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What are Negotiable Instruments?

We use different negotiable instruments in various financial transactions.

What are Negotiable Instruments?

As per Section 13 of Negotiable Instruments Act, 1881, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

What is Promissory Note?

As per Section 4 of Negotiable Instruments Act, 1881, a promissory note is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

Who are the parties to Promissory Note?

The parties to promissory note are –

  • Maker / promisor – a person who promises to pay
  • Payee / promise – a person to whom it is payable

What is Bill of Exchange?

As per Section 5 of Negotiable Instruments Act, 1881, a bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.

Who are the parties to Bill of Exchange?

The parties to bill of exchange are –

  • Drawer – a person who orders to pay (seller of the goods / services)
  • Drawee – a person who is directed to pay (buyer of the goods / services)
  • Acceptor – the drawee becomes acceptor on acceptance of bill of exchange for payment
  • Payee – a person who is authorized to receive payment

What is Hundi?

Hundi is a bill of exchange written in vernacular and governed by local usage or practices. 

Hundis are not covered under the Negotiable Instruments Act, 1881. 

What is Cheque?

As per Section 6 of Negotiable Instruments Act, 1881, a cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Who are the parties to Cheque?

The parties to cheque are –

  • Drawer – a person drawing the cheque (account holder)
  • Drawee – bank on whom the cheque is drawn
  • Payee – a person in whose favour the cheque is drawn

What are Demand Drafts?

As per Section 85A of Negotiable Instruments Act, 1881, drafts is an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand.


References

'THE NEGOTIABLE INSTRUMENTS ACT, 1881'. (n.d.). Retrieved from https://legislative.gov.in/sites/default/files/A1881-26.pdf


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