FEATURES OF

NEGOTIABLE
INSTRUMENTS

FEATURES OF
NEGOTIABLE
INSTRUMENTS
The term negotiable means transferrable from one person to another in return for consideration and
the term instrument means a written document. A negotiable instrument is a document which
guarantees the payment of a specific amount of money, on demand or on a specific date in future by
the payee.
In law, it is a written contract whose benefit can be passed on from the original holder to a new holder.
The receiver is authorized to the benefit of the instrument i.e. money from bank in case of a cheque
and to the sum promised on the note in case of bank note.
LEGAL PROVISIONS IN INDIA:
The Negotiable Instruments Act, 1881 defines a Negotiable Instrument as a promissory note or any
bill of exchange or cheque payable either to order or to bearer. It classifies negotiable instrument into
3 broad types, i.e. Inland Instruments, Foreign Instruments and Bank Drafts.
The Act defines a promissory note as an unconditional undertaking in writing to pay a certain sum of
money only to, or by order of a certain person or to the bearer of the instrument, as the case may be.
A bill of exchange is in all legal terms similar to a promissory note, barring the fact that it is an
unconditional order directed at a certain person rather than an undertaking.
A cheque is not an expression of payment otherwise than on demand. The Law requires Negotiable
Instruments to be paper based instruments as defined under Section 13 of the Negotiable Instruments
Act as an alternate to Cash.

FEATURES OF NEGOTIABLE INSTRUMENT:

Writing & Signature:
The basic condition of a negotiable instrument is that it must be written and signed by the parties
according to the rules governing (a) Promissory notes, (b) Bills of Exchange (c) Cheques.
Negotiability:
The Negotiable instruments are freely transferable from one person to another without any formalities.
The ownership is changed by mere delivery in case of bearer instrument and in case of order
instruments the signature of the holder is required and then delivery is done. Also, it is transferable
any number of times.
Payable by money:
Negotiable Instruments are payable by the legal tender money of India. The Liabilities of the parties
are governed in terms of such money only.
Payable by demand:

The amount of the negotiable instrument is payable otherwise than on demand or at any
predetermination future time.
Holder in due course:
The transferee of a negotiable instrument i.e. the person, who receives a negotiable instrument, is
called the holder when he fulfils certain conditions. He has an undisputable title to the instrument and
in the presence of any defect, the holder gets a good title to the instrument in due course.
Notice:
The notice of transfer is not necessary to give to the party liable to pay.
Presumptions:
Some presumptions are applicable to all negotiable instruments unless proved contrary to it. Example:
Consideration, date, signature of holder. It is not necessary to write in a promissory note the words
for value received or similar expressions.
Special Procedure:
A special procedure is provided for suits on promissory notes and bills of exchange. The procedure is
prescribed in the Civil Procedure Code. The transferee of a negotiable instrument is entitled to file a
suit in his own name for enforcing any right or claim on the basis of the instrument.
Stamping:
According to the Indian Stamp Act1899, the stamping of Bills of Exchange and Promissory Notes is
mandatory and the value of stamp depends upon their value at the time of their payment.
Rule of evidence:
These instruments are in writing and signed by the parties involved and they can be used as evidence
of the fact of indebtness.
Right of Recovery:
Its the right of the creditor to recover the written amount from the debtor as given in the cheque or
note. He can recover this amount by himself or he can transfer this right to another.
Unconditional:
The negotiable instrument is an unconditional instrument and no condition can be attached to it. There
is an unconditional order or promise of payment.
Specified Amount:
The amount written on the negotiable instrument should be specified and definite.
The time of payment must be certain:
It means that the negotiable instrument must be payable at a time which is relevant. It cannot be
stated as when convenient, but the time of payment can be linked to the death of a person.
Delivery:
The delivery of the instrument is essential as any negotiable instrument like a cheque or a promissory
note is not complete till it is delivered to its payee.
Exchange- These instruments are considered as substitutes for money and are accepted in
exchange off goods because cash can be` obtained at any moment by paying a small commission.
INTERNATIONAL PRACTICE:

In the United States, Negotiable Instruments are governed by Article 3 of UCC. As per the US law,
Negotiable Instruments do not include payment orders, investment securities and money in the form
of cash. The rule of derivative title is also not applicable to negotiable instruments.
The Negotiable Instruments used for international transactions are Global Depository Receipts aka
International Depository Receipts. They are originated from American Depository Receipts and
represent a number of shares of a foreign company. Investors in developed markets use them to
invest in emerging markets. They are initially priced based on the values of the underlying shares, but
are traded independent of them.
IMPORTANCE OF NEGOTIABLE INSTRUMENT:
Negotiable Instruments are very important to our economy. It encourages people to do business as
they are certain that they will receive money for their goods and services without the actual transfer of
cash. The laws governing the negotiable instrument protect both the payer and the payee. It
authorizes the creditors to obtain cash by discounting the bill and encourages the expansion of trade.
It is also known as a record-keeping device.