NEGOTIABLE INSTRUMENTS ACT 1881
Special feature of N.I ACT 1881
The Negotiable Instruments Act was passed during 1881 and came into force wef March 01, 1882. It has 148 sections and 17 chapters (Section 138 to 142 were added in 1988- wef April 01, 1989 and Section 143 & 147 during Dec 2002 and 148 on 02/08/2018). Last amendment was on August 2018. The Act is applicable to entire India including Jammu & Kashmir.
The special feature of such an instrument is the privilege it confers to the person who receives it bonafide and for value, to possess good title thereto, even if the transferor has no title or had defective title to the instrument.
Distinctive features of Negotiable Instruments:
● Easily transferable from one person to another
● Confers Absolute and Good Title on the Transferee
● The Holder of a Negotiable Instrument (P.N./B.E./Cheque) is called as the Holder in Due Course and possesses the right to sue upon the instrument in his own name.
● The negotiation of Bearer Cheque (Bill Of Exchange & Promissory Note) is completed by Delivery (Sec 47) & that of Order cheque (Bill Of Exchange & Promissory Note) by delivery & endorsement (Sec 48).
Sec.13 Sub-Sec 2: A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees.
Section 6 of NI Act “Cheque
Holder: As per Sec 8 of NI Act,
Holder in due course: As per Sec 9,
Inchoate Instrument: Section 20 of NI Act 1881
Endorsement: Sec 15 of NI Act 1881
Sec 85 of NI Act: Protection to Paying Banker: Paying Banker is concerned about regularity of endorsement and not its genuineness.
Sec 85(1): Regularity of endorsement i.e no break in the chain of endorsement-paying bank not concerned with genuineness.
Sec 85(2): All endorsements on a bearer cheque are meaningless (once a bearer, always bearer) endorsement has no effect.
Sec 10 of NI Act: Payment in Due Course: Payment in accordance with apparent tenorof the instrument, with good faith and without negligence.
Sec 18 of NI Act: If the Amount in words and figures differs, the amount written in wordswill be the amount intended to be payable. Amount in words can be paid.
Banking Hours:Sec 65 of NI Act: The payment of a cheque should be made only duringbanking hours. Otherwise, it will not be a payment in due course. Reasonable amount can bepaid to DRAWER even after business hours
- Material Alteration: Any change in date, amount or name of payee is called material alteration. ( The change from Order to Bearer, Cancellation of Crossing or convertingSpecial Crossing into general crossing is also called as material alteration. ( Bearer to Order, Crossing a cheque, converting general crossing to special crossing is notmaterial alteration. If any material alteration on a cheque, it can be paid only after confirmation from drawer i.e. drawer has to authenticate material alteration with full signature.
- Protection to Paying Banker:Sec 89 of NI Act: Paying banker gets protection in case of payment of materiallyaltered cheque if the alteration is not apparent at the time of payment and payment hasbeen made in due course.
- Payee Is Fictitious Person: Cheque can be paid to bearer if it is payable to bearer. Ifcheque is payable to order, it can be paid only to drawer.
- If there is Forgery in Signatures, such instrument is null and void. Paying banker will notget protection if it pays such a cheque even though the drawer might have beencareless in custody of the cheque book or bank might have sent statement of accountand customer did not point out the mistake. 15. If the cheque has been signed by the drawer himself but in a different fashion, thebanker will not be liable
Sec 123 of NI Act: If a cheque or draft bears across its face addition of two paralleltransverse lines with or without addition of words “and Company” or any abbreviationthereof, it is called General Crossing.
Sec 124 of NI Act: When a cheque or Draft bears the name of bank across its face with orwithout two parallel transverse lines either with or without the words “Not Negotiable” itis said to be specially crossed.
● Sec 127 of NI Act: A cheque crossed to two banks has to be returned unpaid unless crossedby one bank to another as his agent for collection.
● Account Payee crossing is not recognized by law but is a long standing practice amongbankers.Account Payee Crossing is direction to Collection Banker. Cheque should be credited tonamed payee.
● Not Negotiable Crossing takes away an important characteristic of negotiability. It can be transferred, but the transferee does not get better title.(Sec 130)Cancellation of crossing can be done by drawer only under his full signatures by writing thewords crossing cancelled. In such cases, payment can be made in cash to a person knownto the Bank.
● Sec 128 of NI Act: Paying banker will get protection in respect of crossed cheques ordrafts provided the instrument has been paid in accordance with the requirement of thecrossing and payment has been made in due course.
● Sec 129 of NI Act: If a banker pays a cheque in violation of the crossing direction, it shallbe liable to true owner of the cheque for any loss he may sustain owing to payment of thecheques.
● Sec 131: Protection to collecting banker, against the risk of Conversion.Conversionis illegal interference with rights of true owner of instrument inconsistent with hisrights of ownership. Such protection is available to banker: when cheque/draft iscrossed before it is lodged with bank for collection, the bank receives payment for hiscustomer, the bank acts as agent for collection and not as holder for value and it receivespayment in good faith and without negligence.
Dishonor of cheques due to insufficient funds:
● Recommended by Rajamanar Committee,wef 01-04-1989.
● Sec 138 of NI Act: If a cheque drawn by a person on an account maintained by him with abanker for payment of any amount of money to another person for the discharge, in wholeor in part of any debt or other liability, is returned by the bank unpaid, either with thereason funds insufficient or similar reason, such person shall be deemed to havecommitted an offence.
● Maximum punishment: 2 years imprisonment or twice the amount of cheque or both. For example if cheque amount is Rs 10,000/- then penalty is Rs 20,000/- and principal is 10,000/- total amount will be 30,000/
Reserve Bank of India Act, 1934:
w.e.f 01-04-1935. Established as per recommendations of Hilton Young Commission
Section 2 (e): Scheduled Bank means a bank whose name is included in second schedule of RBI Act, 1934.
Section 42(6) Capital and reserves not less than ₹5lac.
Section 17: Defines various types of business which RBI may transact, which includes acceptance of deposits without interest from Central/State Govt., any other person/institution, purchase or sell foreign exchange, securities, rediscount the bill/PN, grant loan etc.
Section 18: RBI provides emergency loans to banks on liberal terms.
Section 19: Describes business which RBI may not transact.
Section 20: Banker to Govt. It transacts Govt. business and manages Public debt of Central Govt.
Section 21: RBI has right to transact Govt. business in India i.e. remittance, ex-change etc.
Section 22: Sole right to issue notes.
Section 23: Bank notes shall be issued by Issue Department.
Section 24: Denominations of notes. Central Govt may direct discontinuation or non-issue of bank note of any denomination.
Section 26: Bank notes issued by RBI shall be legal tender & shall be guaranteed by Central Govt.
Section 28: RBI can frame rules for refunding value of mutilated, soiled or imperfect notes. Section 29: Bank note exempted from stamp duty under Indian Stamp Act.
Section 31: No person other than Central Government or Reserve Bank of India orany other person authorized in this behalf, can issue Bearer Promissory Notes (i.e., CurrencyNotes) and Demand Bills of exchange payable to bearer.
Section33: Assets of issue department of RBI shall consist of gold coin, gold bullion, foreign securities, rupee coins and rupee securities. The aggregate value of goldcoin, gold bullion and foreign securities held shall not any time be less than ₹200 crores, of whichgold coin and gold bullion not less than ₹115 crores.
Section 42: CRR: Banks are required to maintain certain percentage of Net Demand and Time Liabilities as CASH with RBI. No Floor or Ceiling rate for CRR. RBI will fix CR Rrate. RBI will not pay any interest to Banks on CRR balances. Banks are required to maintain minimum CRR balances upto 70% of total CRR requirement on all days of the fortnight. If it is not maintained, penal interest @3% above bank rate for first day and second day onwards, Bank rate plus 5%.
Section 42C: RBI can add/delete name of a bank in 2nd Schedule.
Section 43: RBI to publish every fortnight a statement showing aggregate liability/assetsof SCBs. Section 45 A to F: Empowers RBI to collect credit information
Section45 H to T: Regulations relating NBFC
Section 48: Exemption to RBI from paying Income Tax.
Section 49: Announcement/publish Bank Rate.
Banking Regulation Act, 1949:
w.e.f 16-03-1949 Not applicable for Co-op Banks, Land Mortgage Banks, Non Agricultural Primarycredit societies.
a) Section 5a): Approved Securities means such securities authorized by Central Govt. under clause b) of Section 20 of Indian Trust Act 1882 or those securities in which a trustee may invest money under clause (a), (b), (bb) or (d) of Section 20 of Indian Trust Act 1882.
b) Section 5 b): Banking means accepting for the purpose of lending or investment indeposits of money from public repayable on demand or otherwise and with drawable by cheque, draft order or otherwise.
c) Section 5 f): Demand Liabilities are the liabilities which must be met on demand & time liabilities means liabilities which are not demand liabilities.
d) Section 5 n): Secured loan or advance made on the security of asset, the market value of which is not at anytime less than the amount of such loan for advance and unsecured loan or advance means a loan or advance, not secured.
e) Section 6-1: Banking Business-a banking company may be engaged in accepting deposits, borrowing money, lending money, dealing in bills, collection of bills, buyingselling foreign exchange, lockers, issuing letter of credit, traveler cheques, mortgages, insurance business, acting as trustee etc. or any other business which Central Govt. may notify in the official Gazette.
f) Section 6-2: Restriction on business: No banking company shall engage in any form of business other than those referred in Sub Section 6-1.
g) Section 7: Use of word ‘Banking’: Banking companies carrying on banking business in India touse atleast one wordbank, banking, banking company in its name.
h) Section 8: Prohibits banks doing trading activities except in connection with realization of security given to or held by it.
i) Section 9: Bank cannot hold any immovable property howsoever acquired except for own use, for a period exceeding 7 years from acquisition thereof. It can be extended by RBI by another 5 years.
j) Section 10: Management-Prohibition on employment like Chairman, Directors etc. (Period of office-not more than 5 years, extended by another 5 years)
k) Section 11: Paid up capital and Reserves: For domestic Banks, ₹5 lakhs and for Foreign Banks Minimum ₹15 lakhs (₹20 lakhs where the bank has place of business in Bombay, Calcutta or both). Ratio of Authorized, subscribed & paid up capital mini- mum 4:2:1.
l) Section 12: Voting right cannot be more than 10% (RBI can increase to 26%) by a single shareholder irrespective of holding of the share.
m) Section 13: Payment of exchange, brokerage on shares: Max.2.5% of paid up value of shares. An instrument can be made payable to two or more persons jointly or pay- able to one of two or one or some of several payees.
n) Section 14/14A: Prohibits a banking company from creating a charge upon any unpaid capital of the company. Section 14A prohibits a banking company from creating a floating charge on the undertaking or any property of the company without RBI permission.
o) Section 15: Prohibits payment of dividend by any bank until all the capitalized expenses have been completely written off.
p) Section 17: Banking Company is required to transfer to Reserve Fund, 25% of profits before declaring dividend.
q) Section 18: Cash Reserves: Non-scheduled banks to maintain, by way of cash reserves with itself for balance in a current account with RBI, at a rate to be prescribed by RBI.
r) Section 19(1): Prevents Banking companies to form subsidiary company for certain purposes. s) Section 19(2): No Banking Company can hold shares in another company whether as pledge, mortgagee or absolute owner of an amount exceeding 30% of the paid up share capital of that company or 30% of its own paid up share capital and reserves, whichever is less.
t) Section 20: No Banking company shall grant loans or advances on the security of its own shares as it tantamount to reduction of capital.
u) Section 21A: Rate of Interest charged by Banks are not subject to scrutiny of courts.
v) Section 22: Obtaining a license from RBI to open a bank is essential.
w) Section 23: Prior permission of RBI is required for opening of new branch, sub office, sub pay office and extension counter etc. except for one month.
x) Section 24: SLR: Maximum 40%. No Minimum prescribed now (earlier 25%). RBI fixes SLR rate periodically. Now it is 18.00% of NDTL. SLR can be kept in the form of Cash or in gold valued at a price not exceeding the current market price, or in unencumbered approved securities valued at a price specified by RBI from time to time.As per Recent RBI instructions, Transactions in Collateralized Borrowing and lending Obligation (CBLO) with Clearing Corporation of India Ltd (CCIL) attracts SLR and CRR requirement. Now these liabilities are included for calculation of DTL for CRR, SLR purpose.
Section 25: Every banking company has to maintain in India, assets not less than 75% of demand and time liabilities of the banking company in India.
z) Section 26: Return on Unclaimed Deposits i.e. not operated for last 10 years, as on 31st December every year. Banks to submit to RBI within One Month.
aa) Section 29: Banks to publish balance sheet as on last working day of March every year on the Form A & P&L account on Form B.
ab) Section 30: Audit: Balance Sheet is to be got Audited from qualified auditors.
ac) Section 31: Submit balance sheet & auditors report within 3 months from the endof the period to which they refer. RBI may extend the period by further 3 months.
ad) Section 35: RBI is authorised to do Inspection of banks, give directions, as deemed appropriate. Banking Ombudsman, Clean Note Policy, KYC guidelines and other customer service related matters.
ae) Section 35A: Powers to give directions in public interest of banking policy.
af) Section 36: RBI can terminate any Chairman or any employee of the bank where it considers desired to do so.
ag) Section 45: RBI has powers to apply to Central Govt. for Suspension of business by a banking company and prepare a schedule of reconstitution or amalgamation.
ah) Section 45Y: Preservation of Records. Central Govt. has powers to frame rules specifying the period for which a bank shall preserve its books.
ai) Section 45Z: Return of Paid Instruments to customers after a true copy of all relevant parts of such instruments and by taking undertaking letter from the party to preserve the instrument for 8 years.
aj) Section 45ZA to ZF: Nomination in Deposits, Safe Custody and Locker Accounts.
ak) Section 47A: RBI can impose penalty for various types of violation.
al) Section 49A: Restriction on acceptance of deposits withdrawable by cheque by any- one other than Banking Company/RBI/SBI.
am) Section 52: Central Govt. can make rules for all matters.
● Banks should adhere to the provisions of Sections 45ZA to 45ZF of the Banking Regulation Act, 1949 and the Banking Companies (Nomination) Rules, 1985.
● Section 45ZA & 45ZB of BR Act – Nomination in Deposit Accounts.
● Section 45ZC&D: Nomination of Safe Custody articles.
● Section 45ZE&ZF: Safe Depositor Lockers Nomination facility