Page 156 - DMGT303_BANKING_AND_INSURANCE

Unit 8: Negotiable Instruments

be payable or demand or after a certain time. Section 32 of the Reserve Bank of India Act makes Notes
issue of such bills or notes punishable with fine which may extend to the amount of the instrument.
The effect or the consequences of these provisions are:
1. A promissory note cannot be made payable to the bearer, no matter whether it is payable
on demand or after a certain time.

2. A bill of exchange cannot be made payable to the bearer on demand though it can be made
payable to the bearer after a certain time.
3. But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a
person's account with a banker.

8.1 Meaning of Negotiable Instruments

To understand the meaning of negotiable instruments let us take a few examples of day-to-day
business transactions. 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.

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.

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