Negotiable Instrument (NI)

A negotiable instrument is a signed document with a promise to make payment of a specified sum to a specified individual or assignee, at a future date or on-demand. It is a formal agreement and a type of IOU (I Owe You). A negotiable instrument is transferable in nature which means that its benefits can be passed on from its original holder to a new holder. The person who shall be receiving the payment on account of a negotiable instrument is known as assignee or payee and his name should compulsorily be stated on the instrument. The final holder of a negotiable instrument shall take the funds at any future date or as per his requirements. This implies that the final holder shall have complete legal title to such an instrument. 

Features of Negotiable Instruments

1. The term “negotiable” in a negotiable instrument comes from the fact that these instruments are negotiable in nature. This implies that the final holder obtains a full legal title to the instrument.
2. Non-negotiable instruments are neither transferable nor can be altered in any other way. 
3. Negotiable instruments enable its holders to either take the funds or transfer to it another assignee. 
4. The entity or person issuing the instrument is known as the drawer of funds.
5. Being contractual in nature, negotiable instruments are signed by the issuer of the document.
6. The amount that the payor or issuer of document is promising to pay is indicated on the negotiable instrument and must be paid on demand or at a specified date.
7. Negotiable instruments are a promise to pay a specified amount and no other promise can be intended on part of the entity who is the issuing authority of the instrument.
8. The instrument in itself is a complete document which offers a legal right to the holder to obtain the payment. Besides that, no other instruction or condition can be imposed on the bearer to receive the amount stated in the negotiable instrument.
9. Negotiable instruments shall state all the relevant information amount, interest rate, date, and, most importantly, the signature of the payor.
10.  Common examples of negotiable instruments include cheques, money orders, and promissory notes.

The Negotiable Instruments (Amendment) Bill, 2017

The Negotiable Instruments (Amendment) Bill, 2017 was introduced in the Lok Sabha in the year 2018. The bill gives the legal definition of promissory notes, bill of exchange, and cheques. The bill also specifies penalties for dishonor of cheques and other violations related to negotiable instruments. If a cheque is dishonoured, the violator shall be liable to pay Rs 10,000 with interest up to 9%.

The Bill also has a provision which allows the court to order for interim compensation to people whose cheques have bounced due to dishonoring party. The limit for such interim compensation shall not exceed 20% of the total cheque value.

Objectives of the Negotiable Instrument Act 

• It facilitates the settlement of payments in business as they pass freely from holder to holder due to easy transferability of the value of instrument.
• It provides legal protection to different mercantile instruments.
• It presents orderly and authoritative statement of leading rules of law relating to a negotiable instrument.
• It provides for the special procedure in case the obligations which have to discharge under the instruments.
• It regulates the different types of negotiable instruments which include Promissory notes, Bills of Exchange, and Cheques.
• It explains the capacity and liabilities of the parties to the instrument.
• It provides the understanding of different topics under the Act that are negotiation, assignment, endorsement etc.
• It inculcates faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments.

Types of Negotiable Instruments

• Promissory notes

As the name suggests, a promissory note refers to a document with a promise between two parties, whereby one party, the payor, promises to pay the other party, the payee, a specified sum of money at a specified future date. As prescribed, promissory note is a negotiable instrument and shall contain all requisite information on the promissory note like, specified principal amount, interest rate, term length, date of issuance, and signature of the payor. In simple words, promissory notes state the amount that one party owes to the other party along with the applicable interest rate, if any, and the future date of payment.

Example: A purchases from B INR 10,000 worth of goods. In case A is not able to pay for the purchases in cash, he can issue a promissory note. The note shall state A’s promise to pay B on a specified date or on-demand. Since negotiable instruments are transferable in nature, so the feature can be used in case of a promissory note also. If there is a possibility that A already has a promissory note issued by C to him, A can endorse this note and transfer it to B and can clear his dues.

A promissory note is especially for individuals and corporations to obtain financing from an unsecured source that is other than a banking or financial institution. 

• Bill of exchange

Bills of exchange are legally binding, written document which states that one party shall pay a predetermined sum of money to the second party. 

A bill of exchange is used in transactions related to trade of goods as well as services. It is signed by a party who owes money, also known as payor and given to a party entitled to receive money, also known as the seller. Since it is transferable in nature, a bill of exchange could also be used to endorse it to a third party. A bill of exchange primarily acts as a promissory note in cases of international trade whereby the exporter of goods addresses a bill of exchange in the name of an importer or buyer. In most cases, a bank usually provides the guarantee for these payments so that neither of the party can cancel the transaction.

It is pertinent to note here that a bill of exchange when issued by a financial institution, it is referred to as a bank draft, and if it is issued by an individual, it is usually referred to as a trade draft. 

• Cheques

A cheque is a contractual document in writing, containing an unconditional order for the banker to make payment to the person who is the bearer of the cheque on his demand or any other person who is authorised to be given the payment under specific instructions. The banker only makes the payment when the cheque is duly signed by the person who has deposited money with the bank.

While technology has led to an increase in popularity as well as the use of online banking, cheques are used to pay all kinds of bills. Since online banking is quick and fast, cheques are relatively losing their significance since they are a slow mode of payment and takes a lot of time in processing and clearing.

Personal cheques are signed and authorized by someone who has deposited money with the bank and also specify the amount to be paid to the bearer along with the name of the bearer of the cheque.

• Money order

Money orders are also documents stating a promise to pay an amount to the holder of the order. They are issued by financial institutions and governments and are widely available, but they have a limit to the amount which can be paid to the holder of the order.

Money orders are bought, and the purchaser has to fill in the details of the recipient and the amount and sends the order to that person. Money orders contain relatively less personal information compared to cheques as they contain only the names and addresses.

• Traveler’s Cheques

Traveler’s cheques are negotiable instruments used as a form of payment by people in foreign countries as an alternative to the foreign currency.

Traveler’s checks are issued by financial institutions and an amount is fixed in advance. They follow a dual-signature method whereby the purchaser of the cheque has to sign the cheque once before using it and the second time while making the transaction. When the two signatures are matched, the financial institution will guarantee the payment to the payee. With these negotiable instruments, purchasers do not have to worry about carrying a lot of cash in foreign currency.

• Certificate of Deposit (CD)

A certificate of deposit (CD) is issued by a financial institution and banks that allow customers to deposit a certain amount for a fixed period of time and, in return, benefit from a significantly high-interest rate. Usually, in this case, the interest rate increases with the increase in tenure. The certificate of deposit is generally held until maturity and the cumulative interest and principal can be withdrawn. In many cases, fees is also charged as a penalty for early withdrawal.

CDs are widely popular among customers not only because of the high-interest rates that they offer but also because the interest rate is fixed throughout the course of the termo. 

Also Read: Banking Awareness: What is Priority Sector Lending?