Description
This is document explaining on the report of negotiable instruments.
Evolution and Revolution of Negotiable Instruments as Facilitators for Trade and Commerce and Its Journey 10 years henceforth
INDEX
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1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Introduction…………………………………………………………….3 Glossary of Unique Terms……………………………………..............4 What are Negotiable Instruments………………………………………5 Evolution of Negotiable Instruments…………………………………..7 Features of Negotiable Instruments……………………………………10 Types of Negotiable Instruments………………………………………13 Amendments to Negotiable Instruments Act…………………………..26 Liabilities, Rights of Parties involved in a Negotiable Instruments…...33 Future of Negotiable Instruments……………………………………...40 Recommendations and Conclusions…………………………………..51 Bibliography…………………………………………………………..54
1. Introduction
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The world as a whole has been the “cradle of commerce” because exchange is not only between individuals but also between individuals and nations. This naturally implies the existence of certain surplus of wealth and certain provision for communication. Both of which are essential for growth of commerce. Man produced what he needed and consumed all that he produced in the initial stages of economic life during which commerce did not exist. When he found himself with a surplus of some goods and deficient on some other goods, Barter system (exchange goods for goods) came into existence. Commerce reached to its next stage when money evolved as a medium of exchange to remove limitations of Barter. People began to produce goods and sell in the local markets. 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 international market and to international trade. Thus the nations of the world were linked together through the medium of the world market. 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. Hence, evolution of trade and commerce led to the introduction of 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.
2. Glossary of Unique Terms
Accused: A person against whom a criminal proceeding is initiated.
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Adesha: A Mauryan period bills of exchange Adjournment: Postponement of a court proceeding to another time. Affidavit: A written statement of facts, recorded under oath, before a judge or notary public. Board of Admiralty: Board that imposes and control laws which were applied to Indian trade between Babylon and China. Complainant: A person who initiates legal proceeding in the court, against another. Fraud: A wilful deception which results in financial injury to another person. Hearing: A court proceeding where the judges hear out the two parties. Magistrate: A judicial officer having the power to issue arrest warrants. Maritime law: Laws governing the trade in the Mediterranean ocean. Mauryan: A north Indian dynasty founded by Chandragupta Maurya. Prima Facie: A Latin word which means ‘on the face of it’. It is evidence sufficient to support a certain conclusion. Promissory note: A written document by which one person promises to pay money to another. Prosecution: Agency responsible for initiating proceeding in a criminal case, against the accused. Proceedings: Generally, the process of conducting judicial business before a court or other judicial officer. Rnapatra: Loan deed forms in ancient India. Sentence: The pronouncement by a court, of the punishment imposed on a person convicted of an offence. Summons: It is a written order of a court to any person, to appear before it. Transferor: Person possessing an asset Transferee: Person who receives an asset Trial: The hearing and determination of issues of fact and law, in a criminal case, in order to reach a disposition.
3. What is a Negotiable Instruments
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STATUTORY DEFINITION OF NEGOTIABLE INSTRUMENT - A “negotiable instrument” means a 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. Explanation (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. Explanation (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 [Section 13(1)]. 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 [Section 13(2)]. Thus a Negotiable instrument is a special type of contract for the payment of money that is unconditional and capable of transfer by negotiation. A negotiable instrument is not a contract, as contract formation requires an offer, acceptance, and consideration, none of which is an element of a negotiable instrument. Unlike ordinary contract documents, the right to the performance of a negotiable instrument is linked to the possession of the document itself (with certain exceptions such as loss or theft). The documents as promissory notes, bills of Exchange and cheques are instruments which are transferable from one person to another through negotiations came to be called as negotiable instruments. The Negotiable Instruments act was passed in 1881. The Act is to regulate commercial transactions and was drafted to suit requirements of business conditions then existing. The instrument is mainly an instrument of credit readily convertible into money and easily passable from one hand to another. Negotiable Instrument in Simple terms
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Suppose Y has 1000 gold coins and he purchased some goods and services from Mr X in exchange of 1000 gold coins. Now Mr Z being Mr X’s friend wants to purchase some goods and services from Mr Y but does not have gold coins, so he collects 1000 gold coins from his friend Mr. X and makes a promise to return back the coins with a note stating “I promise to pay Mr X 1000 gold coins”. Such a note becomes a promissory note. Now X comes across an exciting opportunity to buy goods from some S, Now that he has a promissory note from Z, he would write on the back of note as: ‘Mr Z Pay Mr S 500 gold coins Yours Mr X.’ The above written instrument involves three parties and is based on trust of Mr X on Mr Z came to be called as bills of Exchange. With further specialisations, people like Mr Y started to specialize in money markets by keeping the money of traders and giving it away as per their instructions. This concept further developed to become a bank. A bill exchange drawn from the bank as” Pay Mr S Rs.500” is called as cheques.
4. Evolution of Negotiable Instruments
The ancient Romans are believed to have used an early form of cheque known as praescriptiones in the first century BC. During the 3rd century AD, banks in Persia and other
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territories in the Persian Empire under the Sassanid Empire issued letters of credit known as ?akks. Muslims are known to have used the cheque or ?akk system since the times of Harun alRashid (9th century). In the 9th century, a Muslim businessman could cash an early form of the cheque in China drawn on sources in Baghdad, a tradition that was significantly strengthened in the 13th and 14th centuries, during the Mongol Empire. Indeed, fragments found in the Cairo Geniza indicate that in the 12th century cheques remarkably similar to our own were in use, only smaller to save costs on the paper. They contain a sum to be paid and then the order "May so and so pay the bearer such and such an amount". The date and name of the issuer are also apparent. Between 1118 and 1307, it is believed the Knights Templar introduced a cheque system for pilgrims travelling to the Holy Land or across Europe. The pilgrims would deposit funds at one chapter house, withdraw it from another chapter at their destination by showing a draft of their claim. These drafts would be written in a very complicated code only the Templars could decipher. Negotiable Instruments in India Payment instruments and mechanisms have a very long history in India. The earliest payment instruments known to have been used in India were coins, which were either punch-marked or cast in silver and copper. While coins represented a physical equivalent, credit systems involving bills of exchange facilitated inter-spatial transfers.
Early Punch-marked coin In ancient India, loan deed forms called rnapatra or rnalekhya were in use. These contained details such as the name of the debtor and the creditor, the amount of loan, the rate of interest, the condition of repayment and the time of repayment. The deed was witnessed by a person of respectable means and endorsed by the loan-deed writer. Execution of loan deeds continued during the Buddhist period, when they were called inapanna.
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In the Mauryan period, an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another. There are also numerous references to promissory notes. The loan deed continued into the Mughal period. The deeds were called dastawez and were of two types: dastawez-e-indultalab which was payable on demand and dastawez-e-miadi which was payable after a stipulated time. In the Mughal period, we have the testimony of foreign travelers regarding the use of bills of exchange in the then great commercial centers. From their writings, it may be noted that Indian bankers also issued bills of exchange on foreign countries, mainly for financing seaborne trade. These bills were widely accepted and were traded at high discounts, as the discounts included the insurance premium covering the risk representing safe arrival of goods. Another instrument in use during the Muslim period was the Pay order. Pay orders were issued from the Royal Treasury on one of the District or Provincial treasuries. They were called Barattes and were akin to present day drafts or cheques. The most important class of credit Instruments that evolved in India were termed Hundis. Their use was most widespread in the twelfth century, and has continued till today. In a sense, they represent the oldest surviving form of credit instrument. The princely states of India had their own distinct coins. An example of this was the Arcot Rupee coin struck by the Nawab of Arcot in the Madras Presidency. By 1740, the Europeans had secured the privilege of coining this rupee, and the coins came to be known as English, French and Dutch arcots. In 1835, the East India Company introduced the Company's Rupee to bring about uniformity of coinage over British India. Paper money, in the modern sense, has its origin in the late 18th century with the note issues of private banks as well as semi-government banks. Amongst the earliest issues were those by the Bank of Hindoostan, the General Bank in Bengal and Behar, and the Bengal Bank. Later, with the establishment of three Presidency Banks, the job of issuing notes was taken over by them. Each Presidency Bank had the right to issue notes within certain limits. The Bank of Bengal notes generally circulated within the environs of Calcutta and were mainly used for
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effecting large transactions. The largest proportion of the Bank of Bengal notes consisted of notes of Rs.100 and upwards. The notes sometimes bore a small premium, so great was the public confidence in the bank. The Paper Currency Act of 1861 conferred upon the Government of India the monopoly of Note Issue bringing to an end note issues of private and Presidency Banks. The private banks and the Presidency Banks introduced other payment instruments in the Indian money market. Cheques were introduced by the Bank of Hindoostan, the first joint stock bank established in 1770. Post Bills were introduced by the British in 1827. These were Inland Promissory notes issued by the bank on a distant place, the holder of which would be paid on acceptance after a specified number of days (seven days' sight or thirty days' sight) and were similar to muddati hundis. These bills had a much smaller currency than bank notes, mainly because the government refused to authorize their receipt in payment of public dues. They were mainly used by European businessmen for purposes of internal remittances. In 1833, cash credit accounts were added to the Bank of Bengal's array of credit instruments. The bank used to grant loans against the security of Company's paper, bullion, plate, jewels or goods of non-perishable nature or goods not liable to great alteration in their value up to a limit of 1 lakh sicca rupees.
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5. Features of Negotiable Instruments
I. A negotiable instrument is freely transferable:
The principal characteristic of a negotiable instrument, and that which makes it pass freely as a substitute for money, is that in the hands of a third party who purchases it in good faith and for value before it is due, it is enforceable, while the original holder, perhaps could not enforce it for the reason that the party who made the instrument has a good defense or counterclaim. As soon, however, as an innocent purchaser comes into possession of it for value he cannot be prevented from collecting because of any defenses existing between the original parties. In other contracts the purchaser acquires only the right of the party from whom he buys, but in the case of negotiable instruments, he may acquire a better title than the original holder. II. The instrument must be negotiable in form :
The instrument must be payable to ‘Order’ or ‘Bearer’. If made payable to only a particular person, then it is not a negotiable instrument; falls under the rules governing a simple contract. In other words, the intent of the party making the instrument to execute a negotiable paper must appear by some express words showing such a purpose. III. 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 Amar issued a bearer cheque payable to Shashank. It was stolen from Shashank by a person, who passed it on to Vishal. If Vishal 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 Vishal will be regarded as ‘holder in due course’. As per section 118(e), endorsements appearing on the negotiable instrument are presumed to have been made in the order in which they appear on the instrument, unless contrary is proved. [There is no mandatory provision to put date while signing, though advisable to do
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so]. Section 118(d) provides that there is presumption that the instrument was negotiated before its maturity, unless contrary is proved. As per section 60, Bill can be negotiated even after date of maturity by persons other than maker, drawee or acceptor after maturity. However, person getting such instrument is not ‘holder in due course’ and does not enjoy protections available to ‘holder in due course’.
IV.
A negotiable instrument must be in writing:
This includes handwriting, typing, computer printout and engraving, etc. No oral contract can be negotiable. The handwriting can be executed with any substance or tool as pencil, ink, and pen. There was a case in UK involving an action on promissory note. The defense was that the endorsement to plaintiff was made in lead pencil and that such endorsement was not within the term ‘writing’ as required by the law and custom of merchants. The court held that the writing was sufficient. When the law requires an instrument to be written, it does not require the writing to be in any particular mode or to be done with any particular material.
V.
A negotiable instrument must involve unconditional order:
In every negotiable instrument there must be an unconditional order or promise for payment. VI. A negotiable instrument must involve definite amount of money:
The instrument must involve payment of a certain sum of money only and nothing else. The amount must be definite and certain. For example, one cannot make a promissory note on assets, securities, or goods. VII. 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.
VIII.
The payee must be a certain person:
It means that the person in whose favor the instrument is made must be named or described with reasonable certainty. The term ‘person’ includes individual, body corporate, trade
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unions, even secretary, director or chairman of an institution. The payee can also be more than one person. IX. 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. It is usual to place the signature at the close of the instrument, but if it shown that it is meant for a signature, it may be placed on any other part. X. 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 brother’s name but it is not a negotiable instrument till it is given to your brother. XI. 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 pro-note or bill and the time of their payment. Stamp duty on Bill of Exchange and Promissory Note is a Union Subject. Hence, stamp duty is same all over India.
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6. Types of Negotiable Instruments
According to the Negotiable Instruments Act, 1881 there are just three types of negotiable instruments i.e., promissory note (popularly called pronote), bill of exchange (popularly called bill) and cheque. Apart from these three, many other documents are also recognized as negotiable instruments on the basis of custom and usage, like hundis (a popular indigenous document prevalent in India), demand draft, travelers, treasury bills, share warrants, etc., provided they possess the features of negotiability. Letters of credit, bills of lading, securities etc., are not negotiable instruments. 1. 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 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’. 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.
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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 Address…….. Sd/ Sanjeev Stamp
Parties to a Promissory Note There are primarily two parties involved in a promissory note. They are as follows:
•
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.
•
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
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•
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.
•
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 • A promissory note must be in writing, duly signed by its maker and properly stamped as per Indian Stamp Act. • 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’, then it is not a promissory note. • The promise to pay must not be conditional. For example, if it is written ‘I promise to pay Suresh Rs 5,000/- after my sister’s marriage’, then it is not a promissory note. • It must contain a promise to pay money and money alone. For example, if someone writes ‘I promise to give Suresh a Maruti car’, then it is not a promissory note. • • The parties to a promissory note, i.e. the maker and the payee must be certain. 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’, then it is a promissory note. • 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.
Specimen of promissory note
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Rs. 10,000/-
New Delhi November 14, 2002
I, Ramesh , s/o Sadanand of Surat, Gujarat promise to pay Sashikant, s/o Sunil only) with interest at the rate of 10 percent per annum, for value received. Sd/- Ramesh Stamp To Sashikant Ahmedabad, Gujarat
Kumar
of Ahmedabad, Gujarat or order, on demand, the sum of Rs 10,000/- (Rupees Ten Thousand
2. 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 person’s 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/Negotiable Instruments
New Delhi
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May 2,2001 Five months after date pay Tarun or (to his) order the sum of Rupees Ten Thousand only for value received. To Sameer Address Accepted Sameer Stamp S/d Rajiv
Parties to bill of exchange There are three parties involved in a bill of exchange. They are as follows:
•
The Drawer – The person who makes the order for making payment. In the above specimen, Rajiv is the drawer.
•
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.
•
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 • A bill must be in writing, duly signed by its drawer, accepted by its drawee and properly stamped as per Indian Stamp Act. • It must contain an order to pay. Words like ‘please pay Rs 5,000/- on demand and oblige’ are not used. • The order must be unconditional.
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• • •
The order must be to pay money and money alone. The sum payable mentioned must be certain or capable of being made certain. The parties to a bill must be certain.
3. 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. Cheque evolution The cheque had its origins in the ancient banking system, in which bankers would issue orders at the request of their customers, to pay money to identified payees The ancient Romans are believed to have used an early form of cheque known as praescriptiones in the first century BC. During the 3rd century AD, banks in Persia and other territories in the Persian Empire under the Sassanid Empire issued letters of credit known as ?akks. Features of a cheque •
•
A cheque must be in writing and duly signed by the drawer. It contains an unconditional order. It is issued on a specified banker only. The amount specified is always certain and must be clearly mentioned both in figures and words.
• •
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• • •
The payee is always certain. It is always payable on demand. The cheque must bear a date otherwise it is invalid and shall not be honoured by the bank.
Specimen of a Cheque ………......20....... Pay…….............................................................................................................. ……....................................................................................................... or Bearer Rupees……………………………………………… …………………………………………………… STATE BANK OF INDIA Jawaharlal Nehru University, New Delhi – 110067 MSBL 653003 110002056 10
Types of Cheque Broadly speaking, cheques are of four types. a) Open cheque b) Crossed cheque c) Bearer cheque d) Order cheque 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: • Receive its payment over the counter at the bank.
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• •
Deposit the cheque in his own account. Pass it to someone else by signing on the back of a cheque.
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’. Types of crossing Crossing may be either (1) General - to mean as where a cheque bears across its face an addition of the words
'and company' or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either with or without the words 'not negotiable', that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally. (2) Special - implies the specification of the name of the banker on the face of the cheque
The object of special crossing is to direct the drawee banker to pay the cheque only if it is presented through the particular bank mentioned therein. Thus, it makes the cheque system still safer. Not Negotiable Crossing • A person who takes such a cheque shall not have and shall not be capable of giving a better title to the cheque than that which the person, from whom he took it in the first instance, had. Thus, by including the words 'not negotiable', the cheque is deprived of its special feature of negotiability. A bank, therefore, should be extra careful in paying such cheques.
Account Payee Crossing (A/c Payee Crossing) • An A/c payee crossing signifies that the drawer intends the payment to be credited only to the payee’s account and in none else. The addition of 'A/c payee' to a crossing has no legal
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sanctity and the paying banker may ignore such a direction without being liable for any damages. Not Negotiable, A/c Payee Crossing • The instrument is rendered not negotiable (making the 'paying banker' responsible to see that payment is made to the person who is entitled to receive it) plus A/c payee crossing directs the collecting banker to collect it for the payee only. Who can cross a cheque? • A cheque may be crossed by any of the following:
1. The drawer of a cheque. 2. The holder of a cheque. 3. The Banker, in whose favor the cheque has been crossed specially. 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. 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 as follows: 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’. 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
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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, that 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.
4. 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 customs 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.
Hence, Hundi’s were used as remittance instruments (to transfer funds from one place to another) as credit instruments (to borrow money [IOUs]), for trade transactions (as bills of exchange).
Types of Hundis
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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 on due date after the muddat to a person with credit. This is similar to a time bill. 4. Nam-jog hundi: A nam jog hundi is payable to the person whose name is started on the body of the instrument. 5. Dhani-jog hundi: A dhani jog hundi is payable to the person who purchases it. 6. Jawabee hundi: A jawabi hundi is payable only after the maker gives his consent in writing. 7. Jokhami hundi: A jokhami hundi is payable only in the event of arrival of goods. 8. Firman-jog hundi: A firman jog hundi is payable according to the firman (Order) of its maker. There are few other varieties like Dekhanhar, Nishan Jog, Peth, Zickri Chit or Tickri Chit etc. Characteristics of Hundi • Hundis payable to a specified person or order are negotiable with our endorsement by the payee. • • A holder is entitled to sue on a hundi without an endorsement in his favor. A hundi accepted by the drawee can be negotiated without endorsement.
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•
If a hundi is lost, the owner can claim a peth (duplicate) or perpeth (triplicate) from the drawer and present it to the drawee for payment.
•
Interest above 6% per annum can be charged where usage is established. Market rate of interest is payable according to usage.
5. Demand drafts The Demand Draft is a pre-paid Negotiable Instrument, wherein the drawee bank undertakes to make payment in full when the instrument is presented by the payee for payment. The demand draft is made payable on a specified branch of a bank at a specified centre. In order to obtain payment, the beneficiary has to either present the instrument directly to the branch concerned or have it collected by his / her bank through the clearing mechanism.
6. Travelers cheque
Travelers cheques are a secure and convenient alternative to carrying cash. These are prepaid instruments available in fixed denominations. The holder of the Travelers cheque is required to sign the instrument upon purchase and again in the presence of the merchant establishment at the time of making payment or realizing proceeds thereof. Travelers cheques can be replaced if they are lost or stolen at no additional cost. Travelers cheques are available in both domestic and international currency.
Differences between Bill of Exchange & Promissory Notes
Promissory Note 1. It contains an unconditional promise. 2. There are 2 parties – the maker & the payee.
Negotiable Instruments
Bill of Exchange 1. It contains an unconditional order. 2. There are 3 parties – the drawer, the drawee & the payee.
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3. It is made by the debtor. 4. Acceptance is not required. 5. The liability of the maker/drawer is primary & absolute.
3. It is made by the creditor. 4. Acceptance by the drawee is a must. 5. The liability of the maker/drawer is secondary & conditional upon nonpayment by the drawee.
Differences between a Cheque and a Bill of exchange
Cheque 1. It is drawn only on a banker.
Bill of Exchange 1. It can be drawn on anybody including a banker.
2. The amount is always payable on demand. 3. It can be crossed to end its negotiability. 4. Acceptance is not required.
2. The amount is payable on demand or after a specified period. 3. It cannot be crossed.
4. Acceptance is a must.
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7.
Amendments to Negotiable Instruments Act
Changes made by Amendment Act, 2002 to the Negotiable Instruments Act, 1881 (For section 6 of the Negotiable Instruments Act, 1881 (26 of 1881) (hereinafter referred to as the principal Act), the following section shall be substituted) Substitution for new section for section 6 Definition of ‘cheque’ and related provisions in respect of cheque amended to facilitate electronic submission and/or electronic clearance of cheque. Corresponding changes were also made in Information Technology Act. Cheque - A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. Electronic Cheque - Provisions of electronic cheque has been made by Amendment Act, 2002. As per Explanation I(a) to section 6, ‘A cheque in the electronic form’ means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed by a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system. Truncated Cheque - Provisions of electronic cheque has been made by Amendment Act, 2002. As per Explanation I(b) to section 6, ‘A truncated cheque’ means a cheque which is truncated during the clearing cycle, either by the clearing house during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. Clearing house - The expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognized as such by the Reserve Bank of India.’ Amendment of section 64 (Section 64 of the principal Act shall re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-section shall be inserted)
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Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification: Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment is made accordingly. Amendment of section 81 (Section 81 of the principal Act shall be re-numbered as subsection (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted) • Where the cheque is an electronic image of a truncated cheque, even after the payment the banker who received the payment shall be entitled to retain the truncated cheque. • A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who paid the instrument, shall be prima facie proof of such payment. Amendment of section 89 (Section 89 of the principal Act shall be re-numbered as subsection (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted) • Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image. • Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same. Amendment of section 131 (In section 131 of the principal Act, Explanation shall be renumbered as Explanation I thereof, and after Explanation I so re-numbered, the following Explanation shall be inserted)
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Explanation II - It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care. Amendment of section 138 - In section 138 of the principal Act, • for the words “a term which may be extended to one year”, the words “a term which may be extended to two years” shall be substituted; (that means provision for imprisonment upto 2 years against present one year) • in the proviso, in clause (b), for the words “within fifteen days”, the words “within thirty days” shall be substituted (that means period for issuing notice to drawer increased from 15 days to 30 days). Amendment of section 141 - In section 141 of the principal Act, in sub-section (1), after the proviso, the following proviso shall be inserted, Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter (that means Government Nominee Directors excluded from liability). Amendment of section 142 - In section 142 of the principal Act, after clause (b), the following proviso shall be inserted, Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period (that means court empowered to take cognizance of offence even if complaint filed beyond one month). Insertion of new sections after section 142 - After section 142 of the principal Act, the following sections shall be inserted, 143. Power of Court to try cases summarily.
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1. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), all offences under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials: Provided that in the case of any conviction in a summary trial under this section, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand rupees (that means summary trial procedure permitted for imposing punishment upto one year and fine even exceeding Rs 5,000). Provided further that when at the commencement of, or in the course of, a summary trial under this section, it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the said Code. 2. The trial of a case under this section shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing.
3. Every trial under this section shall be conducted as expeditiously as possible and
an endeavor shall be made to conclude the trial within six months from the date of filing of the complaint. 144. Mode of service of summons 1. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), and for the purposes of this Chapter, a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session (that means summons can be issued by speed post or courier service).
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2. Where an acknowledgement purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorized by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the Court issuing the summons may declare that the summons has been duly served (that means summons refused will be deemed to have been served). 145. Evidence on affidavit 1. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), the evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions be read in evidence in any enquiry, trial or other proceeding under the said Code. 2. The Court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the facts contained therein (that means evidence of complainant through affidavit permitted). 146. Bank’s slip prima facie evidence of certain facts - The Court shall, in respect of every proceeding under this Chapter, on production of bank’s slip or memo having thereon the official mark denoting that the cheque has been dishonored, presume the fact of dishonor of such cheque, unless and until such fact is disproved (that means bank’s slip or memo indicating dishonour of cheque will be prima facie evidence unless contrary proved). 147. Offences to be compoundable - Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), every offence punishable under this Act shall be compoundable. The amendments have been made effective from 6-2-2003.
Dishonor of cheque The main object of this piece of legislation is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. Section 138, THE NEGOTIABLE INSTRUMENTS ACT 1881 is intended to prevent dishonesty on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in his account
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maintained by him in a bank and induces the payee or holder in due course to act upon it. The dishonour of cheque is now a criminal offence punishable by imprisonment up to one year or with fine up to the double the amount of dishonoured cheque or with both. Five basic ingredients of section 138 1) Cheque should have been drawn in payment of a legal liability to discharge the existing debt. Cheque given by way of gift would not come under this provision. 2) The cheque should be presented within the validity period i.e. within six months or three months as the case may be. 3) Return memo by the drawer bank to the drawee bank and vice-versa, reporting that the cheque got unpaid is must. 4) Giving notice to the drawer of the cheque by the drawee within 15 days (amended to 30 days by the 2002 amendment) of the receipt of the information from the drawee bank that the cheque got dishonored. 5) The drawer of the cheque fails to make the payment of the said amount of money to the holder within 15 days of the receipt of the said notice.
Dishonour of the bill When the bill of exchange is not accepted or not paid on maturity the bill is said to have been dishonoured. From the above it is clear that the bill is dishonoured on two accounts: a. Dishonour by non-acceptance b. Dishonour by non-payment
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c. Dishonour by non-acceptance: when the drawee refuses to accept the bill, it stands to be dishonoured. The dishonour by-non-acceptance may have the following reasons:
• • •
The drawee doesn’t accept the bill within 24 hours of its receipt. When the drawee is not entitled to accept it. When the drawee is a fake person. If the bill is to be conditionally accepted When the drawee disappears. In case there are many drawees, and all the drawees do not sign the bill.
• • •
Dishonour by Non-Payment: Another reason for the dishonour of a bill is its non-payment at maturity the drawee may refuse to make the payment of the bill when it is presented at maturity; this refusal gives rise to dishonour by non-payment. The dishonour affects all the parties to the bill. They include the drawer, all endorse and endorse, who are all accountable and liable to the holder.
8. Liabilities and Rights of Parties involved in a Negotiable Instrument
Rights of the Holder
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• •
The holder of a negotiable instrument may sue thereon in his own name and payment to him in due course discharges the instrument. A holder in due-course is a holder who has taken the instrument under the following conditions: 1. That it is complete and regular upon its face. 2. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact. 3. That he took it in good faith and for value. 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. • • Where an instrument payable on demand is negotiated an unreasonable length of time Where the transferee receives notice of any infirmity in the instrument or defect in the
after its issue, the holder is not deemed a holder in due course. title of the person negotiating the same before he has paid the full amount agreed to be paid there for, he will be deemed a holder in due course only to the extent of the amount thereto for paid by him. • The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. • To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. • A holder in due course holds the instrument free from any defect of title or of prior parties and free from defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. • In the hands of any holder other than a holder in due course, a negotiable instrument is
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subject to the same defenses as if it were non-negotiable. But the holder who derives his
Negotiable Instruments
title through a holder in due course, and who is not himself a party to any fraud or duress or illegality affecting the instrument, has all the rights of such former holder in respect to all parties prior to the latter. • Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course. But the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. Liabilities of the holder • The maker of a negotiable instrument by making it engages that he will pay it
according to its tenor, and admits the existence of the payee and his then capacity to indorse. • The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse, and engages that on due presentment the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation limiting his own liability to the holder. • The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance and admits: 1. The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and 2. The existence of the payee and his then capacity to indorse. • A person placing his signature upon an instrument otherwise than as maker, drawer or
acceptor is deemed to be an indorser, unless he clearly indicated by appropriate words his intention to be bound in some other capacity. • Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser in accordance with the following rules: 1. If the instrument is payable to the order of a third person he is liable to the payee and to all subsequent parties.
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2. If the instrument is payable to the order of the maker or drawer, or is payable to dearer, he is liable to all parties subsequent to the maker or drawer. 3. If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. • Every person negotiating an instrument by delivery or by a qualified endorsement,
warrants: 1. That the instrument is genuine and in all respects what it purports to be. 2. That he has a good title to it. 3. That all prior parties had capacity to contract. 4. That he has no knowledge of any fact which would impair the validity of the instrument, or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision three of this section does not apply to persons negotiating public or corporate securities, other than bills and notes. • Every indorser not an accommodating party who indorses without qualification,
warrants to all subsequent holders in due course: 1. The matters and things mentioned in subdivision one, two, three and four of the next preceding section; and 2. That the instrument is at the time of his endorsement valid and subsisting. And, in addition, every indorser engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.
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• •
Where a person places his endorsement on an instrument negotiable by delivery he As respects one another, indorser are liable prima facie in the order in which they
incurs all the liabilities of an indorser. indorse, but evidence is admissible to show that as between or among themselves they have agreed otherwise. Joint payees or joint indorses who indorse are deemed to indorse jointly and severally. Where a broker or other agent negotiates an instrument without endorsement, he incurs all the liabilities prescribed by section sixty-five of this Act, unless he discloses the name of his principal, and the fact that he is acting only as agent.
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
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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%. 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.
•
CASE NO.: Appeal 1066 of 2001 (Special Leave Petition 969 of 2001)
PETITIONER: K.N. BEENA Vs. RESPONDENT: MUNIYAPPAN AND ANOTHER.. DATE OF JUDGMENT: 18/10/2001
The Appellant filed a complaint under Section 138 of the Negotiable Instruments Act as the cheque dated 6th April, 1993 in a sum of Rs.63720/-, issued by the 1st First Respondent in favor of the Appellant on Central Bank, had been dishonored with the remarks "Insufficient Funds". The Appellant had issued a legal notice dated 28th April,
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1993. Receipt of the said notice is admitted. A reply dated 21st May, 1993 was sent by the 1st Respondent. However no payment was made. After trial the Judicial Magistrate-II, Kumbakonam, convicted First Respondent under Section 138 and directed payment of a fine of Rs.65000/-. In default the 1st Respondent was to suffer simple imprisonment for one year. The 1st Respondent challenged the conviction and sentence by filing Criminal Appeal No. 32 of 1995. The same came to be dismissed by the Sessions Judge on 28th August, 1995. The 1st Respondent then preferred Criminal Revision No. 883 of 1995 before the High Court of Madras. A learned Single Judge, by the impugned Order dated 20th July, 2000, set aside the conviction and acquitted the 1st Respondent. The learned Judge acquitted the 1st Respondent on the ground that the Appellant had not proved that the cheque dated 6th April, 1993 had been issued for any debt or liability. In our view the impugned Judgment cannot be sustained at all. The Judgment erroneously proceeds on the basis that the burden of proving consideration for a dishonored cheque is on the complainant. It appears that the learned Judge had lost sight of Sections 118 and 139 of the Negotiable Instruments Act. Under Sections 118, unless the contrary was proved, it is to be presumed that the Negotiable Instrument (including a cheque) had been made or drawn for consideration. Under Section 139 the Court has to presume, unless the contrary was proved, that the holder of the cheque received the cheque for discharge, in whole or in part, of a debt or liability. Thus in complaints under Section 138, the Court has to presume that the cheque had been issued for a debt or liability. This presumption is rebuttable. However the burden of proving that a cheque had not been issued for a debt or liability is on the accused. This Court in the case of Hiten P. Dalal vs Bratindranath Banerjee reported in (2001) 6 S.C.C. 16 has also taken an identical view. In this case admittedly the 1st Respondent has led no evidence except some formal evidence. The High Court appears to have proceeded on the basis that the denials/averments in his reply dated 21st May, 1993 were sufficient to shift the burden of proof onto the Appellant/Complainant to prove that the cheque was issued for a debt or liability. This is an entirely erroneous approach. The 1st Respondent had to prove in the trial, by leading cogent evidence, that there was no debt or liability. The 1st Respondent not having led any evidence could not be said to have discharged the burden cast on him. The 1st Respondent not having discharged the burden of proving that the cheque was not issued for a debt or liability, the
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conviction as awarded by the Magistrate was correct. The High Court erroneously set aside that conviction. In this view of the matter the impugned Judgment is set aside. The conviction and sentence as awarded by the Magistrate by his order dated 21st March, 1994, stand. The 1st Respondent is granted one months’ time to pay the fine. In default thereof he shall suffer simple imprisonment for 3 Months. The fine, if realized, Rs.60,000/- there from shall be paid to the Complainant as compensation. The Appeal stands disposed of accordingly. There will be no Order as to costs.
9. Future of Negotiable Instruments
Biometric Scanning Technologies – Finger, Facial and Retinal Scanning The word “biometrics” comes from the Greek language and is derived from the words bio (life) and metric (to measure). It includes fingerprints, voice patterns, hand measurements, irises and others, all used to identify human characteristics and to verify identity. These biometrics or characteristics are tightly connected to an individual and cannot be forgotten, shared, stolen or easily hacked. These characteristics can uniquely identify a person, replacing
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or supplementing traditional security methods by providing two major improvements: personal biometrics cannot be easily stolen and an individual does not need to memorize passwords or codes. Since biometrics can better solve the problems of access control, fraud and theft, more and more organizations are considering biometrics a solution to their security problems. However, biometrics is not a panacea and has some hurdles to overcome before gaining widespread use.
Finger Scanning Technology Fingerprinting or finger-scanning technology is the oldest of the biometric sciences and utilizes distinctive features of the fingerprint to identify or verify the identity of individuals. Fingerscan technology is the most commonly deployed biometric technology used in a broad range of physical access and logical access applications. All fingerprints have unique characteristics and patterns. A normal fingerprint pattern is made up of lines and spaces. These lines are called ridges while the spaces between the ridges are called valleys. It is through the pattern of these ridges and valleys that a unique fingerprint is matched for verification and authorization. These unique fingerprint traits are termed “minutiae” and comparisons are made based on these traits. On average, a typical live scan produces 40 “minutiae”. The Federal Bureau of Investigation (FBI) has reported that no more than 8 common minutiae can be shared by two individuals. Finger scanning technology is primarily used by Law Enforcing agents for identification. This is used by Banks for Authorization of Transactions, in Computer Network Access, as an Entry Device for Building door locks, in Grocery Stores to automatically recognize registered customers and bill their Credit/Debit Cards, in Subsidized meal programs for recognition of enrolled students and in many such places.
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The advantages of Finger Scanning Technology are high rate of accuracy due to uniqueness of each finger print, the size of memory required to store the biometric template is fairly small, easily deployable in a range of environments and easy to use devices. The only shortcoming is the change in fingerprint characteristics over a period of time. Facial Scan Technology Another biometric scan technology is facial recognition. This technology is considered a natural means of biometric identification since the ability to distinguish among individual appearances is possessed by humans. Facial scan systems can range from software-only solutions that process images processed through existing closed-circuit television cameras to full fledged acquisition and processing systems, including cameras, workstations, and backend processors. With facial recognition technology, a digital video camera image is used to analyze facial characteristics such as the distance between eyes, mouth or nose. These measurements are stored in a database and used to compare with a subject standing before a camera. Facial recognition systems are usually divided into two primary groups. First there is what is referred to as the ‘controlled scene’ group whereby the subject being tested is located in a known environment with a minimal amount of scene variation. In this case, a user might face the camera, standing about two feet from it. The system locates the user's face and performs matches against the claimed identity or the facial database. It is possible that the user may need to move and reattempt the verification based on his facial position. The system usually comes to a decision in less than 5 seconds. The other group is known as the “random scene” group where the subject to be tested might appear anywhere within the camera scene.
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This situation might be encountered within a system attempting to identify the presence of an individual within a group or crowd.
The advantages of Facial Scan Technology are: technology is capable of identification of individuals at a distance and without their awareness, static images can be used to enrol on a subject and thus shortens the time required to enrol a targeted population. The drawbacks of Facial Scan Technology would be the difficulties involved in matching due to sharp angles being involved, the requirement of face to be properly lit-up, changes in hairstyle, make-up or other accessories may pose a problem during the verification process, poor record in verifying a subject who has had a plastic surgery to alter their appearance, it can cause privacy abuse. Retinal Scan Technology Retina-scan technology makes use of the retina, which is the surface on the back of the eye that processes light entering through the pupil. Retinal Scan technology is based on the blood vessel pattern in the retina of the eye. The principle behind the technology is that the blood vessels at the retina provide a unique pattern, which may be used as a tamper-proof personal identifier. Since infrared energy is absorbed faster by blood vessels in the retina than by surrounding tissue, it is used to illuminate the eye retina. Analysis of the enhanced retinal blood vessel image then takes place to find characteristic patterns. Retina-scan devices are used exclusively for physical access applications and are usually used in environments that require high degrees of security such as high-level government military needs.
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The Retina Scan Technology can be used in high end security applications, controlling access to areas or rooms in military installations/ government buildings, power plants, airports, research laboratories, high risk places and in bank facilities. The advantages of this technology are that it is more accurate than finger prints, prevents identity theft or fraud, retinal scanners are not subject to dirt/finger misplacements and they have extremely low false positive rates. The drawbacks of Retinal Scan Technology are: susceptibility to disease damage, viewed as intrusive and not very user friendly, high amount of both user and operator skill required and may be easily breached using a high resolution facial picture Hand Geometry Hand geometry relies on measurements of the width, height, and length of the fingers, distances between joints, and the shape of knuckles. Using optical cameras and light-emitting diodes that have mirrors and reflectors, two orthogonal, two-dimension images of the back and the sides of the hand are taken. Based on these images, 96 measurements are then calculated and a template created. Most hand readers have pins to help position the hand properly. These pins help with consistent hand placement and template repeatability, so there is a low false positive rate and a low failure to match rate.
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Hand Geometry Technology finds its uses in record attendance at multinationals within a short period of time, access control in industries requiring to safe guard their process, International Airports and Ports to control access of staff in restricted areas The advantages of Hand Geometry Technology are: it is very accurate in identification, not as intrusive as other technologies; it is difficult to spoof someone’s hand shadow without his cooperation Voice Recognition Voice recognition technology identifies people based on the differences in the voice resulting from physiological differences and learned speaking habits. When an individual is enrolled, the system captures samples of the person's speech as the individual says certain scripted information into a microphone or telephone multiple times. This information is known as a "pass phrase." (There are also biometric systems available that can distinguish between people's voices without requiring a predefined phrase.) The pass phrase is then converted to a digital format and distinctive characteristics (e.g., pitch, cadence, tone) are extracted to create a template for the speaker. Voice recognition templates require the most data space of all the biometric templates. Voice recognition technology can be used for both identification and verification. Voice Recognition Technology finds uses in gadgets and devices such as mobile phone for security features. The advantages of this technology are: it requires minimal training for the operators and it is inexpensive and very Non-Intrusive. The drawback is that it is quite unreliable and does not work well in noisy environment
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Voice Recognition E-Commerce Electronic commerce, commonly known as (electronic marketing) e-commerce or eCommerce, consists of the buying and selling of products or services over electronic systems such as the Internet and other computer networks. The amount of trade conducted electronically has grown extraordinarily with widespread Internet usage. The use of commerce is conducted in this way, spurring and drawing on innovations in electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. E-Commerce can be used in any situation where any activities can be done, electronically. It is the application of new technologies to existing business processes and practices, resulting in companies conducting business better. E-Commerce can help improve business processes and information flows by enabling you to communicate with other businesses faster and more efficiently. E-Commerce systems can operate all day every day and it provides access to the global marketplace. The Internet spans the world, and it is possible to do business with any business or person who is connected to the Internet. Simple local businesses such as specialist record stores are able to market and sell their offerings internationally using e-commerce.
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However, there are certain drawbacks of this system. E-commerce is often used to buy goods that are not available locally from businesses all over the world, meaning that physical goods need to be delivered, which takes time and costs money. When you walk out of a shop with an item, it's yours. In some respects e-commerce purchases are made on trust. This is because, firstly, not having had physical access to the product, a purchase is made on an expectation of what that product is and its condition. Secondly, because supplying businesses can be conducted across the world, it can be uncertain whether or not they are legitimate businesses and are not just going to take your money.
Mobile Banking Mobile (also known as M-Banking, mbanking, SMS Banking etc.) is a term used for performing balance checks, account transactions, payments etc. via a mobile device such as a mobile phone. Mobile banking today is most often performed via SMS or the Mobile Internet but can also use special programs called clients downloaded to the mobile device. The biggest advantage that mobile banking offers to banks is that it drastically cuts down the costs of providing service to the customers. Additionally, this new channel gives the bank ability to cross-sell up-sell their other complex banking products and services such as vehicle loans, credit cards etc.
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Plastic Money Plastic money is the alternative to the cash or the standard 'money'. Plastic money is used to refer to the credit cards or the debit cards that we use to make purchases in our everyday life. Plastic money is much more convenient to carry around as you do not have to carry a huge sum of money with you. It is also much safer to carry it along or to travel with it as if it is stolen one can consult the bank whose service you are using and get it blocked hence saving your money from getting stolen or even lost.
Digital Cheque Digital Cheques is a secure payment system created for the issue and control of company cheque payment. Designed as chip and pin solution for corporate cheques. Digital Cheques is a Windows based system, password protected for security. System helps define different user permissions, providing increased control by assisting the separation of duties. This allows purchase ledger preparation, cheque print approval, signature application and audit reporting to be carried out, if required by different people.
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Cheque Truncation Cheque Truncation Solution is a big milestone in the Indian banking industry. It enables cheque clearing on the same day, reducing floating time available for funds. Truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch. In the CTS the presenting bank captures the data & images of the cheques using their Capture System which is internal to them. The banks send the captured images and data to the central clearing house for onward transmission to the payee/drawee banks which then processes the data and arrives at settlement figures before forwarding it to payee/drawee bank. It is the responsibility of the drawee bank Capture System to process the inward data and images and generate the return file for unpaid instruments. USE OF BIO METRICS BY UAE The United Arab Emirates (UAE) has found iris recognition to be an effective overt security means for preventing expelled foreigners from re-entering the country. The UAE faced a situation in which an expelled foreigner would return to his or her home country and legally change his/her name, date of birth, and address--all descriptors traditionally used to screen individuals entering the country. Since the new identity would not be on any of the traditionally maintained, name-dependent lists, government agents would admit the banned individual to the UAE. To counter this problem, the UAE began developing a biometric system that could be used to scan all individuals arriving in the country and determine whether the person is banned from entering. The UAE's specifications for the system included using a biometric that did not change over time; could be quickly acquired; was easy to use; could be used in real time; is safe and non-invasive; and which could be scaled in the millions. The UAE determined that iris recognition technology was the only technology that produced a single-person match in a sufficiently short period of time to meet its needs. As of March 4, 2004, the UAE had enrolled 355,000 irises. It enrols approximately 600 new irises per day. Over 6,220 expelled foreigners have been caught trying to re-enter the UAE, which averages to about 30 individuals caught per day. There have been over 1,613,000 searches of the database so far, with no false matches. A statistical analysis of the program
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suggests that the likelihood of a false positive match is less than 1 in 80 billion--in other words, effectively impossible. The UAE has found iris recognition technology easy to use. There have been no failures to acquire an iris scan; the system is regularly used by people unfamiliar with or unskilled in the technology, and in transit areas. The UAE is now considering creating a unified Arab list. The country is also considering a similar system to identify all individuals. Currently, the UAE identity cards are smart cards that contain fingerprints, and the UAE is considering including a person's iris code in the near future. Iris codes may also be placed on passports. The UAE's experience with iris recognition technology is that biometrics enhances the nation's security. LEGAL Issue in the use of Bio Metrics • • • • • Human Rights groups and some other organisations have been arguing that the use of Bio-Metrics instruments is a breach of privacy of individuals. Bio-Metrics such as Face Scanning are conducted without the consent of individuals. Encryption of Bio-Metric images has raised the security concerns. The possible misuse of private data collected through Bio-Metrics. Health impacts due to regular exposure to radiation emitted by such applications.
Moving Towards E-Commerce
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As a sign of people moving to electronic mode of fund transfer, the number of cheques processed in 2008-09 fell 5 per cent after growing at 7 per cent and 11 per cent in the past two years, respectively. According to data released by the Reserve Bank of India (RBI) in its annual report, 1.14 billion cheques were processed in 2008-09, using Magnetic Ink Character Recognition (MICR) compared to 1.20 billion in 2007-08. Retail electronic transactions grew 28 per cent to 280 million in 2008-09. Real Time Gross Settlement (RTGS), an electronic means of transferring funds of over Rs 1 lakh, saw a 27 per cent growth in transactions in 2008-09 to 35.2 million from 27.7 million in 2007-08.
Value (Rs cr)
ITEM
Volume (' 000s)
Volume (' 000s)
Value (Rs cr)
YEAR
2007-08
2008-09
2007-08
2008-09
RTGS
5,840
13,366
2,73,18,330
3,22,79,881
MICR Clearing Retail Electronic Clearing
12,01,045
11,40,492
60,28,672
58,49,642
2,18,800
2,80,610
9,71,485
4,16,419
Cards
3,16,509
3,87,215
70,506
83,903
10.
Recommendations
Recommendations and Conclusions
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Legal issues relating to electronic transaction processing at banks are 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. Suggestions 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 counterparties / 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 In spite 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
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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.
Conclusion Trade and commerce has evolved over the years. Transaction complexity, among people or societies or industries or nations is taking new shape in this new era. As we have seen till date, for transactions to take place faster and a smooth operation of business activities, we think, new forms of negotiable instruments will also get evolved in future. For example, from an old era Hundis to current era of cheques, promissory notes etc. to future era of emerging technologies like biometrics, facial, retina scanning, negotiable instruments will keep evolving with new innovations. But so are the risks and frauds associated with that. So laws and acts assume an importance against future forms of frauds. The implementation of biometric technologies for increasing national security raises numerous practical and policy questions. It is critical that the right type of technology is chosen to meet the purpose and privacy requirements of a specific use. In order for biometric systems to provide security, it is necessary that people not have a false sense of security about them. The weaknesses and flaws of the technologies must be acknowledged and countermeasures need to be considered. The systems cannot be seen as the ultimate security tool, and thus the perfect solution. Rather biometrics (in one layer or many) are simply another tool in a layered approach to security. They are not a panacea--but they can play an important role in protecting and should not be demonized as unacceptable technology. Cheques though a traditional medium of transaction would continue to be used due to the unique advantage of being able to issue post dated cheques which may not be possible in case
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of e-commerce. Cheques require few hours to clear; however this also gives it a unique advantage to the issuer of being able to stop the processing in case of misplacing cheques. The current laws and provisions related to the negotiable instruments have been fabricated in such a manner, so as to avoid any kind of fraudulent activities through the laws. These laws clearly define the liabilities of a drawer or maker of a negotiable instrument so that he doesn’t indulge in any wrong intentions and so that the holder or the payee knows his rights and liabilities that the payer owes to him. There have been various amendments during the past years and will continue to be as new and breakthrough cases continue to appear before the judiciary which need to give sometimes, breakthrough judgements, creating new laws and provisions. We have travelled from Hundis to cheques to plastic money to bio-metric identification and this never ending journey will continue as long as the commerce and trade develops.
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11.
Bibliography
• • •
• •
Legal business Environment: Akhilesh Phatak Banking in India: By Masood Ahmed Khan Commercial Law: By Darwin Curtis Gano Reserve bank Of India www.rbi.orghttp://chddistrictcourts.gov.in/THE NEGOTIABLE INSTRUMENTS %20ACT.pdf
• • • • •
http://www.nos.org/Secbuscour/17.pdfhttp://www.vakilno1.com/bareacts/negoinstruact/negoinstruact.htmlhttp://www.dateyvs.com/gener10.htmlhttp://indiacode.nic.in/incodis/whatsnew/Negotiable.html Milteades Leonidou, (2002), Iris Recognition: Closer Than We Think? -http://www.sans.org/rr/paper.php?id=143
•
Zeena Marchant, Biometrics: Fingerprint Authentication, SANS Reading Room, -http://rr.sans.org/authentic/fingerprint.php
• • • •
Rejman-Greene, M., (2002). Secure Authentification Using Biometric Methods. The Daily Telegraphhttp://www.marcbowles.com/sample_courses/amc/ec1/ec1_3.htmhttp://www.rediff.com/money/2008/feb/21inter.htm
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doc_336002694.doc
This is document explaining on the report of negotiable instruments.
Evolution and Revolution of Negotiable Instruments as Facilitators for Trade and Commerce and Its Journey 10 years henceforth
INDEX
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1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Introduction…………………………………………………………….3 Glossary of Unique Terms……………………………………..............4 What are Negotiable Instruments………………………………………5 Evolution of Negotiable Instruments…………………………………..7 Features of Negotiable Instruments……………………………………10 Types of Negotiable Instruments………………………………………13 Amendments to Negotiable Instruments Act…………………………..26 Liabilities, Rights of Parties involved in a Negotiable Instruments…...33 Future of Negotiable Instruments……………………………………...40 Recommendations and Conclusions…………………………………..51 Bibliography…………………………………………………………..54
1. Introduction
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The world as a whole has been the “cradle of commerce” because exchange is not only between individuals but also between individuals and nations. This naturally implies the existence of certain surplus of wealth and certain provision for communication. Both of which are essential for growth of commerce. Man produced what he needed and consumed all that he produced in the initial stages of economic life during which commerce did not exist. When he found himself with a surplus of some goods and deficient on some other goods, Barter system (exchange goods for goods) came into existence. Commerce reached to its next stage when money evolved as a medium of exchange to remove limitations of Barter. People began to produce goods and sell in the local markets. 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 international market and to international trade. Thus the nations of the world were linked together through the medium of the world market. 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. Hence, evolution of trade and commerce led to the introduction of 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.
2. Glossary of Unique Terms
Accused: A person against whom a criminal proceeding is initiated.
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Adesha: A Mauryan period bills of exchange Adjournment: Postponement of a court proceeding to another time. Affidavit: A written statement of facts, recorded under oath, before a judge or notary public. Board of Admiralty: Board that imposes and control laws which were applied to Indian trade between Babylon and China. Complainant: A person who initiates legal proceeding in the court, against another. Fraud: A wilful deception which results in financial injury to another person. Hearing: A court proceeding where the judges hear out the two parties. Magistrate: A judicial officer having the power to issue arrest warrants. Maritime law: Laws governing the trade in the Mediterranean ocean. Mauryan: A north Indian dynasty founded by Chandragupta Maurya. Prima Facie: A Latin word which means ‘on the face of it’. It is evidence sufficient to support a certain conclusion. Promissory note: A written document by which one person promises to pay money to another. Prosecution: Agency responsible for initiating proceeding in a criminal case, against the accused. Proceedings: Generally, the process of conducting judicial business before a court or other judicial officer. Rnapatra: Loan deed forms in ancient India. Sentence: The pronouncement by a court, of the punishment imposed on a person convicted of an offence. Summons: It is a written order of a court to any person, to appear before it. Transferor: Person possessing an asset Transferee: Person who receives an asset Trial: The hearing and determination of issues of fact and law, in a criminal case, in order to reach a disposition.
3. What is a Negotiable Instruments
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STATUTORY DEFINITION OF NEGOTIABLE INSTRUMENT - A “negotiable instrument” means a 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. Explanation (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. Explanation (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 [Section 13(1)]. 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 [Section 13(2)]. Thus a Negotiable instrument is a special type of contract for the payment of money that is unconditional and capable of transfer by negotiation. A negotiable instrument is not a contract, as contract formation requires an offer, acceptance, and consideration, none of which is an element of a negotiable instrument. Unlike ordinary contract documents, the right to the performance of a negotiable instrument is linked to the possession of the document itself (with certain exceptions such as loss or theft). The documents as promissory notes, bills of Exchange and cheques are instruments which are transferable from one person to another through negotiations came to be called as negotiable instruments. The Negotiable Instruments act was passed in 1881. The Act is to regulate commercial transactions and was drafted to suit requirements of business conditions then existing. The instrument is mainly an instrument of credit readily convertible into money and easily passable from one hand to another. Negotiable Instrument in Simple terms
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Suppose Y has 1000 gold coins and he purchased some goods and services from Mr X in exchange of 1000 gold coins. Now Mr Z being Mr X’s friend wants to purchase some goods and services from Mr Y but does not have gold coins, so he collects 1000 gold coins from his friend Mr. X and makes a promise to return back the coins with a note stating “I promise to pay Mr X 1000 gold coins”. Such a note becomes a promissory note. Now X comes across an exciting opportunity to buy goods from some S, Now that he has a promissory note from Z, he would write on the back of note as: ‘Mr Z Pay Mr S 500 gold coins Yours Mr X.’ The above written instrument involves three parties and is based on trust of Mr X on Mr Z came to be called as bills of Exchange. With further specialisations, people like Mr Y started to specialize in money markets by keeping the money of traders and giving it away as per their instructions. This concept further developed to become a bank. A bill exchange drawn from the bank as” Pay Mr S Rs.500” is called as cheques.
4. Evolution of Negotiable Instruments
The ancient Romans are believed to have used an early form of cheque known as praescriptiones in the first century BC. During the 3rd century AD, banks in Persia and other
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territories in the Persian Empire under the Sassanid Empire issued letters of credit known as ?akks. Muslims are known to have used the cheque or ?akk system since the times of Harun alRashid (9th century). In the 9th century, a Muslim businessman could cash an early form of the cheque in China drawn on sources in Baghdad, a tradition that was significantly strengthened in the 13th and 14th centuries, during the Mongol Empire. Indeed, fragments found in the Cairo Geniza indicate that in the 12th century cheques remarkably similar to our own were in use, only smaller to save costs on the paper. They contain a sum to be paid and then the order "May so and so pay the bearer such and such an amount". The date and name of the issuer are also apparent. Between 1118 and 1307, it is believed the Knights Templar introduced a cheque system for pilgrims travelling to the Holy Land or across Europe. The pilgrims would deposit funds at one chapter house, withdraw it from another chapter at their destination by showing a draft of their claim. These drafts would be written in a very complicated code only the Templars could decipher. Negotiable Instruments in India Payment instruments and mechanisms have a very long history in India. The earliest payment instruments known to have been used in India were coins, which were either punch-marked or cast in silver and copper. While coins represented a physical equivalent, credit systems involving bills of exchange facilitated inter-spatial transfers.
Early Punch-marked coin In ancient India, loan deed forms called rnapatra or rnalekhya were in use. These contained details such as the name of the debtor and the creditor, the amount of loan, the rate of interest, the condition of repayment and the time of repayment. The deed was witnessed by a person of respectable means and endorsed by the loan-deed writer. Execution of loan deeds continued during the Buddhist period, when they were called inapanna.
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In the Mauryan period, an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another. There are also numerous references to promissory notes. The loan deed continued into the Mughal period. The deeds were called dastawez and were of two types: dastawez-e-indultalab which was payable on demand and dastawez-e-miadi which was payable after a stipulated time. In the Mughal period, we have the testimony of foreign travelers regarding the use of bills of exchange in the then great commercial centers. From their writings, it may be noted that Indian bankers also issued bills of exchange on foreign countries, mainly for financing seaborne trade. These bills were widely accepted and were traded at high discounts, as the discounts included the insurance premium covering the risk representing safe arrival of goods. Another instrument in use during the Muslim period was the Pay order. Pay orders were issued from the Royal Treasury on one of the District or Provincial treasuries. They were called Barattes and were akin to present day drafts or cheques. The most important class of credit Instruments that evolved in India were termed Hundis. Their use was most widespread in the twelfth century, and has continued till today. In a sense, they represent the oldest surviving form of credit instrument. The princely states of India had their own distinct coins. An example of this was the Arcot Rupee coin struck by the Nawab of Arcot in the Madras Presidency. By 1740, the Europeans had secured the privilege of coining this rupee, and the coins came to be known as English, French and Dutch arcots. In 1835, the East India Company introduced the Company's Rupee to bring about uniformity of coinage over British India. Paper money, in the modern sense, has its origin in the late 18th century with the note issues of private banks as well as semi-government banks. Amongst the earliest issues were those by the Bank of Hindoostan, the General Bank in Bengal and Behar, and the Bengal Bank. Later, with the establishment of three Presidency Banks, the job of issuing notes was taken over by them. Each Presidency Bank had the right to issue notes within certain limits. The Bank of Bengal notes generally circulated within the environs of Calcutta and were mainly used for
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effecting large transactions. The largest proportion of the Bank of Bengal notes consisted of notes of Rs.100 and upwards. The notes sometimes bore a small premium, so great was the public confidence in the bank. The Paper Currency Act of 1861 conferred upon the Government of India the monopoly of Note Issue bringing to an end note issues of private and Presidency Banks. The private banks and the Presidency Banks introduced other payment instruments in the Indian money market. Cheques were introduced by the Bank of Hindoostan, the first joint stock bank established in 1770. Post Bills were introduced by the British in 1827. These were Inland Promissory notes issued by the bank on a distant place, the holder of which would be paid on acceptance after a specified number of days (seven days' sight or thirty days' sight) and were similar to muddati hundis. These bills had a much smaller currency than bank notes, mainly because the government refused to authorize their receipt in payment of public dues. They were mainly used by European businessmen for purposes of internal remittances. In 1833, cash credit accounts were added to the Bank of Bengal's array of credit instruments. The bank used to grant loans against the security of Company's paper, bullion, plate, jewels or goods of non-perishable nature or goods not liable to great alteration in their value up to a limit of 1 lakh sicca rupees.
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5. Features of Negotiable Instruments
I. A negotiable instrument is freely transferable:
The principal characteristic of a negotiable instrument, and that which makes it pass freely as a substitute for money, is that in the hands of a third party who purchases it in good faith and for value before it is due, it is enforceable, while the original holder, perhaps could not enforce it for the reason that the party who made the instrument has a good defense or counterclaim. As soon, however, as an innocent purchaser comes into possession of it for value he cannot be prevented from collecting because of any defenses existing between the original parties. In other contracts the purchaser acquires only the right of the party from whom he buys, but in the case of negotiable instruments, he may acquire a better title than the original holder. II. The instrument must be negotiable in form :
The instrument must be payable to ‘Order’ or ‘Bearer’. If made payable to only a particular person, then it is not a negotiable instrument; falls under the rules governing a simple contract. In other words, the intent of the party making the instrument to execute a negotiable paper must appear by some express words showing such a purpose. III. 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 Amar issued a bearer cheque payable to Shashank. It was stolen from Shashank by a person, who passed it on to Vishal. If Vishal 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 Vishal will be regarded as ‘holder in due course’. As per section 118(e), endorsements appearing on the negotiable instrument are presumed to have been made in the order in which they appear on the instrument, unless contrary is proved. [There is no mandatory provision to put date while signing, though advisable to do
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so]. Section 118(d) provides that there is presumption that the instrument was negotiated before its maturity, unless contrary is proved. As per section 60, Bill can be negotiated even after date of maturity by persons other than maker, drawee or acceptor after maturity. However, person getting such instrument is not ‘holder in due course’ and does not enjoy protections available to ‘holder in due course’.
IV.
A negotiable instrument must be in writing:
This includes handwriting, typing, computer printout and engraving, etc. No oral contract can be negotiable. The handwriting can be executed with any substance or tool as pencil, ink, and pen. There was a case in UK involving an action on promissory note. The defense was that the endorsement to plaintiff was made in lead pencil and that such endorsement was not within the term ‘writing’ as required by the law and custom of merchants. The court held that the writing was sufficient. When the law requires an instrument to be written, it does not require the writing to be in any particular mode or to be done with any particular material.
V.
A negotiable instrument must involve unconditional order:
In every negotiable instrument there must be an unconditional order or promise for payment. VI. A negotiable instrument must involve definite amount of money:
The instrument must involve payment of a certain sum of money only and nothing else. The amount must be definite and certain. For example, one cannot make a promissory note on assets, securities, or goods. VII. 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.
VIII.
The payee must be a certain person:
It means that the person in whose favor the instrument is made must be named or described with reasonable certainty. The term ‘person’ includes individual, body corporate, trade
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unions, even secretary, director or chairman of an institution. The payee can also be more than one person. IX. 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. It is usual to place the signature at the close of the instrument, but if it shown that it is meant for a signature, it may be placed on any other part. X. 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 brother’s name but it is not a negotiable instrument till it is given to your brother. XI. 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 pro-note or bill and the time of their payment. Stamp duty on Bill of Exchange and Promissory Note is a Union Subject. Hence, stamp duty is same all over India.
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6. Types of Negotiable Instruments
According to the Negotiable Instruments Act, 1881 there are just three types of negotiable instruments i.e., promissory note (popularly called pronote), bill of exchange (popularly called bill) and cheque. Apart from these three, many other documents are also recognized as negotiable instruments on the basis of custom and usage, like hundis (a popular indigenous document prevalent in India), demand draft, travelers, treasury bills, share warrants, etc., provided they possess the features of negotiability. Letters of credit, bills of lading, securities etc., are not negotiable instruments. 1. 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 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’. 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.
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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 Address…….. Sd/ Sanjeev Stamp
Parties to a Promissory Note There are primarily two parties involved in a promissory note. They are as follows:
•
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.
•
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
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•
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.
•
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 • A promissory note must be in writing, duly signed by its maker and properly stamped as per Indian Stamp Act. • 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’, then it is not a promissory note. • The promise to pay must not be conditional. For example, if it is written ‘I promise to pay Suresh Rs 5,000/- after my sister’s marriage’, then it is not a promissory note. • It must contain a promise to pay money and money alone. For example, if someone writes ‘I promise to give Suresh a Maruti car’, then it is not a promissory note. • • The parties to a promissory note, i.e. the maker and the payee must be certain. 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’, then it is a promissory note. • 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.
Specimen of promissory note
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Rs. 10,000/-
New Delhi November 14, 2002
I, Ramesh , s/o Sadanand of Surat, Gujarat promise to pay Sashikant, s/o Sunil only) with interest at the rate of 10 percent per annum, for value received. Sd/- Ramesh Stamp To Sashikant Ahmedabad, Gujarat
Kumar
of Ahmedabad, Gujarat or order, on demand, the sum of Rs 10,000/- (Rupees Ten Thousand
2. 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 person’s 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/Negotiable Instruments
New Delhi
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May 2,2001 Five months after date pay Tarun or (to his) order the sum of Rupees Ten Thousand only for value received. To Sameer Address Accepted Sameer Stamp S/d Rajiv
Parties to bill of exchange There are three parties involved in a bill of exchange. They are as follows:
•
The Drawer – The person who makes the order for making payment. In the above specimen, Rajiv is the drawer.
•
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.
•
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 • A bill must be in writing, duly signed by its drawer, accepted by its drawee and properly stamped as per Indian Stamp Act. • It must contain an order to pay. Words like ‘please pay Rs 5,000/- on demand and oblige’ are not used. • The order must be unconditional.
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• • •
The order must be to pay money and money alone. The sum payable mentioned must be certain or capable of being made certain. The parties to a bill must be certain.
3. 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. Cheque evolution The cheque had its origins in the ancient banking system, in which bankers would issue orders at the request of their customers, to pay money to identified payees The ancient Romans are believed to have used an early form of cheque known as praescriptiones in the first century BC. During the 3rd century AD, banks in Persia and other territories in the Persian Empire under the Sassanid Empire issued letters of credit known as ?akks. Features of a cheque •
•
A cheque must be in writing and duly signed by the drawer. It contains an unconditional order. It is issued on a specified banker only. The amount specified is always certain and must be clearly mentioned both in figures and words.
• •
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• • •
The payee is always certain. It is always payable on demand. The cheque must bear a date otherwise it is invalid and shall not be honoured by the bank.
Specimen of a Cheque ………......20....... Pay…….............................................................................................................. ……....................................................................................................... or Bearer Rupees……………………………………………… …………………………………………………… STATE BANK OF INDIA Jawaharlal Nehru University, New Delhi – 110067 MSBL 653003 110002056 10
Types of Cheque Broadly speaking, cheques are of four types. a) Open cheque b) Crossed cheque c) Bearer cheque d) Order cheque 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: • Receive its payment over the counter at the bank.
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• •
Deposit the cheque in his own account. Pass it to someone else by signing on the back of a cheque.
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’. Types of crossing Crossing may be either (1) General - to mean as where a cheque bears across its face an addition of the words
'and company' or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either with or without the words 'not negotiable', that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally. (2) Special - implies the specification of the name of the banker on the face of the cheque
The object of special crossing is to direct the drawee banker to pay the cheque only if it is presented through the particular bank mentioned therein. Thus, it makes the cheque system still safer. Not Negotiable Crossing • A person who takes such a cheque shall not have and shall not be capable of giving a better title to the cheque than that which the person, from whom he took it in the first instance, had. Thus, by including the words 'not negotiable', the cheque is deprived of its special feature of negotiability. A bank, therefore, should be extra careful in paying such cheques.
Account Payee Crossing (A/c Payee Crossing) • An A/c payee crossing signifies that the drawer intends the payment to be credited only to the payee’s account and in none else. The addition of 'A/c payee' to a crossing has no legal
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sanctity and the paying banker may ignore such a direction without being liable for any damages. Not Negotiable, A/c Payee Crossing • The instrument is rendered not negotiable (making the 'paying banker' responsible to see that payment is made to the person who is entitled to receive it) plus A/c payee crossing directs the collecting banker to collect it for the payee only. Who can cross a cheque? • A cheque may be crossed by any of the following:
1. The drawer of a cheque. 2. The holder of a cheque. 3. The Banker, in whose favor the cheque has been crossed specially. 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. 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 as follows: 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’. 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
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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, that 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.
4. 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 customs 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.
Hence, Hundi’s were used as remittance instruments (to transfer funds from one place to another) as credit instruments (to borrow money [IOUs]), for trade transactions (as bills of exchange).
Types of Hundis
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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 on due date after the muddat to a person with credit. This is similar to a time bill. 4. Nam-jog hundi: A nam jog hundi is payable to the person whose name is started on the body of the instrument. 5. Dhani-jog hundi: A dhani jog hundi is payable to the person who purchases it. 6. Jawabee hundi: A jawabi hundi is payable only after the maker gives his consent in writing. 7. Jokhami hundi: A jokhami hundi is payable only in the event of arrival of goods. 8. Firman-jog hundi: A firman jog hundi is payable according to the firman (Order) of its maker. There are few other varieties like Dekhanhar, Nishan Jog, Peth, Zickri Chit or Tickri Chit etc. Characteristics of Hundi • Hundis payable to a specified person or order are negotiable with our endorsement by the payee. • • A holder is entitled to sue on a hundi without an endorsement in his favor. A hundi accepted by the drawee can be negotiated without endorsement.
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•
If a hundi is lost, the owner can claim a peth (duplicate) or perpeth (triplicate) from the drawer and present it to the drawee for payment.
•
Interest above 6% per annum can be charged where usage is established. Market rate of interest is payable according to usage.
5. Demand drafts The Demand Draft is a pre-paid Negotiable Instrument, wherein the drawee bank undertakes to make payment in full when the instrument is presented by the payee for payment. The demand draft is made payable on a specified branch of a bank at a specified centre. In order to obtain payment, the beneficiary has to either present the instrument directly to the branch concerned or have it collected by his / her bank through the clearing mechanism.
6. Travelers cheque
Travelers cheques are a secure and convenient alternative to carrying cash. These are prepaid instruments available in fixed denominations. The holder of the Travelers cheque is required to sign the instrument upon purchase and again in the presence of the merchant establishment at the time of making payment or realizing proceeds thereof. Travelers cheques can be replaced if they are lost or stolen at no additional cost. Travelers cheques are available in both domestic and international currency.
Differences between Bill of Exchange & Promissory Notes
Promissory Note 1. It contains an unconditional promise. 2. There are 2 parties – the maker & the payee.
Negotiable Instruments
Bill of Exchange 1. It contains an unconditional order. 2. There are 3 parties – the drawer, the drawee & the payee.
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3. It is made by the debtor. 4. Acceptance is not required. 5. The liability of the maker/drawer is primary & absolute.
3. It is made by the creditor. 4. Acceptance by the drawee is a must. 5. The liability of the maker/drawer is secondary & conditional upon nonpayment by the drawee.
Differences between a Cheque and a Bill of exchange
Cheque 1. It is drawn only on a banker.
Bill of Exchange 1. It can be drawn on anybody including a banker.
2. The amount is always payable on demand. 3. It can be crossed to end its negotiability. 4. Acceptance is not required.
2. The amount is payable on demand or after a specified period. 3. It cannot be crossed.
4. Acceptance is a must.
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7.
Amendments to Negotiable Instruments Act
Changes made by Amendment Act, 2002 to the Negotiable Instruments Act, 1881 (For section 6 of the Negotiable Instruments Act, 1881 (26 of 1881) (hereinafter referred to as the principal Act), the following section shall be substituted) Substitution for new section for section 6 Definition of ‘cheque’ and related provisions in respect of cheque amended to facilitate electronic submission and/or electronic clearance of cheque. Corresponding changes were also made in Information Technology Act. Cheque - A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. Electronic Cheque - Provisions of electronic cheque has been made by Amendment Act, 2002. As per Explanation I(a) to section 6, ‘A cheque in the electronic form’ means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed by a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system. Truncated Cheque - Provisions of electronic cheque has been made by Amendment Act, 2002. As per Explanation I(b) to section 6, ‘A truncated cheque’ means a cheque which is truncated during the clearing cycle, either by the clearing house during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. Clearing house - The expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognized as such by the Reserve Bank of India.’ Amendment of section 64 (Section 64 of the principal Act shall re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-section shall be inserted)
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Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification: Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment is made accordingly. Amendment of section 81 (Section 81 of the principal Act shall be re-numbered as subsection (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted) • Where the cheque is an electronic image of a truncated cheque, even after the payment the banker who received the payment shall be entitled to retain the truncated cheque. • A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who paid the instrument, shall be prima facie proof of such payment. Amendment of section 89 (Section 89 of the principal Act shall be re-numbered as subsection (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted) • Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image. • Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same. Amendment of section 131 (In section 131 of the principal Act, Explanation shall be renumbered as Explanation I thereof, and after Explanation I so re-numbered, the following Explanation shall be inserted)
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Explanation II - It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care. Amendment of section 138 - In section 138 of the principal Act, • for the words “a term which may be extended to one year”, the words “a term which may be extended to two years” shall be substituted; (that means provision for imprisonment upto 2 years against present one year) • in the proviso, in clause (b), for the words “within fifteen days”, the words “within thirty days” shall be substituted (that means period for issuing notice to drawer increased from 15 days to 30 days). Amendment of section 141 - In section 141 of the principal Act, in sub-section (1), after the proviso, the following proviso shall be inserted, Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter (that means Government Nominee Directors excluded from liability). Amendment of section 142 - In section 142 of the principal Act, after clause (b), the following proviso shall be inserted, Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period (that means court empowered to take cognizance of offence even if complaint filed beyond one month). Insertion of new sections after section 142 - After section 142 of the principal Act, the following sections shall be inserted, 143. Power of Court to try cases summarily.
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1. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), all offences under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials: Provided that in the case of any conviction in a summary trial under this section, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand rupees (that means summary trial procedure permitted for imposing punishment upto one year and fine even exceeding Rs 5,000). Provided further that when at the commencement of, or in the course of, a summary trial under this section, it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the said Code. 2. The trial of a case under this section shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing.
3. Every trial under this section shall be conducted as expeditiously as possible and
an endeavor shall be made to conclude the trial within six months from the date of filing of the complaint. 144. Mode of service of summons 1. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), and for the purposes of this Chapter, a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session (that means summons can be issued by speed post or courier service).
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2. Where an acknowledgement purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorized by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the Court issuing the summons may declare that the summons has been duly served (that means summons refused will be deemed to have been served). 145. Evidence on affidavit 1. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), the evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions be read in evidence in any enquiry, trial or other proceeding under the said Code. 2. The Court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the facts contained therein (that means evidence of complainant through affidavit permitted). 146. Bank’s slip prima facie evidence of certain facts - The Court shall, in respect of every proceeding under this Chapter, on production of bank’s slip or memo having thereon the official mark denoting that the cheque has been dishonored, presume the fact of dishonor of such cheque, unless and until such fact is disproved (that means bank’s slip or memo indicating dishonour of cheque will be prima facie evidence unless contrary proved). 147. Offences to be compoundable - Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), every offence punishable under this Act shall be compoundable. The amendments have been made effective from 6-2-2003.
Dishonor of cheque The main object of this piece of legislation is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. Section 138, THE NEGOTIABLE INSTRUMENTS ACT 1881 is intended to prevent dishonesty on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in his account
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maintained by him in a bank and induces the payee or holder in due course to act upon it. The dishonour of cheque is now a criminal offence punishable by imprisonment up to one year or with fine up to the double the amount of dishonoured cheque or with both. Five basic ingredients of section 138 1) Cheque should have been drawn in payment of a legal liability to discharge the existing debt. Cheque given by way of gift would not come under this provision. 2) The cheque should be presented within the validity period i.e. within six months or three months as the case may be. 3) Return memo by the drawer bank to the drawee bank and vice-versa, reporting that the cheque got unpaid is must. 4) Giving notice to the drawer of the cheque by the drawee within 15 days (amended to 30 days by the 2002 amendment) of the receipt of the information from the drawee bank that the cheque got dishonored. 5) The drawer of the cheque fails to make the payment of the said amount of money to the holder within 15 days of the receipt of the said notice.
Dishonour of the bill When the bill of exchange is not accepted or not paid on maturity the bill is said to have been dishonoured. From the above it is clear that the bill is dishonoured on two accounts: a. Dishonour by non-acceptance b. Dishonour by non-payment
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c. Dishonour by non-acceptance: when the drawee refuses to accept the bill, it stands to be dishonoured. The dishonour by-non-acceptance may have the following reasons:
• • •
The drawee doesn’t accept the bill within 24 hours of its receipt. When the drawee is not entitled to accept it. When the drawee is a fake person. If the bill is to be conditionally accepted When the drawee disappears. In case there are many drawees, and all the drawees do not sign the bill.
• • •
Dishonour by Non-Payment: Another reason for the dishonour of a bill is its non-payment at maturity the drawee may refuse to make the payment of the bill when it is presented at maturity; this refusal gives rise to dishonour by non-payment. The dishonour affects all the parties to the bill. They include the drawer, all endorse and endorse, who are all accountable and liable to the holder.
8. Liabilities and Rights of Parties involved in a Negotiable Instrument
Rights of the Holder
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• •
The holder of a negotiable instrument may sue thereon in his own name and payment to him in due course discharges the instrument. A holder in due-course is a holder who has taken the instrument under the following conditions: 1. That it is complete and regular upon its face. 2. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact. 3. That he took it in good faith and for value. 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. • • Where an instrument payable on demand is negotiated an unreasonable length of time Where the transferee receives notice of any infirmity in the instrument or defect in the
after its issue, the holder is not deemed a holder in due course. title of the person negotiating the same before he has paid the full amount agreed to be paid there for, he will be deemed a holder in due course only to the extent of the amount thereto for paid by him. • The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. • To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. • A holder in due course holds the instrument free from any defect of title or of prior parties and free from defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. • In the hands of any holder other than a holder in due course, a negotiable instrument is
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subject to the same defenses as if it were non-negotiable. But the holder who derives his
Negotiable Instruments
title through a holder in due course, and who is not himself a party to any fraud or duress or illegality affecting the instrument, has all the rights of such former holder in respect to all parties prior to the latter. • Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course. But the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. Liabilities of the holder • The maker of a negotiable instrument by making it engages that he will pay it
according to its tenor, and admits the existence of the payee and his then capacity to indorse. • The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse, and engages that on due presentment the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation limiting his own liability to the holder. • The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance and admits: 1. The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and 2. The existence of the payee and his then capacity to indorse. • A person placing his signature upon an instrument otherwise than as maker, drawer or
acceptor is deemed to be an indorser, unless he clearly indicated by appropriate words his intention to be bound in some other capacity. • Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser in accordance with the following rules: 1. If the instrument is payable to the order of a third person he is liable to the payee and to all subsequent parties.
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2. If the instrument is payable to the order of the maker or drawer, or is payable to dearer, he is liable to all parties subsequent to the maker or drawer. 3. If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. • Every person negotiating an instrument by delivery or by a qualified endorsement,
warrants: 1. That the instrument is genuine and in all respects what it purports to be. 2. That he has a good title to it. 3. That all prior parties had capacity to contract. 4. That he has no knowledge of any fact which would impair the validity of the instrument, or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision three of this section does not apply to persons negotiating public or corporate securities, other than bills and notes. • Every indorser not an accommodating party who indorses without qualification,
warrants to all subsequent holders in due course: 1. The matters and things mentioned in subdivision one, two, three and four of the next preceding section; and 2. That the instrument is at the time of his endorsement valid and subsisting. And, in addition, every indorser engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.
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• •
Where a person places his endorsement on an instrument negotiable by delivery he As respects one another, indorser are liable prima facie in the order in which they
incurs all the liabilities of an indorser. indorse, but evidence is admissible to show that as between or among themselves they have agreed otherwise. Joint payees or joint indorses who indorse are deemed to indorse jointly and severally. Where a broker or other agent negotiates an instrument without endorsement, he incurs all the liabilities prescribed by section sixty-five of this Act, unless he discloses the name of his principal, and the fact that he is acting only as agent.
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
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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%. 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.
•
CASE NO.: Appeal 1066 of 2001 (Special Leave Petition 969 of 2001)
PETITIONER: K.N. BEENA Vs. RESPONDENT: MUNIYAPPAN AND ANOTHER.. DATE OF JUDGMENT: 18/10/2001
The Appellant filed a complaint under Section 138 of the Negotiable Instruments Act as the cheque dated 6th April, 1993 in a sum of Rs.63720/-, issued by the 1st First Respondent in favor of the Appellant on Central Bank, had been dishonored with the remarks "Insufficient Funds". The Appellant had issued a legal notice dated 28th April,
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1993. Receipt of the said notice is admitted. A reply dated 21st May, 1993 was sent by the 1st Respondent. However no payment was made. After trial the Judicial Magistrate-II, Kumbakonam, convicted First Respondent under Section 138 and directed payment of a fine of Rs.65000/-. In default the 1st Respondent was to suffer simple imprisonment for one year. The 1st Respondent challenged the conviction and sentence by filing Criminal Appeal No. 32 of 1995. The same came to be dismissed by the Sessions Judge on 28th August, 1995. The 1st Respondent then preferred Criminal Revision No. 883 of 1995 before the High Court of Madras. A learned Single Judge, by the impugned Order dated 20th July, 2000, set aside the conviction and acquitted the 1st Respondent. The learned Judge acquitted the 1st Respondent on the ground that the Appellant had not proved that the cheque dated 6th April, 1993 had been issued for any debt or liability. In our view the impugned Judgment cannot be sustained at all. The Judgment erroneously proceeds on the basis that the burden of proving consideration for a dishonored cheque is on the complainant. It appears that the learned Judge had lost sight of Sections 118 and 139 of the Negotiable Instruments Act. Under Sections 118, unless the contrary was proved, it is to be presumed that the Negotiable Instrument (including a cheque) had been made or drawn for consideration. Under Section 139 the Court has to presume, unless the contrary was proved, that the holder of the cheque received the cheque for discharge, in whole or in part, of a debt or liability. Thus in complaints under Section 138, the Court has to presume that the cheque had been issued for a debt or liability. This presumption is rebuttable. However the burden of proving that a cheque had not been issued for a debt or liability is on the accused. This Court in the case of Hiten P. Dalal vs Bratindranath Banerjee reported in (2001) 6 S.C.C. 16 has also taken an identical view. In this case admittedly the 1st Respondent has led no evidence except some formal evidence. The High Court appears to have proceeded on the basis that the denials/averments in his reply dated 21st May, 1993 were sufficient to shift the burden of proof onto the Appellant/Complainant to prove that the cheque was issued for a debt or liability. This is an entirely erroneous approach. The 1st Respondent had to prove in the trial, by leading cogent evidence, that there was no debt or liability. The 1st Respondent not having led any evidence could not be said to have discharged the burden cast on him. The 1st Respondent not having discharged the burden of proving that the cheque was not issued for a debt or liability, the
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conviction as awarded by the Magistrate was correct. The High Court erroneously set aside that conviction. In this view of the matter the impugned Judgment is set aside. The conviction and sentence as awarded by the Magistrate by his order dated 21st March, 1994, stand. The 1st Respondent is granted one months’ time to pay the fine. In default thereof he shall suffer simple imprisonment for 3 Months. The fine, if realized, Rs.60,000/- there from shall be paid to the Complainant as compensation. The Appeal stands disposed of accordingly. There will be no Order as to costs.
9. Future of Negotiable Instruments
Biometric Scanning Technologies – Finger, Facial and Retinal Scanning The word “biometrics” comes from the Greek language and is derived from the words bio (life) and metric (to measure). It includes fingerprints, voice patterns, hand measurements, irises and others, all used to identify human characteristics and to verify identity. These biometrics or characteristics are tightly connected to an individual and cannot be forgotten, shared, stolen or easily hacked. These characteristics can uniquely identify a person, replacing
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or supplementing traditional security methods by providing two major improvements: personal biometrics cannot be easily stolen and an individual does not need to memorize passwords or codes. Since biometrics can better solve the problems of access control, fraud and theft, more and more organizations are considering biometrics a solution to their security problems. However, biometrics is not a panacea and has some hurdles to overcome before gaining widespread use.
Finger Scanning Technology Fingerprinting or finger-scanning technology is the oldest of the biometric sciences and utilizes distinctive features of the fingerprint to identify or verify the identity of individuals. Fingerscan technology is the most commonly deployed biometric technology used in a broad range of physical access and logical access applications. All fingerprints have unique characteristics and patterns. A normal fingerprint pattern is made up of lines and spaces. These lines are called ridges while the spaces between the ridges are called valleys. It is through the pattern of these ridges and valleys that a unique fingerprint is matched for verification and authorization. These unique fingerprint traits are termed “minutiae” and comparisons are made based on these traits. On average, a typical live scan produces 40 “minutiae”. The Federal Bureau of Investigation (FBI) has reported that no more than 8 common minutiae can be shared by two individuals. Finger scanning technology is primarily used by Law Enforcing agents for identification. This is used by Banks for Authorization of Transactions, in Computer Network Access, as an Entry Device for Building door locks, in Grocery Stores to automatically recognize registered customers and bill their Credit/Debit Cards, in Subsidized meal programs for recognition of enrolled students and in many such places.
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The advantages of Finger Scanning Technology are high rate of accuracy due to uniqueness of each finger print, the size of memory required to store the biometric template is fairly small, easily deployable in a range of environments and easy to use devices. The only shortcoming is the change in fingerprint characteristics over a period of time. Facial Scan Technology Another biometric scan technology is facial recognition. This technology is considered a natural means of biometric identification since the ability to distinguish among individual appearances is possessed by humans. Facial scan systems can range from software-only solutions that process images processed through existing closed-circuit television cameras to full fledged acquisition and processing systems, including cameras, workstations, and backend processors. With facial recognition technology, a digital video camera image is used to analyze facial characteristics such as the distance between eyes, mouth or nose. These measurements are stored in a database and used to compare with a subject standing before a camera. Facial recognition systems are usually divided into two primary groups. First there is what is referred to as the ‘controlled scene’ group whereby the subject being tested is located in a known environment with a minimal amount of scene variation. In this case, a user might face the camera, standing about two feet from it. The system locates the user's face and performs matches against the claimed identity or the facial database. It is possible that the user may need to move and reattempt the verification based on his facial position. The system usually comes to a decision in less than 5 seconds. The other group is known as the “random scene” group where the subject to be tested might appear anywhere within the camera scene.
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This situation might be encountered within a system attempting to identify the presence of an individual within a group or crowd.
The advantages of Facial Scan Technology are: technology is capable of identification of individuals at a distance and without their awareness, static images can be used to enrol on a subject and thus shortens the time required to enrol a targeted population. The drawbacks of Facial Scan Technology would be the difficulties involved in matching due to sharp angles being involved, the requirement of face to be properly lit-up, changes in hairstyle, make-up or other accessories may pose a problem during the verification process, poor record in verifying a subject who has had a plastic surgery to alter their appearance, it can cause privacy abuse. Retinal Scan Technology Retina-scan technology makes use of the retina, which is the surface on the back of the eye that processes light entering through the pupil. Retinal Scan technology is based on the blood vessel pattern in the retina of the eye. The principle behind the technology is that the blood vessels at the retina provide a unique pattern, which may be used as a tamper-proof personal identifier. Since infrared energy is absorbed faster by blood vessels in the retina than by surrounding tissue, it is used to illuminate the eye retina. Analysis of the enhanced retinal blood vessel image then takes place to find characteristic patterns. Retina-scan devices are used exclusively for physical access applications and are usually used in environments that require high degrees of security such as high-level government military needs.
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The Retina Scan Technology can be used in high end security applications, controlling access to areas or rooms in military installations/ government buildings, power plants, airports, research laboratories, high risk places and in bank facilities. The advantages of this technology are that it is more accurate than finger prints, prevents identity theft or fraud, retinal scanners are not subject to dirt/finger misplacements and they have extremely low false positive rates. The drawbacks of Retinal Scan Technology are: susceptibility to disease damage, viewed as intrusive and not very user friendly, high amount of both user and operator skill required and may be easily breached using a high resolution facial picture Hand Geometry Hand geometry relies on measurements of the width, height, and length of the fingers, distances between joints, and the shape of knuckles. Using optical cameras and light-emitting diodes that have mirrors and reflectors, two orthogonal, two-dimension images of the back and the sides of the hand are taken. Based on these images, 96 measurements are then calculated and a template created. Most hand readers have pins to help position the hand properly. These pins help with consistent hand placement and template repeatability, so there is a low false positive rate and a low failure to match rate.
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Hand Geometry Technology finds its uses in record attendance at multinationals within a short period of time, access control in industries requiring to safe guard their process, International Airports and Ports to control access of staff in restricted areas The advantages of Hand Geometry Technology are: it is very accurate in identification, not as intrusive as other technologies; it is difficult to spoof someone’s hand shadow without his cooperation Voice Recognition Voice recognition technology identifies people based on the differences in the voice resulting from physiological differences and learned speaking habits. When an individual is enrolled, the system captures samples of the person's speech as the individual says certain scripted information into a microphone or telephone multiple times. This information is known as a "pass phrase." (There are also biometric systems available that can distinguish between people's voices without requiring a predefined phrase.) The pass phrase is then converted to a digital format and distinctive characteristics (e.g., pitch, cadence, tone) are extracted to create a template for the speaker. Voice recognition templates require the most data space of all the biometric templates. Voice recognition technology can be used for both identification and verification. Voice Recognition Technology finds uses in gadgets and devices such as mobile phone for security features. The advantages of this technology are: it requires minimal training for the operators and it is inexpensive and very Non-Intrusive. The drawback is that it is quite unreliable and does not work well in noisy environment
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Voice Recognition E-Commerce Electronic commerce, commonly known as (electronic marketing) e-commerce or eCommerce, consists of the buying and selling of products or services over electronic systems such as the Internet and other computer networks. The amount of trade conducted electronically has grown extraordinarily with widespread Internet usage. The use of commerce is conducted in this way, spurring and drawing on innovations in electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. E-Commerce can be used in any situation where any activities can be done, electronically. It is the application of new technologies to existing business processes and practices, resulting in companies conducting business better. E-Commerce can help improve business processes and information flows by enabling you to communicate with other businesses faster and more efficiently. E-Commerce systems can operate all day every day and it provides access to the global marketplace. The Internet spans the world, and it is possible to do business with any business or person who is connected to the Internet. Simple local businesses such as specialist record stores are able to market and sell their offerings internationally using e-commerce.
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However, there are certain drawbacks of this system. E-commerce is often used to buy goods that are not available locally from businesses all over the world, meaning that physical goods need to be delivered, which takes time and costs money. When you walk out of a shop with an item, it's yours. In some respects e-commerce purchases are made on trust. This is because, firstly, not having had physical access to the product, a purchase is made on an expectation of what that product is and its condition. Secondly, because supplying businesses can be conducted across the world, it can be uncertain whether or not they are legitimate businesses and are not just going to take your money.
Mobile Banking Mobile (also known as M-Banking, mbanking, SMS Banking etc.) is a term used for performing balance checks, account transactions, payments etc. via a mobile device such as a mobile phone. Mobile banking today is most often performed via SMS or the Mobile Internet but can also use special programs called clients downloaded to the mobile device. The biggest advantage that mobile banking offers to banks is that it drastically cuts down the costs of providing service to the customers. Additionally, this new channel gives the bank ability to cross-sell up-sell their other complex banking products and services such as vehicle loans, credit cards etc.
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Plastic Money Plastic money is the alternative to the cash or the standard 'money'. Plastic money is used to refer to the credit cards or the debit cards that we use to make purchases in our everyday life. Plastic money is much more convenient to carry around as you do not have to carry a huge sum of money with you. It is also much safer to carry it along or to travel with it as if it is stolen one can consult the bank whose service you are using and get it blocked hence saving your money from getting stolen or even lost.
Digital Cheque Digital Cheques is a secure payment system created for the issue and control of company cheque payment. Designed as chip and pin solution for corporate cheques. Digital Cheques is a Windows based system, password protected for security. System helps define different user permissions, providing increased control by assisting the separation of duties. This allows purchase ledger preparation, cheque print approval, signature application and audit reporting to be carried out, if required by different people.
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Cheque Truncation Cheque Truncation Solution is a big milestone in the Indian banking industry. It enables cheque clearing on the same day, reducing floating time available for funds. Truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch. In the CTS the presenting bank captures the data & images of the cheques using their Capture System which is internal to them. The banks send the captured images and data to the central clearing house for onward transmission to the payee/drawee banks which then processes the data and arrives at settlement figures before forwarding it to payee/drawee bank. It is the responsibility of the drawee bank Capture System to process the inward data and images and generate the return file for unpaid instruments. USE OF BIO METRICS BY UAE The United Arab Emirates (UAE) has found iris recognition to be an effective overt security means for preventing expelled foreigners from re-entering the country. The UAE faced a situation in which an expelled foreigner would return to his or her home country and legally change his/her name, date of birth, and address--all descriptors traditionally used to screen individuals entering the country. Since the new identity would not be on any of the traditionally maintained, name-dependent lists, government agents would admit the banned individual to the UAE. To counter this problem, the UAE began developing a biometric system that could be used to scan all individuals arriving in the country and determine whether the person is banned from entering. The UAE's specifications for the system included using a biometric that did not change over time; could be quickly acquired; was easy to use; could be used in real time; is safe and non-invasive; and which could be scaled in the millions. The UAE determined that iris recognition technology was the only technology that produced a single-person match in a sufficiently short period of time to meet its needs. As of March 4, 2004, the UAE had enrolled 355,000 irises. It enrols approximately 600 new irises per day. Over 6,220 expelled foreigners have been caught trying to re-enter the UAE, which averages to about 30 individuals caught per day. There have been over 1,613,000 searches of the database so far, with no false matches. A statistical analysis of the program
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suggests that the likelihood of a false positive match is less than 1 in 80 billion--in other words, effectively impossible. The UAE has found iris recognition technology easy to use. There have been no failures to acquire an iris scan; the system is regularly used by people unfamiliar with or unskilled in the technology, and in transit areas. The UAE is now considering creating a unified Arab list. The country is also considering a similar system to identify all individuals. Currently, the UAE identity cards are smart cards that contain fingerprints, and the UAE is considering including a person's iris code in the near future. Iris codes may also be placed on passports. The UAE's experience with iris recognition technology is that biometrics enhances the nation's security. LEGAL Issue in the use of Bio Metrics • • • • • Human Rights groups and some other organisations have been arguing that the use of Bio-Metrics instruments is a breach of privacy of individuals. Bio-Metrics such as Face Scanning are conducted without the consent of individuals. Encryption of Bio-Metric images has raised the security concerns. The possible misuse of private data collected through Bio-Metrics. Health impacts due to regular exposure to radiation emitted by such applications.
Moving Towards E-Commerce
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As a sign of people moving to electronic mode of fund transfer, the number of cheques processed in 2008-09 fell 5 per cent after growing at 7 per cent and 11 per cent in the past two years, respectively. According to data released by the Reserve Bank of India (RBI) in its annual report, 1.14 billion cheques were processed in 2008-09, using Magnetic Ink Character Recognition (MICR) compared to 1.20 billion in 2007-08. Retail electronic transactions grew 28 per cent to 280 million in 2008-09. Real Time Gross Settlement (RTGS), an electronic means of transferring funds of over Rs 1 lakh, saw a 27 per cent growth in transactions in 2008-09 to 35.2 million from 27.7 million in 2007-08.
Value (Rs cr)
ITEM
Volume (' 000s)
Volume (' 000s)
Value (Rs cr)
YEAR
2007-08
2008-09
2007-08
2008-09
RTGS
5,840
13,366
2,73,18,330
3,22,79,881
MICR Clearing Retail Electronic Clearing
12,01,045
11,40,492
60,28,672
58,49,642
2,18,800
2,80,610
9,71,485
4,16,419
Cards
3,16,509
3,87,215
70,506
83,903
10.
Recommendations
Recommendations and Conclusions
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Legal issues relating to electronic transaction processing at banks are 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. Suggestions 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 counterparties / 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 In spite 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
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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.
Conclusion Trade and commerce has evolved over the years. Transaction complexity, among people or societies or industries or nations is taking new shape in this new era. As we have seen till date, for transactions to take place faster and a smooth operation of business activities, we think, new forms of negotiable instruments will also get evolved in future. For example, from an old era Hundis to current era of cheques, promissory notes etc. to future era of emerging technologies like biometrics, facial, retina scanning, negotiable instruments will keep evolving with new innovations. But so are the risks and frauds associated with that. So laws and acts assume an importance against future forms of frauds. The implementation of biometric technologies for increasing national security raises numerous practical and policy questions. It is critical that the right type of technology is chosen to meet the purpose and privacy requirements of a specific use. In order for biometric systems to provide security, it is necessary that people not have a false sense of security about them. The weaknesses and flaws of the technologies must be acknowledged and countermeasures need to be considered. The systems cannot be seen as the ultimate security tool, and thus the perfect solution. Rather biometrics (in one layer or many) are simply another tool in a layered approach to security. They are not a panacea--but they can play an important role in protecting and should not be demonized as unacceptable technology. Cheques though a traditional medium of transaction would continue to be used due to the unique advantage of being able to issue post dated cheques which may not be possible in case
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of e-commerce. Cheques require few hours to clear; however this also gives it a unique advantage to the issuer of being able to stop the processing in case of misplacing cheques. The current laws and provisions related to the negotiable instruments have been fabricated in such a manner, so as to avoid any kind of fraudulent activities through the laws. These laws clearly define the liabilities of a drawer or maker of a negotiable instrument so that he doesn’t indulge in any wrong intentions and so that the holder or the payee knows his rights and liabilities that the payer owes to him. There have been various amendments during the past years and will continue to be as new and breakthrough cases continue to appear before the judiciary which need to give sometimes, breakthrough judgements, creating new laws and provisions. We have travelled from Hundis to cheques to plastic money to bio-metric identification and this never ending journey will continue as long as the commerce and trade develops.
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11.
Bibliography
• • •
• •
Legal business Environment: Akhilesh Phatak Banking in India: By Masood Ahmed Khan Commercial Law: By Darwin Curtis Gano Reserve bank Of India www.rbi.orghttp://chddistrictcourts.gov.in/THE NEGOTIABLE INSTRUMENTS %20ACT.pdf
• • • • •
http://www.nos.org/Secbuscour/17.pdfhttp://www.vakilno1.com/bareacts/negoinstruact/negoinstruact.htmlhttp://www.dateyvs.com/gener10.htmlhttp://indiacode.nic.in/incodis/whatsnew/Negotiable.html Milteades Leonidou, (2002), Iris Recognition: Closer Than We Think? -http://www.sans.org/rr/paper.php?id=143
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Zeena Marchant, Biometrics: Fingerprint Authentication, SANS Reading Room, -http://rr.sans.org/authentic/fingerprint.php
• • • •
Rejman-Greene, M., (2002). Secure Authentification Using Biometric Methods. The Daily Telegraphhttp://www.marcbowles.com/sample_courses/amc/ec1/ec1_3.htmhttp://www.rediff.com/money/2008/feb/21inter.htm
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