Introduction to Negotiable Instruments

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Negotiable instruments are an important financial tool in the business world. They act as a source of finance and help the parties in doing business with ease. Let us understand the features of negotiable instruments and their advantages in detail.

A negotiable instrument is a written document specifying payment to a specific person or the bearer of the instrument at a specific date. On similar lines, a bill of exchange can be defined as “a document signifying an unconditional promise signed by the person giving the promise, requiring the person to whom it is addressed to pay on demand, or at a fixed date or time”.

What is a Non-Negotiable Instrument?

Non-negotiable instruments are those that cannot be transferred from one party to the next. They are also known as non-marketable instruments. An example of non-negotiable instruments can be a government savings bond.

What is a Bearer Instrument?

A bearer instrument is a document that entitles the holder of this document to have rights of ownership or title to the underlying property, such as shares or bonds.

What is Negotiability?

A negotiable instrument must contain the word negotiability. The customary words of negotiability are: "or order," or  "or bearer," but there are other words such as "or assigns” that show an intent that the contract might be transferred.

Essential Features of Negotiable Instruments

  • Easily Transferable

Negotiable instruments are freely and easily and transferable without any formalities or too much paperwork. The ownership of a negotiable instrument can be transferred through delivery or by a valid endorsement.

  • Must be in Writing

All types of negotiable instruments must be in writing. They can be in the form of handwritten notes, or can be engraved, printed, or typed, etc

  • Time of Payment must be Certain

The period for a negotiable instrument has to be certain, even if the date has not been specified. It is not an order to pay as per the convenience. Example: The time of payment can be specified or linked to the death of a specific person since death is a certain event.

  • Payee to be Certain- 

The person to whom the payment is to be made by the negotiable instrument must be a specific person or persons. There can be more than one payee for a negotiable instrument. The term “person” here also includes artificial persons like corporates, trade unions, chairman, etc.

Types of Negotiable Instruments

Some common negotiable instruments are:

  • Promissory Note

This negotiable instrument is made by the debtor who unconditionally promises to pay the creditor (or the bearer of the document) a certain sum of money on a specific date.

  • Bills of Exchange-  

This instrument instructs the drawee or the debtor to pay the payee a certain amount of money. A bill of exchange is made by the drawer (the creditor).

  • Cheque- 

It is another form of a bill of exchange but in this case, the drawer is a bank. A cheque is only payable on demand. When the depositor presents the cheque at the bank, he is instructing the bank to pay a certain amount of money to the payee or the bearer of the cheque.

  • Other Negotiable Instruments - 

Some other examples of negotiable instruments are government promissory notes, delivery orders, railway receipts, etc. These can be considered as negotiable instruments according to the custom or practice of the trade, in which they are used.

Advantages of Negotiable Instruments

  • Consideration Presumed

In the case of bills of exchange, the consideration between the debtor and the creditor is presumed. It is an assumption that the purchaser is in debt to the seller, and the onus of proving this fact is not on the seller. Once, the bill has been accepted by the debtor the court will assume that the debt exists legitimately.

  • Maturity Period- 

The creditor does not have to wait for the maturity period to get the money. He can opt for bill discounting or can endorse the bill to another creditor.

  • Low Rate of Interest- 

With the help of accommodation bills, businessmen can obtain funds at a low rate of interest to meet any temporary financial shortfalls in business.

FAQ (Frequently Asked Questions)

Q1. What do you mean by a Negotiable Instrument?

Ans. A negotiable instrument is a signed and transferable document that promises a sum of payment to a specified person, the assignee, or the bearer at a future date or on-demand. The payee must either be named or otherwise indicated on the instrument.

Q2. What is Negotiable Instrument act 1881 or What is NI Act?

Ans. The Negotiable Instruments Act was enacted, in India, in 1881 and extends to the whole of India except the State of Jammu and Kashmir. According to the act, “ no person in India other than the Bank or as expressly authorised by this Act, the Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of 3 money payable to the bearer on demand.”

This act contains all the rules, laws, and provisions related to the negotiable instruments. By referring to this act, one can understand what is the meaning of a negotiable instrument.

Q3. What is a negotiable Certificate of Deposit?

Ans. A negotiable certificate of deposit can be bought and sold on a secondary market and the bank issuing the original certificate decides the face amount and interest to be paid. The longer the term, the higher is the interest rate for negotiable CDs. They mature over short periods, from two weeks up to a year.