Rs 19.28 crore which was 147.58% of
its net owned fund. The RBI complaint also said that the deposit
forms issued by the JVG Group did not contain any information
regarding premature withdrawals, which was necessary as per RBI
provisions. The companies had not provided any information about
the rate of interest to the investors on the receipts issued to them.
Further, the companies failed to submit their audited balance sheets
for the period ending March 31, 1994 and 1995 15 days after their
annual general meeting (AGM) and did not inform the RBI about the
changes in the composition of the board of directors.
RBI's petition also stated that the company had not maintained liquid
assets as required by section 45IB of the RBI Act, 1934. RBI further
contended that JVG Securities accepted public deposits through
JVG Leasing Ltd. and had illegally credited it to the account of JVG
Finance Ltd. Thus, JVG Securities facilitated collection of further
deposits by JVG Finance Ltd., a company which had already
accepted public deposits beyond the permissible limit in spite of the
warning from RBI not to accept any further deposits.

Advocate arrested in credit card fraud


case
Lawyers, police on warpath
Tribune News Service
Ludhiana,
April 28
The local police and the lawyers are heading for a showdown over the
issue of arrest of an advocate by the Division No 8 police in an alleged
credit card fraud case.
A verbal spat took place between a group of local lawyers and city
policemen at the Division No 8 police station when the policemen were
giving details about a credit card fraud allegedly committed by a city-based
advocate, a pickpocket and a former employee of a private telephone
company.
The police was claiming that it had arrested advocate Amarjit Singh of
Fauji Mohalla here on the basis of evidence along with Vikas, former

employee of a telephone company, for doing shopping worth over Rs 4


lakh from a stolen credit card of an NRI. The third accused was Sonu, an
alleged pickpocket, who had stolen the credit card. He was missing.
The credit card was stolen six months ago in November 2004 from GRD
Academy here where the Miss World Punjaban contest was being held.
The alleged victim, NRI Jaswinder Singh, was watching the show when his
pocket was picked.
However, a group of lawyers led by a former president of the District Bar
Association, Mr. Harish Rai Dhanda, 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 pay, he
was booked in a false case. The police have denied the allegations.
DSP Simratpal Singh Dhindsa stated at a press conference that the
accused had indulged in shopping using the stolen credit card from
showrooms of Adidas, Nike, Weekender, Tanishq, Titan and Sant Ram
Mangat Ram.
The police narrowed down on the accused after the complainant learnt that
the credit card was being misused.
However, Mr. Dhanda alleged that the lawyer was innocent and had been
falsely implicated in the case. He said the lawyer was tortured in police
custody. A group of lawyers later filed a complaint before a local Judge
against police torture and harassment.
Meanwhile, taking a tough stand against the arrest and the alleged
custodial torture of the advocate, the District Bar Association (DBA) has
demanded immediate suspension of the guilty policemen.
Mr. Rana Harjasdeep Singh, Secretary, DBA, said in a statement that they
had got the medical examination of the accused advocate conducted from
the Civil Hospital. A delegation of the DBA would meet the SSP tomorrow
and demand action against the SHO and other policemen of the Division
No 8 police station.
Former DBA president K.R. Sikri condemned the incident and termed it as
breach of trust and of an understanding reached between the lawyers and
a former DGP, Dr A A Siddiqui, last year that the police would take the DBA
into confidence before arresting an advocate in any case, except a rape or
a murder case.

13.

FRAUD

Within this specification by a negotiable instrument is meant a


cheque, a credit card, a debit card, a bond, a share certificate, an account
card, a travelers cheque, an electronic transfer, 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 unauthorized and/or
fraudulent dealing therewith by third parties.
Fraud in relation to the use of negotiable instruments is an international
problem. Many different forms of fraud that can result in the owner of a
negotiable instrument suffering a financial loss are known, with the
common element generally being that the negotiable instrument is
presented for serving as a payment for goods purchased, for converting its
value into cash, or for depositing its value into a third party account,
without authorization of the original owner or in a form in which it has been
fraudulently tampered with to the detriment of the original owner.
Although the invention as defined and described hereafter is directed
mainly at inhibiting fraud in relation to the use of cheques and credit
cards, 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.
For the sake of convenience and clarity, the original owner of a negotiable
instrument as herein envisaged shall merely be referred to as the owner of
the negotiable instrument who, in relation to certain negotiable
instruments such as cheques, promissory notes, and the like, will be the

person issuing such instruments, and in relation to other negotiable


instruments such as credit cards, will be the person who legally presents
such instruments in order to serve their intended purpose. The owner is
thus generally the person, whether a natural or a juristic person, who can
suffer a loss as a result of the unauthorized 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 who, for example, in relation
to cheques, and the like, generally will be a bank and particularly an
employee of a bank, and in relation to credit cards, 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 who, in
accordance with the present invention, is generally responsible for
ensuring that the owner of the negotiable instrument is not prejudiced.
The person presenting a negotiable instrument to the presentee shall
hereinafter merely be referred to as the presentor and, in practice, this
may be a legitimate person to whom the instrument has been issued or
who owns the instrument, or an illegitimate person who may be attempting
a fraudulent act and/or who is not authorized to present the instrument.
It will be appreciated that the various negotiable instruments as herein
envisaged can be associated with various different `types` of presenters
and presentees. Presentees need not necessarily be banks or vendors,
but may be any third party who generally deals with and/or who is
responsible for dealing with, 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 line, via the internet, or the like. 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
unit, as well as data processing means and data storage means that
permit processing of stored data and of data communicated to it, for
enabling the system of the invention as defined hereafter.
BRIEF SUMMARY OF THE INVENTION

According to the invention there is provided a system for inhibiting fraud


in relation to the use of negotiable instruments, which includes the steps
of:
the owners of negotiable instruments communicating with a central
communication and processing unit in order to register with the unit by
providing information, including at least identification numbers, linked
directly with the respective owners and information linked directly with
the negotiable instruments in respect of which fraud is to be inhibited,
each owner then being provided with an individual secret code by the unit;
and the presentees of negotiable instruments communicating with the
central communication and processing unit in order to register with the unit
by providing information, including at least identification numbers, linked
directly with the respective presentees, each presentee then being
provided with an individual secret code by the unit, and which includes,
in relation to each negotiable instrument to be issued or used by a
registered owner, the steps of:
the registered owner communicating with the central communication and
processing unit in order to authorize the negotiable instrument, by
identification via the identification number and the individual secret
code linked with the owner and by providing sufficient details in respect
of the negotiable instrument for subsequently permitting the instrument to
be verified, the unit then issuing an authorization code to be linked with
the instrument; and upon presentation of the authorized negotiable
instrument by a presentor to a presentee, the presentee communicating
with the central communication and processing unit in order to verify the
negotiable instrument, by identification via the individual secret code linked
with the presentee and providing the authorization code linked with the
instrument, 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 authorized 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 and, as such, includes an audio text electronic processing
system that permits verbal information to be converted into binary code,

and a processing and memory system linked 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. Alternatively, or in addition, the central communication and
processing unit may permit communication via the internet and, as such,
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.
Presentees registering with the unit also will provide the unit with any
other information, including at least their names, that will subsequently
permit the unit to identify a particular presentee that dealt with the
verification of a particular negotiable instrument.
Owners registering with the unit, insofar as the owners are natural
persons, may provide at least their names and their official identity
numbers. Insofar as owners are juristic persons such as registered
businesses, 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
unit, insofar as they wish to use the system for inhibiting fraud in
respect of negotiable instruments such as cheques rendered payable via
their bank accounts, to provide the unit with the name of each relevant
bank, the branch code associated with the said relevant bank and the
relevant bank account number.
Insofar 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 banks and linked to accounts, the system will provide
for such owners to provide the unit with the name of each relevant bank
and the card type, the number of each relevant card and the name of the
card owner that appears on the card.
Further according to the invention, the system may provide for the
registered owner of a cheque being issued by the owner, when authorizing
the cheque, to provide to the unit bank account details of the payee and
an identification number linked with the payee, the cheque number, the
amount indicated on the cheque and the name of the payee and, when
issued by the unit with an authorization code, to apply the code to the
cheque. In relation to an authorized cheque, the system may provide for

the presentee, upon being presented with an authorized cheque and in


order to verify the cheque, following the identification of the presentee to
the unit and the provision of the authorization code applied to the cheque,
for the unit to communicate to the presentee account details of a payee,
the identification number linked with a payee, a cheque number, an
amount and a payee name and if this information matches the information
applied to the cheque presented, to verify the cheque. Still further,
following verification of the cheque, the system may provide for the unit to
provide the presentee with a transaction code which must be applied by
the presentee to the cheque, 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 bank, upon authorizing a telephonic or
an online credit card transaction, for the owner to provide the unit with
the name of the bank that issued the card and the type of card, the card
number and the name of the card owner that appears on the card, and
when issued with an authorization code by the unit, to supply the code to
the vendor with whom the transaction is taking place to permit the vendor
as presentee to verify the credit card by communicating with the unit.
Still further according to the invention, the system may provide, when a
registered owner of a credit card issued by a bank presents as presentor
the card to a vendor as presentee, in order to perform a direct credit
card transaction, for the authorization 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 owner, in response to which the unit
provides the presentee a name of a bank that issued a card, a card
number and a name of a card owner and if this information matches the
information on the card as presented to the presentee, the card is both
authorized 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. Still further, 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.


It must be appreciated that the system of the invention as above defined
may be applied specifically also to the authorization and verification of
negotiable instruments not particularly in the form of cheques or credit
cards, by applying the same principles to those applied when authorizing
and verifying cheques or credit cards, and the system of the invention as
defined must be interpreted as such.
Inspite of all the inventions made to stop fraudulent practices, the
fraud keeps taking place . Every day we read in the news paper how
a credit card is stolen and easily used for making purchases by the
thief without the knowledge of the real owner. Then when making
payments online by credit card so many times the credit card number
gets hacked and then used by the hacker for making online
purchases .By the time the owner realizes the thief gets away by
making big purchases.
New laws and ways are being adopted for stopping fraudulent
practices but the best and the only way it can be kept under control is
by the owner of these negotiable instruments himself. He should be
careful and take all necessary precautions while using these
negotiable instruments .When making online payments one should
make sure later by calling his bank customer care and confirming
that only the transaction made by him is showing .In the event of
misuse/theft, one should immediately report to the concerned
authorities for stopping payment from that account

PRECAUTIONS TO BE TAKEN TO AVOID FRAUD

1. Keep an eye on your credit card every time you use it, and make sure
you get it back as quickly as possible. Try not to let your credit card out of
your sight whenever possible.
2. Be very careful to whom you give your credit card. Don't give out your
account number over the phone unless you initiate the call and you know
the company is reputable. Never give your credit card info out when you
receive a phone call. (For example, if you're told there has been a
'computer problem' and the caller needs you to verify information.)
Legitimate companies don't call you to ask for a credit card number over
the phone.
3. Never respond to emails that request you provide your credit card info
via email -- and don't ever respond to emails that ask you to go to a
website to verify personal (and credit card) information. These are called
'phishing' scams.
4. Never provide your credit card information on a website that is not a
secure site.
5. Sign your credit cards as soon as you receive them.
6. Shred all credit card applications you receive.
7. Don't write your PIN number on your credit card -- or have it anywhere
near your credit card (in the event that your wallet gets stolen).
8. Never leave your credit cards or receipts lying around.
9. Shield your credit card number so that others around you can't copy it or
capture it on a cell phone or other camera.
10. Keep a list in a secure place with all of your account numbers and
expiration dates, as well as the phone number and address of each bank
that has issued you a credit card. Keep this list updated each time you get
a new credit card.
11. Only carry around credit cards that you absolutely need. Don't carry
around extra credit cards that you rarely use.
12. Open credit card bills promptly and make sure there are no bogus
charges. Treat your credit card bill like your checking account -- reconcile it
monthly. Save your receipts so you can compare them with your monthly
bills.

13. If you find any charges that you don't have a receipt for -- or that you
don't recognize -- report these charges promptly (and in writing) to the
credit card issuer.
14. Always void and destroy incorrect receipts.
15. Shred anything with your credit card number written on it.
16. Never sign a blank credit card receipt. Carefully draw a line through
blank portions of the receipt where additional charges could be fraudulently
added.
17. Carbon paper is rarely used these days, but if there is a carbon that is
used in a credit card transaction, destroy it immediately.
18. Never 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).
19. Ideally, it's a good idea to carry your credit cards separately from your
wallet -- perhaps in a zippered compartment or a small pouch.
20. Never lend a credit card to anyone else.
21. If you move, notify your credit card issuers in advance of your change
of address.

14.

PRESENT SCENARIO OF NEGOTIABLE


INSTRUMENTS

Legal issues relating to electronic transaction processing at banks are


very many and the need to address them by amending some of the
existing Acts and by promoting legislation in a few hitherto unexpected
areas has assumed critical urgency. Necessary legislative support is

essential to protect the interests as much of the customers as of the


banks / branches in several areas relating to electronic banking and
payment systems. This is specially required to establish the credibility of
ECS and EFT schemes based on the electronic message transfer.
Since the Reserve Bank is embarking on large electronic schemes such
as the nationwide RTGS, it is time that efforts are made to bring about
necessary legislative framework that synchronizes and synthesizes with
the initiatives taken by the Government of India, Department of
Electronics for promotion of the Information Technology Bill, 1999 and /
or the Electronic Commerce Bill, 1999.

Need for Regulation / Legislation on Netting


There is a growing debate on the legality of netting in inter-bank 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. In fact, the issue gained critical
significance while examining the proposal for setting up of a foreign
exchange clearing and settlement system in India. The basic issue in
netting systems is that of the settlement risk and the systemic risks borne
by the participants if one or some of the participants fail to meet the
clearing liability. In case of funds transfers settled on a gross basis, the
parties involved are only two and principal risk if any, is only for the specific
transaction. But in multilateral netting systems where claims and
obligations accumulate over a period of time (called the clearing cycle),
incoming and outgoing payments are set off against each other. In case of
failure of a party in meeting the clearing liability, the methodology of
identifying the counter-parties / counterparts and determining the exposure
level becomes difficult. Although netting system is in vogue in India for all
inter-bank clearings by way of procedural details embodied in the Uniform
Rules and Regulations for Clearing Houses, it is necessary that the
provisions are made statutory. There is a need to amend Section 58 of the
Reserve Bank of India Act, 1934 with a view to enabling RBI to frame
specific regulations

15.

SUMMARY

The project on negotiable instruments starts with the evolution of trade and
commerce which in turn leads to the discovery of negotiable instruments.
We as a group working on this topic had curiosity on the need of
negotiable instruments in the market. Our research gave us an idea and an
overview of the evolution of trade and commerce as a whole which kept on
developing and growing bigger. We came across the different stages
through which trade and commerce went:
1. PASTORAL

STAGE where business was limited and survival by


breeding of animals was the main motto. The first stage had to do
nothing with money, people lived a nomadic life.

2. However man learned quickly to grow food for their own need which

can be termed as the AGRICULTURAL STAGE. The demand


increased for other commodities as well and thus BARTER SYSTEM
was introduced. This can be termed as the turning point of trade and
commerce.

3.

After this man never looked back. They started producing


specialized products which led to the introduction of HANDICRAFT
STAGE.

4. Then came the era in which people started to think about

development and thus formed groups to protect their rights, this was
known as the GUILD STAGE.
5. Then came the stage where technology was introduced and

business forms became complex, this is where the necessity of


introducing negotiable instruments were felt.
This was known as the FACTORY STAGE
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.
Now as we have come across the term negotiable instruments and why
it was evolved, lets now have a brief knowledge about negotiable
instrument.

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.
Types of Negotiable Instruments
- Promissory note
- Bill of exchange
- Cheque
- Hundi

1. Promissory note - 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 a certain person or to the bearer of the instrument.
2. Bill of exchange - 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.
3. Cheque - It is an order by the account holder of the bank directing his
banker to pay on demand the specified amount, to or to the order of the
person named therein or to the
bearer.
4. Hundi - It is form of a bill of exchange drawn in any local language in
accordance with the custom of the place.
Features of negotiable instruments are1. Free transferability
2. Absolute & good title
3. Always in written form
4. Unconditional order or promise for payment
5. Certainty of payment
6. Payee
7. Signature of the maker
8. Delivery of the instrument
9. Stamping of BOE & Promissory notes mandatory

Negotiation of Commercial paper


1. Assignment
2. Negotiation

3. Endorsements

Exceptions
1. Letters of Credit Article5
2. Bills of Lading and other documents of title Article7
3. Securities Article8
4. Deeds & other documents conveying interests in real estate

Article3
5. IOUs

BIBLOGRAPHY
1. damodaran.com
2. knowlegeworld.com

3. indialaw.com
4. casestudy.com
5. google.com

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