Negotiable instruments are written documents that represent a legal promise or commitment to pay a specified sum of money to a designated person or entity.
They are used in financial transactions as a way to transfer value from one party to another. Some common types of negotiable instruments include cheques, drafts, promissory notes and bills of exchange.
Negotiable instruments have certain characteristics that make it easy to transfer them from one party to another.
They are generally transferable by endorsement (signing the back of the instrument) and delivery, and they can be bought and sold in financial markets.
They also have a fixed maturity date, meaning that the payment is due on a specific date, and they often carry interest until they are paid.
What are the Three Types of Negotiable Instruments?
The three main types of negotiable instruments are cheques, drafts, and promissory notes.
Cheques A cheque is a written order to a bank to pay a specified sum of money to a designated person or entity. It is typically used in everyday transactions, such as paying bills or buying goods and services.
Drafts A draft is a written order to pay a specified sum of money to a designated person or entity, usually drawn by one party (the drawer) on another party (the drawee).
There are several types of drafts, including sight drafts, which are payable on demand, and time drafts, which are payable at a specific future date. Drafts are commonly used in international trade transactions.
Promissory Notes A promissory note is a written promise to pay a specified sum of money to a designated person or entity at a specific time or on demand.
Promissory notes are often used in lending transactions and can be either secured or unsecured.
There are other different types of negotiable instruments as well, such as bills of exchange and commercial paper, but cheques, drafts, and promissory notes are the most common.
What are the Features of Negotiable Instruments?
Negotiable instruments have certain features that make them easy to transfer from one party to another and that establish the legal rights and obligations of the parties involved.
These features include:
Writing:
Negotiable instruments must be in writing, signed by the issuer (also known as the maker or drawer), and contain an unconditional promise or order to pay a specific sum of money.
Certainty of Sum:
The amount of money to be paid must be certain and fixed.
Order or Promise to Pay:
The instrument must contain an unconditional order or promise to pay a specific sum of money.
Signature of the Issuer:
The instrument must be signed by the issuer (also known as the maker or drawer).
Negotiability:
The instrument must be transferable by endorsement (signing the back of the instrument) and delivery, and it must contain a statement that it is payable to the bearer (i.e., the person who holds it) or to the order of a designated person.
Fixed Maturity:
The instrument must have a fixed maturity date, meaning that the payment is due on a specific date.
Interest:
Negotiable instruments often carry interest until they are paid.
These features are designed to make the different types of negotiable instruments easy to transfer and to establish the legal rights and obligations of the parties involved.
What are the Functions of Negotiable Instruments?
Negotiable instruments serve several important functions in financial transactions.
Some of the main functions of negotiable instruments include:
1. Transfer of Value Negotiable instruments are used as a means of transferring value from one party to another.
For example, a cheque is a written order to a bank to pay a specified sum of money to a designated person or entity, and a promissory note is a written promise to pay a specific sum of money at a specific time or on demand.
2. Credit Instrument Negotiable instruments can be used as credit instruments, meaning that they can be used to borrow or lend money.
For example, a promissory note can be used to borrow money from a lender, and a draft can be used to pay for goods or services before the payment is due.
3. Payment Instrument Negotiable instruments can be used as payment instruments, allowing parties to pay for goods and services without having to exchange physical currency.
For example, a cheque can be used to pay for goods or services, and a bill of exchange can be used in international trade transactions.
4. Investment Instrument Negotiable instruments can also be bought and sold in financial markets, making them a popular investment option.
For example, commercial paper, which is a short-term unsecured promissory note issued by corporations, is often bought and sold in financial markets.
Overall, negotiable instruments serve as a convenient and secure means of transferring value, borrowing and lending money, paying for goods and services, and investing.
Who is a Holder of a Negotiable Instrument?
The holder of a negotiable instrument is the person who is in possession of the instrument and is entitled to receive payment when it becomes due.
The holder may be the original payee (the person to whom the instrument is payable), or it may be someone who has acquired the instrument through endorsement and delivery.
For example, if Jai writes a cheque to Mariam and Mariam endorses the cheque and delivers it to Tanya, Tanya becomes the holder of the cheque. If the cheque is payable to Mariam, Mariam is the original payee, and if Mariam endorses the cheque to Tanya, Tanya becomes the holder.
The holder of a negotiable instrument has certain rights and obligations under the law, including the right to present the instrument for payment and the right to recover the amount due if the instrument is not paid.
The holder also has an obligation to take reasonable steps to protect the instrument from loss, theft, or damage.
It is important to note that the holder of a negotiable instrument is not necessarily the owner of the instrument.
The owner is the person who has the legal right to the instrument, while the holder is the person who physically possesses it.
Is Cash a Negotiable Instrument?
Cash, in the form of physical currency (e.g., paper money and coins), is not considered a negotiable instrument.
Negotiable instruments are written documents that represent a legal promise or commitment to pay a specified sum of money to a designated person or entity.
They are used in financial transactions as a way to transfer value from one party to another.
Cash, on the other hand, is a physical representation of value that is used to pay for goods and services.
It is a direct and immediate form of payment and does not involve the use of a written document or promise to pay.
While cash is a common and convenient way to pay for goods and services, it is not considered a negotiable instrument.
Is a Demand Draft a Negotiable Instrument?
Yes, a demand draft is a negotiable instrument.
A demand draft is a written order to pay a specified sum of money to a designated person or entity, usually drawn by one party (the drawer) on another party (the drawee).
It is similar to a cheque, but it is not drawn on a bank. Instead, it is issued by a person or entity (the drawer) and is payable by another person or entity (the drawee).
Demand drafts are payable on demand, which means that they can be presented for payment at any time.
They are considered negotiable instruments because they can be transferred from one party to another by endorsement and delivery, and they are payable to the bearer (the person who holds it) or to the order of a designated person.
What are the Advantages of Negotiable Instruments?
Negotiable instruments offer several advantages for both businesses and consumers. Some of the main advantages of negotiable instruments include:
1. Convenience
Negotiable instruments are a convenient way to transfer value from one party to another. For example, a cheque or draft can be used to pay for goods or services without the need to exchange physical currency.
2. Security
Negotiable instruments are generally considered a secure form of payment because they are backed by a written promise or commitment to pay.
In addition, negotiable instruments can be traced and tracked through the endorsement and delivery process, which helps to prevent fraud and unauthorized use.
3. Credit
Negotiable instruments can be used as credit instruments, allowing businesses and individuals to borrow or lend money.
For example, a promissory note can be used to borrow money from a lender, and a draft can be used to pay for goods or services before the payment is due.
4. Investment
Negotiable instruments can also be bought and sold in financial markets, making them a popular investment option.
For example, commercial paper, which is a short-term unsecured promissory note issued by corporations, is often bought and sold in financial markets.
Overall, negotiable instruments offer convenience, security, credit, and investment opportunities, making them an important part of the financial system.
Which are the Two Most-Used Negotiable Instruments?
The two most-used negotiable instruments are cheques and promissory notes.
Cheques are the most commonly used negotiable instrument and are used in everyday transactions, such as paying bills or buying goods and services.
Promissory notes are often used in lending transactions and can be either secured or unsecured.
Is Bill of Lading a Negotiable Instrument?
A bill of lading (B/L) is a document that serves as a receipt for goods shipped by a carrier (e.g., a shipping company or a trucking company) and as a contract of carriage.
It is issued by the carrier and specifies the terms and conditions of the transportation of the goods, including the point of origin, the destination, the type and quantity of goods, and the terms of payment.
While a bill of lading is not strictly a negotiable instrument, it can be made negotiable by endorsement and delivery.
This process, called "negotiation," allows the bill of lading to be transferred from one party to another and to be used as a means of payment for the goods shipped.
In a negotiable bill of lading, the carrier's obligation to deliver the goods to the named consignee (the person or entity to whom the goods are shipped) is transferred to the holder of the bill of lading.
The holder becomes the owner of the goods and is entitled to receive delivery of the goods upon presentation of the bill of lading to the carrier.
Overall, while a bill of lading is not a negotiable instrument in and of itself,__ it can be made negotiable by endorsement and delivery__, allowing it to serve as a means of payment for the goods shipped.
What is the Negotiable Instrument Act in India?
The Negotiable Instrument Act of 1881 is an Indian law that governs the issuance, endorsement, and negotiation of negotiable instruments, such as cheques, drafts, promissory notes, and bills of exchange.
It applies to the whole of India and has been adopted in various forms by several other countries.
The Negotiable Instrument Act defines a negotiable instrument as a promissory note, bill of exchange, or cheque that is payable to the bearer or to the order of a designated person and is transferable by endorsement and delivery.
It sets out the rights and obligations of the parties involved in the issuance, endorsement, and negotiation of negotiable instruments, including the issuer (also known as the maker or drawer), the payee, the endorser, and the holder.
The Act also provides for civil and criminal remedies in case of a breach of the provisions of the act, such as the dishonour of a cheque or the failure to pay a promissory note.
It is an important piece of legislation that helps to ensure the smooth functioning of the financial system in India and promotes the use of negotiable instruments as a means of payment.
