Page 157 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes 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".

Did u know? The Negotiable Instruments Act was enacted, in India, in 1881?

8.2 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.

8.2.1 Promissory Note

Suppose you take a loan of rupeess 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 else's 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'.

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

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