Types of Negotiable Instruments

Negotiable instruments include bill of exchange, promissory note, cheque, bank draft, pay order, hundis, railway receipt for goods, delivery order and government promissory note. All these are broadly classified into two major kinds. One is negotiable instrument by statute and the other is negotiable instrument by usage or custom. The former one is the instrument that was created legally and the latter one was through usage it has become a negotiable instrument. Here under, a detailed explanation about both the kinds and other types.



Negotiable Instrument by Statute


The act that deals with negotiable instruments in India is Negotiable Instrument Act. This act has three kinds of instruments. All these three together can be named as negotiable instruments by statute. The three instruments named in the act are;

  • Bill of exchange,
  • Promissory note and
  • Cheque.


What is a bill of exchange?


The bill of exchange is a negotiable instrument by statute. This is an instrument in writing, which contains an unconditional order and signed by the one who created the instrument or the maker of the instrument. It is an unconditional order which directs a person to pay the amount that was mentioned in there in the instrument to the bearer of that instrument. So, it is an order or direction which is unconditional about making a payment as mentioned in the instrument to the one who have it in his possession by the another person as mentioned in the instrument.

What is a promissory note?


The promissory note is a negotiable instrument by statute. This is a negotiable instrument in writing, which contains an unconditional undertaking and signed by the maker of the instrument. It is an unconditional undertaking agreeing to pay the amount as specified in the instrument to another person mentioned in the instrument or to the bearer of the instrument. So, it is an undertaking or agreement which is unconditional and agreed by the maker of the instrument, promising to pay the amount mentioned in the instrument to the bearer of the instrument.

What is a cheque?


A cheque is a bill of exchange and is a negotiable instrument by statute. It is drawn on a specified banker. It is a payable by the banker on demand. So, basically the cheque is an order or direction to the banker to pay certain amount on demand to the person mentioned in the cheque from the funds in the bank account of the person who signed the cheque. This is an instrument created to make payments in an easier and simpler way without carrying the cash.


Negotiable Instrument by Custom


There are certain instruments though not mentioned in the act, yet gained the prominence as negotiable instrument due to their usage. These instruments were even recognised by the Transfer of property act in India. The examples for the negotiable instruments by custom include;

  • Bank draft,
  • Bank pay order,
  • Hundi,
  • Railway receipt for goods,
  • Delivery order and
  • Government promissory note.


What is a bank draft?


The bank draft is a negotiable instrument by custom. This is somewhat similar to the bank Cheque. But there is a difference however. To draw a bank draft the person must deposit cash in advance and create a bank draft. Unlike cheque, the funds are not paid from the maker's bank account but the cash is deposited by the maker while making or creating the draft.

What is a pay order?


The pay order is a negotiable instrument by custom. It is an instruction to the bank by the account holder of that bank. The instruction is to make a payment to a third party as mentioned by the bank account holder in the instrument.

What is a hundi?


The hundi is a negotiable instrument by custom. It is an instrument in writing and which is unconditional. It is a direction to the person mentioned in the instrument to pay the amount quoted in the instrument to another person mentioned in the instrument. It is a form of credit instrument generally used to transfer money. This is generally used in trading and this is a credit instrument.

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