Negotiable Instruments (Part II) PDF

Banking and Insurance Dr. Ruchi Jain Week 4_V2 Week 4 : Video...

Banking and Insurance Dr. Ruchi Jain Week 4_V2 Week 4 : Video 2 Negotiable Instruments (Part II) Dear Learners, Namaskar In the previous video, we gained knowledge about negotiable instruments and their features. In this video, we will discuss different types of negotiable instruments in detail. A negotiable instrument can be classified on the basis of law and usage. The first classification based on law states that the promissory Note, Bill of Exchange, and Cheque are all negotiable instruments, according to Section 13 of the Negotiable Instruments Act. The second type of categorization is usage-based. Trade customs and usage recognize certain instruments as negotiable instruments. Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts, Treasury bills, and railway receipts are examples of these instruments. Promissory Note: Let's discuss the classification based on law. The first component is the promissory note, which is also called Pronote. Section 4 of The Negotiable Instruments Act, of 1881, defines a promissory note as an instrument in writing (note being a banknote or a currency note) containing an unconditional © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 1  Banking and Insurance Dr. Ruchi Jain Week 4_V2 undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments. When deciding if a paper is a promissory note, the parties' intent is considered rather than just how the document looks. Let's understand with the help of an example. When a person "A" signs a promissory note, it can be depicted as “I promise to pay B on order Rs. 2000.” Or I acknowledge myself to be indebted to B in Rs 1,0000 to be paid on demand for the value received. Parties to a Promissory Note :Moving ahead, let's see the parties to a promissory note. The parties to a promissory note are the Debtor, Payee, Endorser, and Endorsee Debtor:The debtor is the person named as the maker in a promissory note. This is the person named in the note who promises to pay the specified sum. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 2  Banking and Insurance Dr. Ruchi Jain Week 4_V2 Payee:The payee, on the other hand, is the creditor, the person to whom the money is payable. The payee can also be the holder, the person to whom the note has been endorsed. Endorser:In terms of endorsement, when the note's holder transfers it to someone else, they become the 'Endorser. Endorsee : The person who receives the endorsed note is known as the 'Endorsee.' Dear friends we will discuss the endorsements in the subsequent videos in detail. Essential features of a Promissory Note: Now, let's examine the Essential features of a promissory note. 1) The first distinguishing feature is that the promissory note must be written rather than simply spoken. The writing medium, whether in ink, pencil, or printing, is adaptable, but it should not be changed easily. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 3  Banking and Insurance Dr. Ruchi Jain Week 4_V2 2) The second characteristic is an explicit promise to pay. A clear and unconditional promise to pay a predetermined amount must be included in the promissory note. The promise can be inferred from the document's context or implied by the words used. Statements such as "I owe you 10,000 rupees," "I am obligated to pay you 10,000 rupees," and "I'll pay whenever you ask" are not examples of promissory notes. Promissory notes, on the other hand, include statements like "I promise to pay Bhavya or order 10000 rupees." I acknowledge that I owe Richa 10,000 rupees, payable on demand, for the value received." 3) The third characteristic is that the promise to pay should be unconditional and not dependent on external events. Specific times or future events should not have an impact on the payment. Promissory notes, for example, do not contain statements such as "I promise to pay Ananya Rs 1000 after the rains this year," "I promise to pay Akash 10000 after marriage with Deepika," or "I promise to pay Anil 2000 when I get a good job." However, promissory notes can be as simple as "I promise to pay Aakash 10,000 ten days after his retirement." I promise to pay Divya Rs 2000 on her 20th birthday. 4) The fourth requirement is that the promissory note be signed by the maker or person making the promise. The signature can be in any form and placed on any part of the instrument, such as initials or a thumbprint. 5) The next feature is concerned with the certainty of the maker, payee, and amount. It specifies that the maker, payee, and amount must all be identified and specified. The maker must be certain because even if someone signs under a fictitious name, they are still liable if their true identity is revealed. In the case of the payee's certainty, the individual to whom the promise is made must be identified, either by name or by designation. Furthermore, the amount to be paid should be specific, and the promissory note should be clear about the payment. The promise to pay in money only, rather than goods or commodities, is the next feature of a promissory note. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 4  Banking and Insurance Dr. Ruchi Jain Week 4_V2 6) Another requirement is that the promissory note be properly stamped in accordance with the Indian Stamps Act, with each stamp properly cancelled. The following feature is related to other formalities in promissory notes: While additional information such as date, location, and consideration are common, they are not required by law. Bill of Exchange:The second type of negotiable instrument is a bill of exchange. So, let's take out the key concepts first. What is a bill of exchange? In simple terms, it's a written order, or financial document, used in trade transactions. Now, according to Section 5 of the Negotiable Instrument Act, a bill of exchange is an instrument in writing containing an unconditional order, signed by the maker or drawer, directing a certain person or the bearer to pay a certain sum of money. So, it's a written acknowledgment of debt written by the creditor and accepted by the debtor. In other words, a bill of exchange is used in business and trade transactions, particularly those conducted on credit terms between the seller and buyer of goods or services. Essential conditions of Bill of Exchange: Now, let's analyze the essential conditions for a bill of exchange: It must be in writing. It must be signed by the drawer. The parties drawer, drawee, and payee must be certain individuals. Proper stamping is required. It must contain an unconditional order to pay. The sum payable must be certain, and payment must be in legal tender. Now, consider these examples to distinguish bills of exchange from mere requests to pay: © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 5  Banking and Insurance Dr. Ruchi Jain Week 4_V2 If I say, "I shall be highly obliged if you make it convenient to pay Rs 10,000," Or, Richa, please let the bearer have one thousand rupees and place it in my account." So, these examples are not bills of exchange. Whereas, in the case of the bill of exchange: I will say," Please pay Rs. 5,000 to the order of 'Anil'." Or Aakash will oblige Mr. Sunil by paying to the order of Mahesh." Parties to Bill of Exchange: Now, let's see the parties to the bill of exchange. These are Drawer: The maker of the bill. Drawee: The person directed to pay by the drawer. Acceptor: The drawee who signs their assent to the bill. Payee: The person named in the instrument to whom the money is directed to be paid. Endorser: The holder who transfers the bill. Endorsee: The person to whom the bill is endorsed. Holder: The person legally entitled to possess the negotiable instrument. There are some parties in special roles; these are the drawee in cases of need and the acceptor of honor. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 6  Banking and Insurance Dr. Ruchi Jain Week 4_V2 Drawee in Case of Need: When an additional person is named to be resorted to in case of need, they are called the 'drawee in case of need.' If the original drawer refuses, the bill is considered dishonored only when this drawee refuses. Acceptor for Honor: If the original drawee refuses, any person not liable on the bill may accept it for the honor of a party liable. This person is termed the 'acceptor of honor.' Types of Bills of Exchange :Now, let's categorize bills based on various criteria: Inland and foreign bills are distinguished by location. Time and Demand Bills: Based on the time of payment. Trade and Accommodation Bills: Differentiated by the Nature of the Transaction. Inland and Foreign Bills First, we have inland and foreign bills. If the bill is both drawn and payable in the same country is called an Inland bill. Imagine you're in India, drawing a bill on someone in India—that's an inland bill. Whereas Foreign bills are issued when a bill is drawn in a country other than the one in which it is payable; as a result of foreign trade operations. For example, if you draw a bill outside India, say in London, and it's payable in India, that is a foreign bill. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 7  Banking and Insurance Dr. Ruchi Jain Week 4_V2 Time and Demand Bills :Moving on to time and demand bills If a bill is payable on sight or demand, that's a demand bill. No specific time was mentioned. On the flip side, if a bill is payable after a fixed period, we call it a time or usance bill. Now, let's explore this distinction in payment terms and timelines between demand and usance bills in detail. Instead of immediate cash payment, the drawee or buyer agrees to pay a specified sum to the payee, either on demand as in a demand bill upon presentation or at a future date as in a usance bill after acceptance. The drawee is only liable after accepting the bill and agreeing to the drawer's payment instructions. A demand bill is payable immediately upon presentation, whereas a usance bill is presented twice—once for acceptance and again on the due date. Demand bills must be paid immediately, while usance bills must be paid at a later date, incurring stamp duty and requiring acceptance by the drawee(s) for legal obligation. Trade and Accommodation bills Now, let's explore Trade and Accommodation bills. A bill is drawn and accepted for the course of a genuine business transactions.is called a trade bill. For instance, a wholesaler draws a bill on a retailer for goods sold on credit. On the other hand, an accommodation bill is drawn not for a trade transaction but without consideration as a financial favor, to some party. for example, a friend lending you some cash. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 8  Banking and Insurance Dr. Ruchi Jain Week 4_V2 Clean and Documentary Bills :Next is clean and documentary bills. Clean bills are those unaccompanied by any document. But in foreign trade, we often deal with documentary bills. It involves documents such as bills of lading, invoices, and so on. These bills can be D/A Bill or Documents against Acceptance. If the documents pass after the importer's acceptance, it is called Documents Against Acceptance. Whereas in D/P bill or Documents against Payment. A document is handed over after the importer's payment, then it is called a document against payment. In conclusion, bills of exchange are multifaceted instruments crucial for business and trade transactions. Dear friends Today, we've covered different aspects of promissory notes and bills of exchange. In the next video, we will discuss checks and other negotiable instruments. Till then, Stay tuned, and enjoy learning. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 9