Negotiable Instrument: Meaning and Types

In a growing business world, always carrying money and doing transactions through substantial currency (notes) is very difficult and not feasible because of many reasons. To resolve this issue, the use of negotiable instrument began.

What does Exactly Negotiable Instrument Define?

A negotiable instrument is a piece of paper that functions similarly to a contract in that it outlines the understanding between the party who signs it and the party to whom the money is being promised. The amount of money must be specified, and there may be a deadline by which it must be paid or made accessible upon request. Negotiable documents are classified as either drafts or notes. To request a certain sum of money is paid to someone, use a draught. On the other hand, a note might be used to make a financial guarantee, such as one regarding a loan.

A negotiable instrument must meet the following requirements in order to be considered valid −

• It must be in writing and duly signed by the maker or drawer

• It must contain an unconditional promise or order to pay a certain sum of money

• It must be payable on demand or at a fixed or determinable future time

• It must be payable to the bearer or order.

Importantly, once a negotiable instrument is issued, it can be transferred from one person to another by endorsement and delivery. This means that the person who holds the instrument can sign the back of it, and then deliver it to the next person, who then becomes the new holder.

Use of negotiable instruments is pretty common in the financial industry and in business transactions because it is a secure and convenient way to transfer value. Besides, it has the added advantage of being easily transferable, so they are widely used in the commercial world.

Legislation

The Negotiable Instruments Act, of 1881, is in charge of regulating negotiable instruments in India.

A promissory note, bill of exchange, or check that is payable to order or to the bearer is a negotiable document, as defined by Section 13 of the Negotiable Instruments Act of 1881.

The Act is divided into 147 separate sections. Section 4 (promissory notes), Section 5 (bill of exchange), Section 6 (cheque), and Section 15 are the crucial portions (endorsements).

Purpose of Negotiable Instrument

A negotiable instrument is used to move money from one entity to another. The note may be transferred to a different party; this is referred to as being "negotiable." No more conditions or demands are placed on the bearer of the document after it has been transferred. A "non-negotiable" instrument, on the other hand, cannot be given away or transferred. As a result, negotiable instruments have considerable flexibility, which is especially helpful when additional funds are needed in the future. As previously indicated, some instances of negotiable instruments may specify the day and hour of this payment, but others are available whenever needed.

Function of Negotiable Instrument

The documents used to make payments are known as negotiable instruments. Before the payment is paid, the ownership of these documents may be transferred from one party to another.

In the modern corporate world, it is typical for transactions to involve substantial sums of money. Receiving and sending cash payments can often be a nuisance for both parties.

Professionals today frequently employ particular documents that permit the transfer and payment of large sums of money. Some of these papers may qualify as negotiable instruments.

Negotiable instruments are defined as "a promissory note, bill of exchange, or check, payable either to the order or to the bearer" in Section 13 of the Negotiable Instruments Act of 1881.

But because they can have the quality of negotiability, many other instruments, including Treasury bills, share warrants, hundis, etc., are also viewed as being tradable in the context of specialised and customary usage. Additionally, if you're going to lend someone money for a business, make sure you know if they'll be able to pay you back or not.

Types of Negotiable Instruments

Following are the major types of negotiable instruments −

Personal Checks

Personal checks are written with the amount to be paid, the bearer's name, and are signed and authorised by someone who has deposited money with the bank (the recipient).

Checks are still used to make a variety of payments, even though technology has increased the use of online banking. Personal checks do have one drawback, though, in that they are a relatively slow means of payment and take a long time to process when compared to other options.

Traveler Checks

Another sort of negotiable instrument is the traveler's check, which is meant to be used as an alternative to foreign money by tourists while making purchases abroad.

Financial institutions issue traveler's checks with serial numbers and in pre-paid, predetermined amounts. They function with a dual signature mechanism that requires the check buyer to sign twice: once before using the check and once during the transaction. The financial institution issuing the check will absolutely guarantee payment to the payee as long as the two signatures match.

Buyers can avoid worrying about taking significant quantities of foreign cash on vacation when using traveler's checks, and banks offer security for misplaced or stolen checks.

The use of traveler's checks has decreased in recent years as more practical methods of making payments overseas have emerged as a result of technological innovation. Traveler's checks raise additional security issues because they can be faked, both in terms of the checks' signatures and the actual checks. Traveler's checks are no longer widely accepted by many businesses and financial institutions due to the hassle of the transactions and the fees associated with cashing them. Debit and credit cards have largely taken over the role of traveler's checks as a form of payment.

Money Order Checks

In that they guarantee a certain sum to the person holding the order, money orders are similar to cheques. Money orders are widely available and are issued by financial institutions and governments. However, they differ from checks in that they typically have a cap on their value, usually $1,000.

For needs over $1,000, entities must place numerous orders. After purchasing the money orders, the buyer fills out the receiver's information, specifies the amount, and sends the order to the intended recipient.

Compared to checks, which only include the sender's and recipients' names and addresses but no other personal information, money orders contain a lot less personal data. Nowadays, sending money abroad is also a common practice, thanks to international money orders, which do not require cashing at the time of issuing. They, therefore, make it possible for a quick and easy manner of money transfer.

Promissory Notes

Promissory notes are written agreements between two parties wherein one party (the payor) promises to pay the other party (the payee) a specific sum of money at a future date. Promissory notes, like other negotiable documents, include all the pertinent details for the promise, such as the stipulated principal amount, interest rate, period, date of issuance, and payor's signature.

Promissory notes are largely used to help people and businesses get finance from sources other than banks and other financial institutions. Lenders are those who issue promissory notes.

Promissory notes are not as casual as an IOU, which only states that a debt exists, but they are also not as strict and formal as a loan contract, which is more specific and outlines the repercussions of not paying the note as well as other impacts.

The Negotiable Instruments (Amendment) Act, 2018

On January 2, 2017 the Negotiable Instruments (Amendment) Bill, was tabled in the Lok Sabha, which became an Act in 2018. The proposed law modified the current Act. Promissory notes, bills of exchange, and checks are all defined in the act. The act also outlines the consequences for failing to respect checks as well as a number of other breaches involving negotiable instruments.

According to a recent circular, a person would be responsible for paying up to INR 10,000 as well as interest at a rate of 6% to 9% for dishonoured checks. The act also adds a clause allowing the court to order interim compensation for people whose checks bounced as a result of a dishonest party (the people or companies responsible). Such interim payment shall not be more than twenty percent (20%) of the total chequing amount.

Certificate of Deposit

Financial organisations and banks provide certificates of deposit (CDs), a product that enables clients to deposit and leave untouched a specific amount for a predetermined amount of time in exchange for receiving a remarkably high-interest rate.

The interest rate typically rises gradually as the duration lengthens. The certificate of deposit must be kept until it matures, at which point the principal and interest may be taken. As a result, fines are frequently assessed as a punishment for early withdrawal.

Banks and credit unions typically provide CDs, although the interest rates, term restrictions, and penalty costs vary widely. Because the interest rates on CDs are so much higher than those on savings accounts (between three and five times higher), most individuals look around for the best rates before deciding to buy a CD.

Customers are drawn to CDs not just for the high-interest rate but also for their safety and conservatism because the interest rate is fixed for the duration of the term.

Conclusion

The economy depends on negotiating tools because they allow you to transact business and ensure that you will receive payment in return for goods and services without having to move any cash. The economy cannot run as smoothly as it does without laws that safeguard both the payer and the recipient of negotiable instruments. Additionally, using Khatabook is yet another excellent approach to saving on the time you typically squander while adding up all of your business transactions.

FAQs

Q1. Is Cheque a negotiable instrument?

Ans. A check is a Negotiable Instrument that is Payable on Demand and can be further bargained by endorsement.

Q2. Is the rupee a negotiable instrument?

Ans. Be aware that, in accordance with section 21 of the Indian Currency Act, a Currency Note is not a negotiable instrument.