brave bank in related

8/6/2019 Brave Bank in Related

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PART A

BANKING

RELATED

ACTS


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BRAVE - Banking Related Acts and Various Enactments2


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PART A - Banking Related Acts 3

CHAPTER - 1

STATE BANK OF INDIA (SBI) ACT-1955

The State Bank of India is the largest Bank in India, in terms of number of branches,

deposits & advances, assets & liabilities, net profit, number of employees etc.,

History

The roots of the State Bank of India rest in the first decade of 19th century, when the Bank of

Calcutta, later renamed the Bank of Bengal, was established on 2nd June 1806. The Bank of

Bengal and two other Presidency banks, namely, the Bank of Bombay (incorporated on 15th April1840) and the Bank of Madras (incorporated on 1 July 1843). All three Presidency banks were

incorporated as joint stock companies, and were the result of the royal charters. These three

banks received the exclusive right to issue paper currency in 1861 with the Paper Currency Act,

a right they retained until the formation of the Reserve Bank of India. The Presidency banks

amalgamated on 27th January 1921, and the reorganized banking entity took as its name Imperial

Bank of India. The Imperial Bank of India continued to remain a joint stock company.

Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of India,

which is Indias central bank, acquired a controlling interest in the Imperial Bank of India. On

30th April 1955 the Imperial Bank of India became the State Bank of India. The Govt. of India

recently acquired the Reserve Bank of Indias stake in SBI so as to remove any conflict of interestbecause the RBI is the countrys banking regulatory authority.

In 1959 the Government passed the State Bank of India (Subsidiary Banks) Act, enabling the

State Bank of India to take over eight former State-associated banks as its subsidiaries. On Sept.

13, 2008, State Bank of Saurashtra, one of its Associate Banks, merged with State Bank of India.

SBI has acquired local banks in rescues. For instance, in 1985, it acquired Bank of Cochin in

Kerala, which had 120 branches. SBI was the acquirer as its affiliate, State Bank of Travancore,

already had an extensive network in Kerala.

The bank traces its history back through the Imperial Bank of India in 1920, to the founding in

1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent.

The Government of India nationalised the Imperial Bank of India in 1955, with the Reserve Bank

of India taking a 59.73% stake, and renamed it as State Bank of India. On 31st March 2008, the

Government of India took over the stake held by the Reserve Bank of India.

SBI provides a range of banking products and Insurance (SBI Life) through its vast network in

India and overseas, including products/services aimed at NRIs. It is slated to start General Insurance

(Non-Life) very shortly. It is Super Financial Market in India aiming to play big role in the years to

come globally. The State Bank Group, with over 16000 branches, has the largest branch network

in India. With an asset base of $250 billion and $195 billion in deposits, it is a regional banking

behemoth. It has a market share among Indian commercial banks of about 20% in deposits and

advances, and SBI Accounts for almost one-fifth of the nations loans.

The State bank of India is 29th most reputable company in the world according to Forbes.


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State Bank of India (SBI), Mumbai Main Branch is Indias largest branch. The government of

India is the largest shareholder in SBI.

International presence

The bank has 141 overseas offices spread over 32 countries as on 31st Dec 2009. It has branchesof the parent in Colombo, Dhaka, Frankfurt, Hong Kong, Johannesburg, London and environs,

Los Angeles, Male in the Maldives, Muscat, New York, Osaka, Sydney, and Tokyo. It has offshore

banking units in the Bahamas, Bahrain, and Singapore, and representative offices in Bhutan and

Cape Town.

SBI operates several foreign subsidiaries or affiliates. In 1990 it established an offshore bank,

State Bank of India (Mauritius). It has two subsidiaries in North America, State Bank of India

(California), and State Bank of India (Canada). In 1982, the bank established its California

subsidiary, named State Bank of India (California), which now has eight branches - seven branches

in the state of California and one in Washington DC which was recently opened on 23rd November,

2009. The seven branches in the state of California are located in Los Angeles, Artesia, San Jose,

Canoga Park, Fresno, San Diego and Bakersfield. The Canadian subsidiary too dates to 1982 and

has seven branches, four in the greater Toronto area, and three in British Columbia.

In Nigeria, SBI operates as INMB Bank. This bank began in 1981 as the Indo-Nigerian Merchant

Bank and received permission in 2002 to commence retail banking. It now has five branches in

Nigeria.

In Nepal SBI owns 50% of Nepal SBI Bank, which has branches throughout the country. In

Moscow SBI owns 60% of Commercial Bank of India, with Canara Bank owning the rest. In

Indonesia it owns 76% of PT Bank Indo Monex.

State Bank of India already has a branch in Shanghai and plans to open one up in Tianjin.

Associate banks

There are six associate banks that fall under SBI, and together these six banks constitute the

State Bank Group. All use the same logo of a blue keyhole and all the associates use the State

Bank of name followed by the regional headquarters name. Originally, the then seven banks

that became the associate banks belonged to princely states until the government nationalized

them between October, 1959 and May, 1960. In tune with the first Five Year Plan, emphasizing

the development of rural India, the government integrated these banks into State Bank of India

to expand its rural outreach. There has been a proposal to merge all the associate banks into SBI

to create a mega bank and streamline operations. The first step along these lines occurred on

13th August 2008 when State Bank of Saurashtra merged with State Bank of India, which reducedthe number of state banks from seven to six. Furthermore on 19th June 2009 the SBI board

approved the merger of its subsidiary, State Bank of Indore, with itself. SBI holds 98.3% in the

bank, and the balance 1.77% is owned by individuals, who held the shares prior to its takeover

by the government.

The acquisition of State Bank of Indore is in the process and which will help SBI add 470 branches

to its existing network of 12000+. Also, following the acquisition, SBIs total assets will inch very

close to Rs 10,00,000 lakh crore mark. Total assets of SBI and the State Bank of Indore stood at

Rs 998,119 crore as on March 2009.

The Subsidiaries of SBI till date

State Bank of Indore State Bank of Bikaner & Jaipur


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State Bank of Hyderabad

State Bank of Mysore

State Bank of Patiala

State Bank of Travancore

The Bank handles almost the entire gamut of financial services. It is a financial supermarket.

The Bank extends services to the following sections:-

Corporate Sector

SMEs

Mid-Corporates

Rural Sector, especially Agriculture and allied activities

Retail Sector i.e., Personal Segment

The Bank has designed 200+ Products under Deposits & Advances portfolio including SBI Life &

SBI Mutual Fund, for specific segments or tailor made schemes suitable to the needs of the

customers.

The quantum of loan ranges from Rs.100 to Rs.10000 crores, which is the amount advancedwhile Tata Group acquired Corus Steel Company.

The State Bank has following Non-Banking Subsidiaries/Joint Ventures.

SBI Capital Markets Ltd., (SBI CAP)-an Investment Banking arm

SBICAP Securities Ltd., (SSL)-a Stock Market Trading wing

SBICAPS Ventures Ltd., (SVL)-a Venture Capital wing

SBICAP (UK) Ltd.,

SBI Funds Management Pvt Ltd., (SBIFMPL)-a Mutual Fund management arm

SBI Factors & Commercial Services Pvt Ltd., (SBI FACTORS)-for factoring services

SBI Cards & Payment Services Pvt. Ltd., (SBICSPL)-a Credit/Debit Cards venture

SBI DFHI Ltd.,-a Discount Finance co., for Govt Securities SBI Life-a Life Insurance Company

Global Trade Finance Ltd., (GTFL)-a factoring services for overseas business

SBI Mutual Funds Trustee Company Pvt Ltd.,-a MF Trust activities

Additional Subsidiaries/Jointly Controlled Entities:-

SBI Commercial and International Bank Ltd., in Russia

SBICAP (UK) Ltd.

SBI Funds Management (International) Ltd.

GE Capital Business Process Management Services Pvt Ltd.

C-Edge Technologies Ltd.

SBIs Foreign Banking Subsidiaries are:- State Bank of India (Canada)

SBI International (Mauritius) Ltd.

State Bank of India (California)

Indian Ocean International Bank Ltd. (Mauritius)

PT Bank Indo Monex (Indonesia)


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TOGETHER A MAMMOITH ORGANISATION CALLED STATE BANK

STATE BANK OF INDIA AS ON 31-03-2009

Rs. In Crores

Authorised Capital 1000 Registered Office Kolkatta

Paid-Up Capital &

Reserves & Surplus 57948 Corporate Office Mumbai

Aggregate Deposits 742073 No. of employees 205896

Market Share

17.72%

Aggregate Advances 542503 No. of pensioners 103556

Market Share including family

16.03% pension

Net Interest Income 20873 No. of Branches 11448100%

Core

Other Income 12691 No. of ATMs 8581

Operating Profit 17915 No. of Foreign Offices 92 in 32

countries

Net Profit 9121 Associate Banks 6

Gross NPA 2.84% Local Head Offices 14

Net NPA 1.76% Total Networks 29

Earnings Per Share Rs.143.77 No. of Admn offices 61

Capital Adequacy 14.25% No. of SBLCs 46

Ratio - CAR

Dividend paid 290% No. of LCPCs 04

Government of India 37,72,07,200 Apex Training Institutes:- Gurgaon

Share holding share Staff Academy

59.41%

No. of individual

shareholders 781263 Staff College Hyderabad

Staff Recruited during 08-09 33703 State Bank Institute for Hyderabad

Information and

Communication

Management-SBIICM

State Bank Institute for Hyderabad

Rural Development

S-BIRD

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CHAPTER 2

RESERVE BANK OF INDIA ACT-1934

RBI was established on the recommendations of Royal Commission on Indian currency & Finance

(1926). The Act was passed in the year 1934 and the RBI was established on 1.4.1935 as a

Private Sector Bank. It was nationalised on 1.1.1949. With nationalisation, the Central Govt.

owns hundred percent of the capital of the bank. The Share Capital of the bank (paid-up) is Rs.5

Crores, with face value of a share of Rs.100. The RBI is managed by a Governor, 4 Deputy

Governors and 15 Directors.

RBI Functions:

RBI performs mainly 5 types of functions:

1. It functions as currency issuing Bank.

2. It functions as a Banker to Central & State Govt.

3. It acts as Banker to the scheduled Banks.

4. It works for the promotion & development of Agriculture, commerce, Trade and Industry.

5. It communicates important information to the public, on behalf of Central/State Govt.

and collects various industrial/economic data.

Currency Issue:

The Central Govt. is issuing one Rupee Note, which are signed by the Finance Secretary

The Reserve Bank issues all currency notes also called as bank notes for denominations

of Rs. 2, 5, 10, 20, 50, 100, 500, 1000, 5000 and 10,000 under the signature of Governor.

The RBI issues currency notes against the 100 percent backing of Gold, Bullion, Foreign

Securities, Rupee Securities, Mint, Promissory Notes or Bills of Exchange.

It withdraws from the circulation, the defaced, mutilated or soiled currency notes.

RBI can avail the services of other commercial banks for distribution of currency through

chests. Such banks provide currency chest service to the RBI in the capacity of agents of

RBI.

Banker to Central/State Governments:

Sec. 20 of RBI Act, the RBI manages Public Debt of Central Govt.

Sec. 21 of RBI Act, the RBI manages Public Debt of State Govt.

Such Public Debts can be Long Term Bonds and Short Term Treasury Bills, Ad-hoc Treasury

Bills etc. RBI gives Ways & Means advance to the Central and State Governments.

Bankers Bank:

It frames and implements monetary policy with an objective to provide necessary/suitable

credit for development of Agriculture, Commerce, Trade and Industry, to ensure price

stability. It controls and regulates money supply and liquidity through different quantitative and


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qualitative tools such as CRR, SLR, Bank Rate, Open Market Operations, Selective Credit

Control, etc.

It frames and implements Credit Control and Credit Policy by way of Bank Rate, Interest

Rates, Open Market Operations and Reserve Requirements.

It exercises selective credit control and by way of fixing ceiling on loan amounts, marginsto be maintained, minimum interest rates to be changed on certain notified commodities.

It prescribes stipulations for paid up capital and reserves for the banks.

It provides finance/re-finance, export refinance (to the extent of 15% of outstanding

export credit eligible for refinance) and bills rediscounting facilities to the banks.

It provides Liquidity Adjustment Facility (LAF).

It also manages market stabilization scheme from time to time

Promotion of Agriculture, Industry, Commerce & Trade:

RBI formulates and implements policies for the promotion of Agriculture. Industry,

Commerce and Trades of the economy. It maintains National Industrial Credit Fund.

It makes its contributions to NABARD for promotion of Agriculture.

It maintains National Housing Credit Fund and allows long-term credit to National Housing

Bank for creating dwelling units.

It allows advance to Development/Promotional Institutions like SIDBI, EXIM Bank, etc.

for the promotion of industry and foreign trade.

Furnishing of Information:

It collects necessary information regarding Deposits, Loans and Advance, various Govt.

Schemes for the poor and downtrodden from banks through returns such as Basic

Statistical Returns (BSR-I and BSR-II).

It can seek the banks to submit any specific information as required for policy making or

control purpose from time to time. It monitors the position of big borrowal Accounts,

NPAs, Suit filed Accounts, etc.

It provides necessary information to the banks from time to time.

(For Various Sections of RBI Act refer other part of the Book)

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CHAPTER-3

BANKING REGULATION ACT-1949

The Banking activity was governed by the Companies Act and subsequently Banking Companies

Act 1949 was passed on 10th March, 1949, with a view to consolidate the law relating to banking

companies to safe guard the interest of the depositors and economic interest of the country. The

nomenclature of the Act was changed w.e.f. 1st March, 1966: it now stands as Banking Regulation

Act 1949. The Act is applicable to all commercial, co-operative and foreign banks operating in

India including J & K.

Important Features:

a) A comprehensive definition of banking so as to bring within the scope of the legislationall institution which receives deposits, repayable on demand or otherwise, for lending or

investment.

b) Prohibiting non-banking companies from accepting deposits repayable on demand.

Separate set of guidelines are there for NBFCs accepting deposits from the public.

c) Prohibition on trading with a view to eliminate non-banking. Exceptions to recent changes

to Life/Non-Life Insurance and MFs.

d) Prescription of minimum capital standards. Read in conjunction with Basel II.

e) Limiting the pay out of dividends by the Banks.

f) Inclusion in the scope of the legislation of banks incorporated or registered outside the

Provinces of India.

g) Introduction of a comprehensive system of licensing of banks and their branches. Nowliberalised branch licensing policy is in vogue.

h) Special format of balance-sheet and conferring of powers on the RBI to call for periodical

returns.

i) Inspection of the books and Accounts of banks by the RBI.

j) Empowering the Central Government to take action against banks conducting the affairs

detrimental to the interests of the depositors.

k) Provision for bringing the RBI into closer touch with banking companies.

l) Provision of an expeditious procedure for liquidation in case of need.

Demand Liabilities: Demand Liabilities include all liabilities which are payable on demand and

they include current deposits, demand liabilities portion of savings bank deposits, margins held

against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and

cumulative / recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs),

Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit Account and deposits

held as Security for advances which are payable on demand.

Time Liabilities: Time Liabilities are those which are payable at the end of the term which

includes fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion

of saving bank deposits, staff Security deposits, margin held against letters of credit if not payable

on demand, deposits held as securities for advances which are not payable on demand, India

Millennium Deposits and Gold Deposits. However, pre mature closure of FD allowed with some

conditions.

Other Demand & Time Liabiities (ODTL): Other Demand and Time Liabilities (ODTL) include


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interest accrued on deposits, bills payable, unpaid dividends, suspense Account balances

representing amount due to other banks or public, net credit balances in branch adjustment

Account, any amount due to the Banking System which are not in the nature of deposits or

borrowing.

Liabilities not included for DTL/NDTL calculations: The under-noted liabilities will not formpart of liabilities for the purpose of CRR:

a) Paid up capital, reserves, any credit balance in the Profit & Loss Account of the bank,

amount availed of as refinance from the RBI and apex financial institutions like Exim

Bank, IDBI, NABARD, NHB, SIDBI etc.

b) Amount of provision for IT in excess of the actual estimated liabilities.

c) Amount received from DICGC towards claim and held by banks pending adjustments

thereof. SBI is not a member with DICGC for the purposes of advances.

d) Amount received from ECGC by invoking the guarantee.

e) Amount received from insurance companies on ad-hoc settlement of claims pending

judgement of the Court.

f) Amount received from the Court Receiver.

g) The liabilities arising on Account of utilisation of limits under Banks Acceptance Facility

(BAF).

h) Interbank term deposits/term borrowing liabilities of original maturity of 15 days and

above and up to one year with effect from fortnight beginning August 11, 2001.

Classification & Valuation of Security for the purpose of SLR: (Methods of

classification):

The entire investment of the portfolio of the banks (including SLR Securities and non-SLR Securities)

should be classified in three categories viz. Held to Maturity, Available for Sale, and Held for

Trading.

Valuation:

Held to Maturity (HTM): These Securities need not marked to market and will be

carried at acquisition cost unless it is more than the face value, in which case the

premium should be amortized over the period remaining to maturity.

Available for Sale (AFS): The individual scripts in the Available for Sale category will

be marked to market at the quarterly or at more frequent intervals, while the net

depreciation under each classification should be recognised and fully provided for, the

net appreciation under each classification should be ignored. The book value of the

Security would not under-go any change.

Held for Trading (HFT): The individual scripts in this category will be marked to the

market at monthly or at more frequent intervals as in the case of those in the available

for sale category. The book value of the individual Security in this category would not

undergo any change after marking to market.

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CHAPTER-4

NEGOTIABLE INSTRUMENTS ACT

The Negotiable Instruments Act, 1881 is applicable to the whole in the India including J & K and

now having 147 Secs and 17 chapters. The Act was amended from time to time and the last

amendment was made in February 2003. The important features of these amendments are that

return of cheques due to insufficient funds has been made a criminal offence and Information

Technology Act has also been made applicable to the Negotiable Instruments Act. Due to the

applicability of IT Act, Electronic Cheques and Digital Signatures have been given statutory

recognition.

NEGOTIABLE INSTRUMENTS: Sec 13 gives the meaning of Negotiable Instruments and states

Negotiable Instruments means a promissory note, bill of exchange or cheque payable either to

order or to bearer. Even though separate definitions of all these instruments are given in Sec 4,5

and 6 of the Act respectively but there is no direct definition of Negotiable Instrument as such in

the Act. Definition of Demand Draft is given in Sec 85 A, which states it 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.

Demand Promissory Note, Bill of Exchange and Cheques are specifically mentioned as Negotiable

Instruments in Negotiable Instrument Act but Sec 137 of the Transfer of Property Act states that

there can be additional Negotiable Instruments as per customs and usages of the trade. As of the

day the following instruments have been legally recognised as negotiable instruments as per

Customs and Usages of the trade.

1) Pay order or Bankers cheque

2) Govt. Promissory Note

3) Certificate of Deposit

4) Commercial Paper

5) Treasury Bills

6) Hundi

7) Bill of Lading*

8) Railway Receipts*

9) Dock warrant*

10) Warehouse Receipt (Wharfinger certificate)*

11) Delivery Order

12) GRs issued by transport operations approved by IBA.

* The instruments mentioned above from serial no. 7 to 11 are also documents of title to goods

under Sale of Goods Act. Lorry receipt is not mentioned in the document of title to goods in the

Sale of Goods Act. However, as in banks most of the transactions take place through lorry receipt,

therefore, to assist the banks, IBA has the system of approving the transport operators. Therefore,

only those lorry receipts are negotiable instruments which are issued by approved transport

operators by IBA. However airway bill is neither a document to title to goods and nor recognisedas negotiable instrument.


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BASIC FEATURES OF NEGOTIABLE INSTRUMENTS: Negotiable instruments possess a unique

characteristic called Negotiability. Term negotiation has been defined in Sec 14 of the Act, which

states when a promissory note, bill of exchange or cheque is transferred to any person, so as to

constitute the person the holder thereof, the instrument is said to be negotiated.

The Negotiation contains following features:

a) Free Transferability: the instrument should be freely transferable. Transferability

may be by:

Delivery, if its is payable to bearer (Sec 47), and

By endorsement and delivery if it is payable to order (Sec 48)

b) Holders Title Free from Defects: The person (transferee) taking the instrument

bonafide for value known as previous holder. A holder in due course in one who receives

the instrument for value, before maturity, in good faith and without negligence and

suspicion as to the defect in the title of the transferor.

The above two conditions are necessary for an instrument to be called a negotiable instrument.If the above two conditions are satisfied, the holder can sue on the instrument in the own name.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS

(I) Sec 118 provides certain presumptions as to Negotiable Instruments, in favour of

holder until the contrary is proved:

a) Negotiable Instrument was made, drawn, accepted, endorsed and negotiated or

transferred for consideration.

b) It bears the date on which it was made or drawn.

c) It was accepted within a reasonable time after its date and before maturity.d) Every transfer of negotiable instrument was made before maturity.

e) Endorsements appearing on negotiable instrument were made in the order in which

they appear thereon.

f) That a lost instrument was duly stamped.

g) Holder is a holder in due course.

The burden of proof that the instrument is contrary to all/any of the above presumptions is with

the person, who challenges such presumption.

(II) Sec 119-In a suit upon an instrument, which has been dishonoured, the court shall, on

proof of the protest, presume the fact of dishonour, unless and until such fact is disproved.

RULE OF ESTOPPEL (SEC 120-122)

1) No maker of Negotiable Instrument or acceptor of bill of exchange has the right to deny

the original validity of instrument in any suit.

2) Capacity of the payee to endorse cannot be denied by the maker in a suit by the holder

in due course.

3) No endorser of a Negotiable Instrument shall be permitted to deny the signature or

capacity to contract of any prior party to the instrument.


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KINDS OF NEGOTIABLE INSTRUMENTS:

PROMISSORY NOTE: As per Sec 4 of NI Act, Promissory Note is an instrument:

(a) In writing (not being a bank note or a currency note),

(b) Containing an unconditional undertaking (or promise),

(c) Signed by the maker,

(d) To pay a certain sum of money,

(e) To or to the order of a certain person or to the bearer of the instrument.

Parties to a Promissory Note: There are basically two parties i.e. maker (who promises to pay

in case of bank loan, it is borrower) and payee (to whom it is payable in case of a bank loan,

the bank). In case of sale and purchase transactions, the buyer i.e., debtor is the maker when he

promises to pay for the goods and the seller is the creditor and becomes payee.

Types of Promissory Note: There are two types of Promissory Notes, i.e. Demand Promissory

Note, which is payable immediately on demand and Usance Promissory Note, payable after a pre-

definite period.

Stamping of Promissory Note: The Promissory Notes require to be stamped as per Indian

Stamp Act and stamp duty is same for entire India except J & K.

Promissory Notes payable in Instalments: Promissory Notes can be drawn payable in

instalments also and a provision can be made that on default in payment in one instalment, entire

amount becomes payable. This is also known as usance promissory note because payment

cannot be demanded before due date. In the category of usance promissory notes, two additional

instruments as per custom and usages Certificates of Deposit and Commercial Papers have also

been recognised a usance promissory notes.

Promissory Note Payable to Bearer: Although, under Sec 4 there is no bar to the issue of apromissory note payable to bearer on demand or payable to bearer, Sec 31 of the RBI Act

prohibits such a promissory note to be issued by any person other than the RBI or by the Central

Government.

Currency Notes and Promissory Notes: Currency notes being money, though fulfil a number

of conditions of promissory notes, are not promissory notes and have been excluded from

promissory notes as per Sec 4 of NI Act and are governed by Indian Currency Act (Sec 21).

BILL OF EXCHANGE: As per Sec 5 of NI Act, a Bill Exchange (B/E) may be a demand or usance.

In case of cash sale in the commercial transactions, normally demand bills of exchange are drawn

and in case of credit sales, usance bills of exchange are drawn by the seller on the purchaser.

Bill of Exchange has following characteristics:

a) In Writing,

b) Containing an unconditional order,

c) Signed by the marker,

d) Directing a certain person to pay,

e) A certain sum of money and money only,

f) To or to the order of a certain person or to the bearer of the Instrument.


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Parties to a Bill of Exchange:

Drawer: The person who orders to pay i.e. creditor or seller of goods.

Drawee: The person who is directed to pay i.e. debtor or buyer of goods. Since a minor cannot

incur any liability, he cannot be the drawee.

Payee: The person who is authorised to obtain the payment.

Acceptor: The drawee becomes acceptor on acceptance of B/E for payment.

Drawee in case of need: When the bill mentions the name of additional person in addition to

the drawee, it is known as the drawee in case of need.

Acceptor for honour: When a bill of exchange has been noted or protested for non-acceptance

for better Security and any person accepts it for honour of the drawer or anyone of the endorsers,

such person is called as on accepter for honour.

DUE DATE CALCULATION (Sec 22 OF NI ACT): Due date is required to be calculated for

payment in case of usance promissory note and usance bill of exchange. While calculating the

due date three days of grace are required to be added. However if the drawer has either already

mentioned the due date is already calculated by the drawer then grace period is not to be given.

Drawer has every right to contract out the provisions related to grace period within the parameters

of law.

In case of usance promissory note on each instalment three days of grace are to be added.

However, in case of commercial paper and certificate of deposit even though they are usance

promissory notes no days of grace are to be given because due date is already calculated by the

drawer.

PRINCIPLES FOR CALCULATING THE DUE DATE:

(1) If a usance period is mentioned in complete months while calculating the due datecorresponding date of the concerned month is to be taken and there after three days will

be added e.g. if due date is to be calculated from 15th June for one month, the due datewill be 15+3 days of grace i.e. 18th July.

(2) If that concerned date is not available, then last date of the month is to be taken, e.g.,

if due date is to be calculated for one month from 31st Jan, corresponding day works outto 31st Feb and as that day is not available we will have to take last day of the month i.e.28th/29th Feb and after adding three day of grace, due date will be 3rd March

(Sec 23).

(3) If the bill is drawn in days, then while calculating the due date 1st

day is excluded andlast day be included. Suppose the due date is to be calculated for 45 days from 10th

March, the procedure will be as under. (Sec 24)

Days of March after 10th = 21 days

Days of April = 9 days

Total = 30 days

After adding 3 days of grace in April 9th, the due date will be 12th of the April.

If the maturity date, falls on Public Holiday/Sundays, the bill will become payable onnext preceding business day. Public holidays are declared under Sec 25 of NI Act byCentral Govt. only after making the notification in the Official Gazette.

CHEQUE: As per Sec 6 of NI Act, a cheque is: (a) A bill of exchange (b) Drawn on a specifiedbank and (c) Not expressed to be payable otherwise than on demand.


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Parties to a Cheque:

Drawer: The person who draws the cheque or the Account holder.

Drawee: The bank on whom the cheque is drawn or where the Account is maintained.

Payee: The person named in the cheque for receiving the payment.

ELECTRONIC CHEQUE: It means a cheque which contains the exact mirror image of a paper

cheque, with the use of digital signatures.

HOLDER (Sec 8): The holder of a negotiable instruments, is a person who is entitled in his own

name to the possession of the instrument and to receive the amount due their on from the parties

thereto. Where the promissory note, bill of exchange is lost or destroyed, its holder is the person

so entitled at the time of such loss or destruction.

Example: A thief in possession of an instrument, a finder of any instrument, persons who takes

instrument under forged endorsement and payee or endorsee who is prohibited by Court (an

insolvent) from receiving the payment, cannot become holders.

Rights of a Holder

a) Holder can obtain a duplicate of the lost instrument (Sec 45-A).

b) Holder can cross the cheque if not already crossed, convert a general crossing to a

special crossing, endorse and can negotiate, if the negotiation is not restricted.

c) Holder can sue in his own name in relation to the instrument.

d) Holder can complete an inchoate instrument.

e) Holder can give proper discharge to the person making the payment.

Holders in Different Situations

a) Legal heirs in case of a deceased holder.

b) There cannot be any holder of a forged instrument.

c) Drawee/acceptor continues to be liable to the true owner till the owner gets the payment

(in case of payment to a wrong person).

d) Payee or last endorse of an order cheque.

e) The person to whom a cheque is validly negotiated, in case of bearer cheques.

f) Person entitled to payment at the time of loss of an instrument in case of a lost instrument,

the finder cannot become holder. In such situation, if a transferee becomes holder in

due course, he gets good title. But in case of order cheque when endorsement of the

holder is forged, the transferee does not get any title because forgery conveys no title

(Sec 58).

g) The person is entitled to receive the payment in case of a damaged/ mutilated/ truncated

instrument.

HOLDER IN DUE COURSE (Sec 9): It means any person who for consideration became the

possessor of the negotiable instrument if payable to the bearer or payee or endorsee if payable to

the order before the amount mentioned in it became payable and without having sufficient cause

to believe that any defect existed in the title of the person from whom he derives his title.

Thus to become a holder in due course, the holder must have received the negotiable instrument

(a) for consideration; (b) in good faith i.e. without knowledge of any defect in the transferorstitle; and (c) before maturity.


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Privileges of a Holder in due Course:

Inchoate Stamped Instrument: Where one person signs and delivers to another, a

paper stamped in accordance with the law relating to negotiable instruments, and either

wholly blank or having written thereon an incomplete negotiable instrument, he thereby

gives prima facie authority to the holder thereof to make or complete, as the case maybe, upon it a negotiable instrument, for any amount specified therein and not exceeding

the amount covered by the stamped. The person so signing shall be liable upon such

instrument, in the capacity in which he signed the same, by any holder in due course for

such amount, provided that no person than a holder in due course shall recover from the

person delivering the instrument anything in excess of the amount intended by him to

be paid there under.

(Sec. 20). An Inchoate instrument means an incomplete instrument, which is not legally

invalid (say date or amount or place not stated i.e. anything other than signatures of the

drawer). The drawer or holder can complete such instruments. Where amount is not

filled by the drawer, holder has the right to complete it for an amount not more than the

one, intended. Even though inchoate instrument is valid, banks do not pay suchinstruments as it will not be the payment in due course and bank will not get the valid

discharge. Subsequently, if the same instrument if presented after completion by the

holder, the banks will make payment of such instruments if otherwise in order.

Liability of Prior Parties: Every prior party to a negotiable instrument is liable thereon

to a holder in due course until the instrument is duly satisfied (Sec 36).

Example: A draws and B accepts a bill of exchange payable to C or order.

C endorses the bill to D and D to E, who is a holder in due course. E can recover the

amount from A,B,C and D.

Fictitious Bill: If a bill is drawn payable to the drawers order in a fictitious name, the

acceptor is not relieved from liability to any holder in due course, provided endorsementand the drawers signatures are in the same handwriting (Sec.42).

No Effect of Conditional Delivery: If a BOE or PN is negotiated to a holder in due

course, the other parties to the instrument cannot escape liability on the ground that the

delivery of the instrument was conditional or for a special purpose only (Sec 6).

Example: A gives a promissory note to B. It is agreed that B will demand payment of

the note only on delivery of goods to A. Before the delivery of goods is effected, B

endorses it to C, a holder in due course, C can recover the amount from A (condition is

applicable between A and B).

Instrument obtained by unlawful means or for unlawful consideration When

a negotiable instrument has been lost, or has been obtained from any marker, acceptor

or holder thereof by means of an offence or fraud, or for an unlawful consideration, no

possessor or endorse who claims through the person who found or so obtained the

instrument is entitled to receive the amount due thereon from such marker, acceptor or

holder, or from any party prior to such holder, unless such possessor or endorsee is, or

some person through whom he claims was a holder thereof in due course. (Sec. 58).

Where holder in due course cannot be there?

There cannot be holder in due course in case of not-negotiable crossing because defective title is

not converted into better title (Sec 130) and for an instrument the title to which has been

obtained through forged endorsement (forgery does not convey any title as per Sec 58). Even if

the only word is written on the endorsement, this is a situation of restrictive endorsement andperson receiving there after cannot become the holder in due course.


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Conditions to become Holder in due course:

a) Person who claims to be holder in due course must have the negotiable instruments in

his possession. He must be payee or endorsee and a bearer.

b) He must obtain possession of it for real, valuable and lawful consideration (and not as a

gift) before its maturity, as after maturity, subsequent holders cannot be holders in duecourse, even though they acquire in good faith and for due consideration.

c) He must obtain it in good faith without any sufficient reason to believe that any defect

existed in the title of the person from whom he obtained it.

DISTINCTION BETWEEN HOLDER AND HOLDER IN DUE COURSE:

a) Holder in due course obtains the instrument for lawful consideration while the condition

of consideration does not apply to holder.

b) A person must acquire the possession of negotiable instrument before maturity to become

a holder in due course, while the holder may obtain the possession, even after maturity.

c) Negotiable Instruments must have been acquired in good faith and without sufficientreason to believe the existence of defect in title of a person from whom it had been

acquired, to be a holder in due course. On the other hand, this qualification is not

needed to be a holder.

d) A holder gets defective title while the holder in due course gets better title.

AMBIGUOUS INSTRUMENT: As per Sec 17, where the instrument is drawn in such a manner

that it can be construed both as a promissory note or bill of exchange, it is called ambiguous and

may be treated by the holder as anyone of these and instrument shall be treated and dealt with

accordingly.

ESCROW: When a negotiable instrument is delivered (to a third party to be handed over to thepayee) subject to fulfilment of some condition or for a special purpose as collateral Security or not

for the purpose of transferring absolutely, the property there in, it is called Escrow. For instance,

a cheque delivered to a person, with the condition that it should be encashed only if the payee,

complies with a condition.

NEGOTIATION AND ASSIGNMENT: Negotiable Instruments can be either negotiated under

NI Act or can be assigned under Transfer of Property Act by following the procedure for assignment.

Since the procedure of negotiable is easier and convenient and that of assignment is difficult, the

parties dealing with negotiable instruments adopt the procedure of negotiation.

Negotiation: It implies a transfer of negotiable instrument so as to constitute the transferee a

holder thereof who would be entitled in his own name to sue on the instrument and recover theamount due thereon. A negotiation involves the transfer of ownership of the instrument from its

holder to the other person.

Assignment: It means transfer of ownership in the instrument by means of a written and

registered document under the provisions of the Transfer of Property Act, 1882.

DISTINCTION BETWEEN NEGOTIATION & ASSIGNMENT

The two differ on the following grounds:

1) Consideration: Consideration is always presumed in case of transfer by negotiation.

There is no such presumption as to consideration in case of transfer by assignment; thetransferee must prove consideration for the transferor.


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2) Mode of Transfer: Negotiation is effected by mere delivery in case of an instrument

payable to bearer and by endorsement and delivery in case of instrument payable to

order. Assignment, on the other hand, requires a discharge on instrument and also a

written document signed by the transfer in favour of transferee / assignee, irrespective

of whether the instrument is bearer or order one.3) Title: In case of Negotiation, if the transferee is a holder in due course, he takes the

negotiable instrument free from all defects in the title of the previous transferor. But in

case of Assignment, the assignees claim shall he subject to all defects and equities that

may exist in the title of the assignor, even though he took the instrument for value and

in good faith.

4) Notice of Transfer: Assignment does not bind the debtor unless a notice of the

assignment has been given to him and he has, expressly or impliedly, assented to it.

But no information of the transfer of a negotiable instrument has to be given to the

debtor.

INSTRUMENTS MADE PAYABLE TO BEARER: RBI Act 1934 (Sec 31) vests all powers in RBIand Central Govt. and states that no person other than RBI or Central Govt. can draw, accept,

make or issue any bill of exchange or promissory note payable to bearer on demand. This Sec

also puts a restriction on making a promissory note payable to bearer by a person other than

RBI/Central Govt.

Although Sec 4 of NI Act, while defining a Promissory Note provides for issue of bearer promissory

note, but Sec 31 of RBI Act has over-riding effect. Therefore, currency note is not a promissory

note even though it contains the promise by the Government of India/Governor of RBI because it

has been specifically excluded from the definition of promissory note. In India currency notes are

governed by separate act i.e. Indian Currency Act.

MINOR IN RELATION TO NEGOTIABLE INSTRUMENT: As per Sec 26 of NI Act, a minor may

draw, endorse, deliver and negotiable the instruments so as to bind all parties except himself.

AGENCY (SEC 27 OF NI ACT): Every person capable of contact may bind himself or be bound

by a duly authorised agent acting in his name. A general authority to transact business and to

receive and discharge debts does not confer upon an agent the power of accepting or endorsing

bills of exchange so as to bind his principal. An authority to draw bills of exchange does not in

itself impart an authority to endorse.

DISTINCTION BETWEEN NEGOTIATION AND ENDORSEMENTS

NEGOTIATION: Negotiation means transferring an instrument from one person to another insuch a manner as to convey title and to constitute the transferee the holder thereof. As per Sec

46 delivery is important to complete negotiation, which may be actual or constructive. Without

delivery, the property will not be considered to have been transferred. For instance, if a person

endorses an instrument and expires without delivery to the endorses and his legal heirs deliver

him, the negotiation has not been completed.

Bearer Instruments (Sec 47) In case of bearer instruments, the negotiation is complete

with delivery only.

Order Instruments (Sec 48) The negotiation by endorsement and delivery would be required

in case of negotiable instruments payable to order. Sec 58 is the exception to the rule mentioned

is Sec 47 and Sec 48 because if the instrument is obtained through unlawful means or unlawful


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consideration negotiation will not take place. In case of order instruments, if after making the

endorsement holder dies legal heirs cannot deliver the instrument. However, if they are delivered,

the person who has received the instrument will not become holder in due course. The legal

representatives however can re-endorse and deliver.

ENDORSEMENTS: As per Sec 15 of NI Act, endorsement is made for the purpose of negotiableinstrument, by the maker or holder of a negotiable instrument, by signing on the face or backside

of an instrument or on a slip of paper called allonge or so signs for the same purpose on a stamp

paper intended to be completed as a negotiable instrument. A person who signs and transfers

the property is called endorser and in whose favour it is transferred is called endorse.

IMPORTANT ASPECTS OF ENDORSEMENT:

Types of Instruments Endorsed: Cheque, bill of exchange and promissory note can be endorsed.

Who can Endorse: An endorsement is made by maker or holder of an instrument.

Endorsement on face or back: As per Sec 15, the endorsement can be done on the back or on

the face of the instrument or on a slip of paper attached to it. But as per common usage, it is

usually done on the back of the instrument.

Number of Endorsements: There can be any number of endorsements on a NI as there is no

limit for negotiation.

Endorsement by Minor: A minor can endorse u/s 26 of NI Act, but he will not be liable as an

endorser.

Types of Endorsements: The endorsements may be blank or general, special, full, restrictive,

partial, conditional or qualified.

Blank Endorsements

Sec 16(1): If the endorser signs his name only, without adding any words or directions,

the endorsement is said to be blank.

Sec 54: In case of blank endorsement can be converted to an endorsement in full by

writing name of a person above the endorsers signatures. By doing so, such holder

does not incur the liability of an endorser because his name will not appear in the

instrument.

Endorsement in Full: Where the endorser signs his name and adds the name of endorsee

specifically, the endorsement is called full. Blank endorsements can be converted into full.

Restrictive Endorsement: To restrictive further endorsement, when the endorser adds words

like Pay the contents to X only or Pay X or order for the Account of Y or Pay X for my use, or

must be credit to Z the endorsement is said to be restrictive endorsements. (Sec 50).

Partial Endorsement: When an endorser transfers only a part of the amount of the negotiable

instrument to the endorsee, it is called partial endorsement. It is not a valid endorsement for

purpose of negotiation. Further if the cheque is partly paid and the fact is mentioned on the

cheque, it can be negotiated for the balance amount (Sec. 56).

Conditional Endorsement: An endorsement which stipulates some conditions is called conditionalendorsement. For example Pay to Mr. A when he marries. In case of conditional endorsement


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the fulfilment of condition is binding between endorser and endorsee only. The paying bank is

not bound to verify the fulfilment of such conditions. It is applicable between endorser and

endorsee i.e., between immediate parties only. If the instrument is endorsed further without

fulfilling the conditions, the other person will become the holder in due course because he has no

concern with the fulfilment of the condition.

Sans Recourse Endorsement: By adding the words like Pay Venkatesh or order without

recourse to me the holder excludes his liability as an endorser. This type of endorsement is

called Sans Recourse.

Facultative Endorsement: Where an endorser give up his rights or increases his liability by

express words by writing Pay Venkatesh or order, notice of dishonour waived, it becomes a

facultative endorsement.

Forged Endorsement: Endorsement made by person other than the holder, by signing the

name of holder, is called forged endorsement. All endorsees including a Holder or Holder in due

course or Holder for values subsequent to the forged endorsement do not derive any title to theinstrument. The paying banker gets protection as per Sec 85(1) provided the endorsement is

regular.

Effect of Endorsement: An unconditional endorsement of negotiable instrument followed by its

unconditional delivery, transfers to the endorsee the property therein, vesting in him the title to

the instrument. The endorsee acquires a right to negotiate the instrument to anyone he likes and

sue all parties whose names appear on it. The endorser on the other hand, assumes the liability

of a principal debtor till the instrument is paid.

Liability of Endorser U/s 25, by endorsing an instrument, the endorser impliedly promises that

On due presentment, the instrument will be accepted and paid,

In case of dishonour of bill, he will compensate the holder, provided the notice of dishonour

is given.

He will not deny to a holder in due course, the genuineness or regularity of the drawers

signature and endorsement and;

He will not deny the validly of endorsement and his title to the instrument to any

subsequent endorsee.

Every endorser after dishonour is liable as upon on instrument payable on demand.

Impairing Endorsers Remedy: Where the holder of a negotiable instrument without the

consent of the endorser destroys or impairs the endorsers remedy against any prior party, the

endorser is discharged from liability to the holder to the same extent as if the instrument has

been paid on maturity (Sec. 40).

For instance, if an instrument is endorsed by holder B in favour of C and C endorses it in favour

of D, D to E and B strikes the endorsement of C without the consent of E; B is not entitled to

recover anything from E and is absolved of his liability.

Negotiation back in favour of Endorser: When one of the prior endorsers again becomes

holder of the NI before maturity, it is called negotiation back. In such circumstances, all parties

subsequent to the said holder do not remain liable and cannot be sued by him on the bill. For

instance, where a cheque is endorsed by B in favour of C and C to D and by D to E and E

endorsers it in favour of C, C reaches at the previous position when he had endorsed in favourof D. C can demand payment from B only and not D & E.


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lines or of two parallel transverse lines simply, either with or without the words not negotiable,

that addition shall be deemed a crossing and the cheque shall be deemed to be crossed

generally.

Special Crossing: A Special Crossing implies the specification of the name of the banker on

the face of the cheque. Sec 124 of the NI Act reads, Where a cheque bears across its face,an addition of the name of a bank either with or without the words not-negotiable that

addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially,

and to be crossed to that banker. In simple words, a special crossing is a direction to the

paying bank for paying to that bank whose name is there on the face of the cheque.

Cancellation/Opening of Crossing: Crossing can be cancelled by the drawer only by adding

the words crossing cancelled and with proper authentication. The payment of such cheques

should preferably be given to drawer only as the chances of forgery in such cases could be high.

Protection to paying Bank for crossed cheque: Protection is available to a paying bank, as

per Sec. 128 of NI Act, if the same is a payment in due course as per Sec 10 of NI Act.NOT NEGOTIABLE CROSSING(Sec 130) The notation not-negotiable by itself does not

constitute a crossing. When it is added to a general or special crossing, the crossing becomes a

Not-negotiable Crossing.

The inclusion of the words not-negotiable takes away one of the important characteristics of

negotiability though the instrument continues to be transferable. The normal characteristic of

cheque is that the transferee of a cheque if he fulfils the requirements of holder in due course can

get absolute title to the cheque notwithstanding the defective title of the transferor. However, in

case of a cheque bearing not-negotiable crossing, the transferee of a cheque cannot have a

better title than that of the transferor inspite of fulfilling all the requirements of Holder in due

course as mentioned in Sec 9 of NI Act.

Further Transfers not restricted: Not-negotiable crossing does not restrict further transfers

but the endorsee do not get a better title than the endorsers.

Benefit of not negotiable crossing: This crossing protects the interest of drawer because if

the cheque goes into wrong hands the person will not get the better title, which means he will not

become the holder in due course and will not be able to demand the money from the drawer,

because drawer is answerable only to the holder in due course.

Not Negotiable Crossing warning to the endorse/holder: Not negotiable crossing is a warning

to the endorsee / holder to thoroughly ascertain that the endorser has right title over the instrument

in case he fails to do so, his title may become defective and he would be liable to the true owner

of the cheque.

Crossed cheque a direction to the Banker: All types of crossings are direction to the paying

banker that payment of the cheque must be made to a banker or through a banker only. However,

Account payee crossing even though not defined in N.I. Act but legally recognised is a direction to

the collecting banker that cheque must be collected in the Account of payee only. The resultant

effect of the same is that all types of crossed cheques can be endorsed but Account payee cheque

cannot be endorsed because it is to be collected in the Account of payee only.

If the collecting bankers sends the Account payee crossed cheque bearing endorsement for

collection, paying banker cannot make the payment of that cheque because the apparent tenorstates that Account payee cheque cannot be endorsed and if paying banker makes the payment


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of that cheque, if will not be a payment in due course. Therefore, the paying banker will return

the cheque with the reason that Account payee cheque cannot be endorsed. At the same time,

collecting the cheque for other than the Account of the payee will be liable for conversion.

Responsibility of the paying banker in case of Cross Cheques (Sec 129): Any banker

paying a cheque crossed generally otherwise, than to a banker, or a cheque crossed speciallyotherwise, than to a banker, to whom, the same is crossed or his agent for collection, being a

banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the

cheque having been so paid.

PAYMENT OF CHEQUES

Liability of Drawee (payment banker): It is statutory

Obligation of the banker of the banker to honour the cheques of a customer provided there is

sufficient balance and the cheque is otherwise in order.

Sec 31 of NI Act provides that The drawee of a cheque

a) Having sufficient funds of the drawer in his hands,

b) Property applicable to the payment of such cheque,

c) Must pay the cheque when duly required to do so and

d) In default of such payment, must compensate the drawer for any loss or damage caused

by such default.

As per the above Sec, following conditions must be satisfied:

a) The bank must have sufficient funds of the drawer in his hands.

b) The funds should be properly application to the payment of the cheque i.e. there should

not be any legal bar in payment of this cheque. Cheque should not be countermanded. There is no garnished order or attaching

the amount of cheque.

No notice is received regarding insolvency, death or insanity of customer.

There is no defect in the title of the customer and the cheque is otherwise in order.


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SPECIMEN OF CROSSING

Sec-123 Sec -124

GENERAL CROSSING SPECIAL CROSSING

IMPORTANT ASPECTS OF CROSSING

Two transverse lines essential for General Crossing: Two transactions lines across the face

of the cheque are essential for general crossing. A cheque generally crossed can be collected

through a banker-any banker i.e. the bank of the holder.

Two transverse lines not essential for Special Crossing: Drawing two parallel transverse

lines either with or bill of exchange or promissory note.

Who can cross: As per Sec 125, where a cheque is uncrossed, the holder may cross it generally

or specially.

Crossing can also be done by:

A drawer, at the time of issue,

A holder (general to special or not negotiable crossing) and

A banker who receives the cheque for collection (special crossing) can cross the

instruments again to another banker who is agent for collection.

Alteration of General Crossing to Special Crossing and vice versa: A general crossing canbe converted to a special crossing by the drawer or by any holder. However a special crossing can


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be changed to a general crossing only under the signatures of the drawer since it amounts to

material alteration.

Cheque crossed specially to more than one bank: As per Sec 127, if a cheque is crossed

specially to more than one bank (unless one bank is acting as collecting agent to another), the

payment shall be refused.

Cheque crossed to two or more branches of the same bank: A cheque crossed to two or

more branches of the same bank, is considered to be crossed to one bank only, because the

whole bank has indivisible corporate entity. Cheque can be collected by any branch of the bank

whether the name of the branch is mentioned or not.

Then duly required to do so means: Cheque should be in proper form, and issued from a

particular cheque book which is issued in that Account only and further properly filled & signed.

The Cheque should not be mutilated.

Any alteration should be duly authenticated.

Should not be stale or post-dated. It must be properly endorsed if necessary.

Cheque must be presented at the branch where Account is kept.

Presentment should be during business hours.

Liability of Wrongful Dishonour: If the banker wrongfully dishonours a customer cheque, the

bank is liable for damages to the customer. The damaged can be as under:

a) Nominal damages i.e. equal to actual loss.

b) Substantial damages i.e. direct and indirect loss e.g., if the bank has returned Rs. 5,000

cheque and customer alleges that cheque was for an advance amount paid for tender

and if the cheque would have been honoured by the bank he would have get a tender of

Rs. 5 lac and in that tender he could have earned Rs. 3 lac, the bank will have to

compensate for this indirect loss to the customer.

c) Exemplary damages i.e. compensation for defamation or mental agony suffered by the

customer due to the wrongful dishonour of the cheque.

Golden rule of Damages: In case of wrongly dishonour of cheque the smaller the amount

bigger the compensation.

Protection for Paying Banker in case of Cheque: Important Sections dealing with protection

for Paying Banker are:

a) Regularity of endorsement Sec. 85(1): Paying bankers liability is to ensure the regularity

of endorsement and is not concerned with genuineness of endorsement. The genuinenessof endorsement is the liability of collecting banker. Therefore, protection is available to

the paying banker in case of forged endorsements.

b) All endorsements on a bearer cheque are meaningless Sec. 85(2): It means once a

bearer, always a bearer.

c) Protection in case of demand draft 85(A): Protection as per 85(1) and (2) available for

a bank draft also.

d) Cheque with material alteration which is not apparently visible (Sec. 89): Where a

promissory note, bill of exchange or cheque has been materially altered but does not

appear to have been so altered, or where a cheque is presented for payment which does

not at the time of presentation appear to be crossed, the paying banker will get theprotection.


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e) Where the cheque is an electronic image of a truncated cheque, any difference in apparent

tenor of such electronic image of the truncated cheque shall be a material alteration and

it shall be the duty of the bank or the clearing house, as the case may be, to ensure the

exactness of the apparent tenor of electronic image of the truncated cheque while

truncating and transmitting the image.

f) Any bank or a clearing house which receives a transmitted electronic image of a truncated

cheque, shall verify from the party who transmitted the image to it, that the image so

transmitted to it and received by it, is exactly the same.

g) If a cheque payable to order, purports to be endorsed by or behalf of the payee and the

banker on whom it is drawn pay if in due course, the banker is discharged and he can

debit his customers Account with the amount so paid even if the endorsement of payee

might turn out to be forgery and might have been endorsed by payees agent without

his authority.

h) To claim the protection the payment must be a payment in due course (Sec 10).

PAYMENT IN DUE COURSE: As per Sec. 10, a payment would be consideration in due course ifit is made:

In accordance with the apparent tenor of the instrument.

In good faith and without negligence.

To the person in possession of the instrument.

Under circumstances which do not afford a reasonable ground for believing that he is

not entitled to receive payment of the amount mentioned therein.

It must be made in money only.

Apparent tenor: Apparent tenor implies that the bank should ascertain the actual intention of

the parties, as it appears or seen in the instrument. Payment of a crossed cheque in cash is nota payment in accordance with the apparent tenor. Similarly, a payment made after stop payment

instructions, after banking hours, of a forged cheque etc., are not the payments in due course.

(P.M. Das v. Central Bank of India, AIR 1978 Cal).

WHEN BANK SHOULD NOT PAY

Death of the drawer - The death of a drawer in case of individuals Account (such as Individual/

Proprietorship, Joint Accounts, HUF, Partnership Firm) terminates the contractual relationship.

Company in liquidation - The balance lying with the bank in case of company in liquidation,

vests with the official liquidator.

Insane customers - The insanity terminates the contractual capacity and payment after that

cannot be made.

Insolvent drawers - Where a customer is adjudged insolvent, the balance in the Account is

vested with official receive/assignee. Hence bank should stop the operations in the Account. If

the Account is having the credit balance, bank will remit the proceeds to official receiver/assignee

whenever demanded and in case of debit balance, bank should file the recovery before official

receiver/assignee because after insolvency bank cannot initiate the legal proceedings against

insolvent persons. Insolvency means commercial death of a person.

Countermanding - On receipt of valid stop payment instruction from the drawer bank must notpay. Stop payment instructions from others cannot be accepted but due precaution should be


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taken when information relating to loss of an instrument is received from others e.g., if the payee

informs the loss of cheque, he has no right to stop the payment but at the same time this has

become the suspicious instrument for the bank and payment of such instrument will never be a

payment in due course. The cheque will be returned with the reason cheque reported lost by the

payee, drawers instructions awaited.

OthersWhen cheque is post dated or bank has insufficient funds or cheques is of doubtful

legality, or the funds in the hands of the bank are not properly applicable to the payment, or

cheque or it is irregular, ambiguous or otherwise materially altered or has become stale etc.

PAYEE OF CHEQUESAFE GUARDS:

The bank should take abundant precaution while dealing with special type of payees such as

minors, insolvent, company representatives etc.

Minors Sec 26 states that a minor can draw, endorse, deliver and negotiable any negotiable

instrument, but he binds all parties except, himself. Hence a minor payee can be paid but it

should be ensured that he appears to be capable of obtaining payment because to get the valid

discharge it is the duty of the paying banker to make the payment in good faith and without

negligence.

Company/Corporation/Govt. Department - Cheques drawn in favour of a company should

not be paid in cash and should be credited to its Account, from where they can obtain cash

payments. The cheques drawn in favour of a company should be paid through a bank Account

only (even if bearer). Such cheques endorsed in favour of 3rd parties, directors and employees

should also not be paid. Similar treatment is given to the cheques relating to Govt. departments

or corporations.

Impersonal payees - Where the payee is impersonal, such as Bhagwan Ram or order, thepayment should be made to drawer or after getting an endorsement from a drawer.

Insolvent - The property of an un-discharged insolvent is vested in Official receiver and he is not

entitled to obtain payment, where he is payee of a cheque. Hence he should not be paid.

AMOUNT OF CHEQUE: If the amount ordered to be paid is stated differently in figures and in

words, the amount stated in words is paid irrespective of the fact, which amount is more or less.

(Sec 18).

BEARER OR ORDER CHEQUES

If the cheque is issued without mentioning the words order or bearer, it should be treated to bepayable to order. Its conversion from order to bearer should be with full signatures. However, if

the cheque is drawn payable to a person only i.e.. Mr. Amir Khan only, then it can be paid only

to Mr.Amir Khan and not his order. This cheque cannot be further endorsed also.

If both the words bearer as well as order is written and none of them is deleted, the cheque would

be considered as bearer.


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1) The bank must have acted in good faith and without negligence.

2) The cheque collected must be crossed.

3) Bank has received the payment as agent for collection.

4) Bank has collected the cheque in the duty introduced Account of customer only.

5) Collection has been good faith and without negligence

I) With faith: To get protection, the collecting bank should have acted bonafide and

should not have any fraudulent or malafide intention.

II) Without Negligence: A banker is said to be negligent if the circumstances are

such that he should have doubted the genuineness of the title of the customer to

the cheque but has failed to do so.

Example of Negligence: Three circumstances have to be consideration in deciding the question

whether a collecting bank has discharge its responsibility to come within Sec 131. These are:

Opening of an Account by its customer whether proper introduction was obtained.

The endorsement leading to the collection of the instrument whether there is anything

suspicious in it.

The operation of the Account whether there was anything peculiar in operating the

Account which could have aroused the suspicion of a banker.

DISHONOUR OF CHEQUES DUE TO INSUFFICIENCY OF FUNDS

With a view to discourage the issuing of cheques without sufficient balance, provisions were

introduced in NI Act in Secs 138 to 147. By these provisions returning of cheques with the

insufficient balance was made the criminal offence. The pre-requisites for criminal prosecution

under the Act are:

1) The cheque should have been issued for discharge of lawful liability. A cheque given in

gift will not fall in the framework. The cheque should be presented within validity

period.

2) Cheque should be returned with the reason insufficient balance but due to different

judgements of Supreme Court reasons like Refer to drawer, Account closed, Exceeds

arrangement, Payment stopped by drawer and effects not clear are treated equal to

insufficient balance.

3) Holder can have the legal remedy against drawer only.

4) The payee or holder in due course should give notice to drawer within 30 days of return

of cheque with the reason insufficient balance and demanding payment within 15 days

of his receiving information of dishonour.

5) The drawer can make payment within 15 days of the receipt of notice and only if he fails

to do so prosecution could take place.

6) The complaint can be made only by the payee or holder in due course.

7) The complaint is to be made within one month of the cause of action i.e. expiry of notice

period.

8) No court inferior to that of Metropolitan Magistrate or Judicial Magistrate of 1st class will

try the offence.

Two types of procedure for providing the punishment have been prescribed under the law:

Summary Proceedings: Punishment is fine up to Rs.5000 or imprisonment up to 1 year orboth.


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Regular Proceedings: Punishment is fine up to double the amount of cheque or imprisonment

up to 2 year or both.

All partners are liable except dormant partner and in case of company all Directors are liable

except Nominated Director.

Under regular proceeding, the court will conclude the trial within six months from the day of filing

of the complaint.

Magistrate issuing summons to an excused may direct a copy of summons to be served at the

place where such accused ordinarily resides or carries on business.

Banks cheque returning memo will be treated as prima facie evidence of return of cheque by the

court.

DEALING WITH INCIDENCE OF FREQUENT DISHONOUR:

With a view to enforce financial discipline among the customers, banks should introduce a conditionfor operation of Accounts with cheque facility that in the event of dishonour of a cheque valuing

rupees one crore and above drawn on a particular Account of the drawer on four occasions during

the financial year for want of sufficient funds in the Account, no fresh cheque book would be

issued. Also, the bank may consider closing current Account at its discretion. However, in

respect of advances Accounts, such as cash credit Account, OD Account, the need for continuance

or otherwise of these credit facilities and the cheque facility relating to these Accounts should be

reviewed by appropriate authority higher than the sanctioning authority.

For the purposes of introduction of the condition mentioned above in relation to operation of the

existing Accounts, banks may at the time of issuing new cheque book, issue a letter advising the

constituents of the new condition.

If a cheque is dishonoured for a third time on a particular Account of the drawer during the

financial year, banks should issue a cautionary advice to the concerned constitute drawing his

attention to aforesaid condition and consequential stoppage of cheque facility in the event of

cheque being dishonoured on fourth occasion on the same Account during the financial year.

Similar cautionary advice may be issued if a bank intended to close the Account.

n


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CHAPTER - 5

THE INDIAN CONTRACT ACT-1872

[W.e.f. 25th April, 1872]

Definition of a Contract: Sec. 2(h) defines a Contract as an agreement enforceable by law.

Every agreement and Promise enforceable at law is a contract.

Agreement & Enforceability by Law: An agreement comes in to existence whenever one or

more persons promise to one or others, to do or not to do something. As per the act agreement

is defined as every promise and every set of promises forming consideration for each other.

ESSENTIALS OF A VALID CONTRACT: Agreements become Contracts only if certain conditions

mentioned below are satisfied.

Offer & Acceptance must exist

Capacity to contract

Free consent

Certainly

Lawful consideration should exist

Intention to create a legal relationship should exist

Possibility of performance.

Legality of the object of contract

Sec 11 of the Contract Act lays down that every person is competent to enter in to a contract if:

He has attained the age of majority

He is of sound mind &

He is not disqualified from entering in to a contract by any law to which he is subject.

Minors Contracts: As per Sec. 11 of the act, one has to have attained the age of majority. As

such, an agreement made with a minor is Void-ab inito. A minor therefore is not liable to perform

any promise made by him under any agreement. In India minor will attain majority at age 18.

Contracts with a Pardanashin Lady: In banks we often come across contracts to be made

such as Account opening, a locker to be rented etc where the customer is a Pardanashin lady. It

is therefore essential for bankers to know that a contract with a Pardanashin lady is presumed to

be under undue influence; one has to show that there was no undue influence and full disclosure

of facts was shown to her before she entered the contract.

Void Agreements/Contracts: Contracts which cannot be carried out at all (even with the

consent of the parties concerned where available) are known as void contracts. For example, a

contract with the minor is void and even if he gives consent after becoming major, it will remain

void. All void contracts are invalid but they are not illegal. A contract with a minor is valid but it

is not illegal because no action can be taken against the person. But if the agreement is for

opening a gambling den, the agreement is invalid and also illegal and against public policy and

the parties is liable to be arrested. Agreements which can either be avoided or carried out by theaggrieved party are called Voidable agreements.


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Example: Mr. Venkatesh has entered in to an agreement to sell Basmati rice of A+ grade quality

to Shiva. However, when the consignment arrived. Shiva found that the rice received is of B+

quality. The actual consignment received by Shiva was of inferior quality. Shiva, therefore, is the

aggrieved party. It is up to him either to accept the consignment or refuse. Law will not interfere.

The following kinds of agreements have been specifically declared void under the act:1) Agreements without consideration (other than exception allowed)

2) Unlawful consideration

3) The object of the agreement is unlawful

4) Reciprocal promises where there are void promises

5) Where capacity to contract does not exist

6) Where there is Mistake of fact and law

7) Where Fraud exists

8) Wagering agreements

9) Agreements in restraint of trade10) Agreement in restraint of marriage

11) Agreement in restraint of legal proceedings

12) Agreements where performance is impossible

13) Vague agreements

PRELIMINARY

Section 1-Short title

This Act may be called the Indian Contract Act, 1872.Extent, Commencements.-It extends to the

whole of India 2*[except the State of Jammu and Kashmir]; and it shall come into force on the

first day of September, 1872.3* Nothing herein contained shall affect the provisions of any Statute,Act or Regulation not hereby expressly repealed, nor any usage or custom of trade, nor any

incident of any contract, not inconsistent with the provisions of this Act.

Section 2-Interpretation clause

In this Act the following words and expressions are used in the following senses, unless a contrary

intention appears from the context:-

(a) When one person signifies to another his willingness to do or to abstain from doing

anything, with a view to obtaining the assent of that other to such act or abstinence, he

is said to make a proposal:

(b) When the person to whom the proposal is made signifies his assent thereto, the proposalis said to be accepted. A proposal, when accepted, becomes a promise:

(c) The person making the proposal is called the promisor and the person accepting the

proposal is called the promisee:-

(d) When, at the desire of the promisor, the promisee or any other person has clone or

abstained from doing, or does or abstains from doing, or promises to do or to abstain

from doing, something, such Act or abstinence or promise is called a consideration for

the promise:

(e) Every promise and every set of promises, forming the consideration for each other, is an

agreement:

(f) Promises, which form the consideration or part, of the consideration for each other arecalled reciprocal promises;


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(g) An agreement not enforceable by law is said to be void;

(h) An agreement enforceable by law is a contract;

(i) An agreement which is enforceable by law at the option of one or more of the parties-

thereto, but not at the option of the other or others, is a voidable contract;

(j) A contract which ceases to be enforceable by law becomes void when it ceases to beenforceable.

CHAPTER I-OF THE COMMUNICATION, ACCEPTANCE AND REVOCATION OF

PROPOSALS

Section 3-Communication, acceptance and revocation of proposals

Communication, acceptance and revocation of proposals.-The communication of proposals the

acceptance of proposals, and the revocation of proposals and acceptances, respectively, are

deemed to be made by any act or omission of_ the party proposing, accepting or revoking by

which he intends to communicate such proposal acceptance or revocation, or which., has the

effect of communicating it

Section 4-Communication when complete

Communication when complete.-The, communication of a proposal is complete when it comes to

the knowledge of the person to whom it is made.

The communication of an acceptance is complete, as against the proposer, when it is put in a

course of transmission to him, so as to be out of the power of the acceptor; as against the

acceptor, when it comes to the, knowledge, of the proposer.

The communication of a revocation is complete, as against the person who makes it, when it is

put into a course of transmission to the person to whom it is made, so as to be out of the power

of the person who makes it; as against the person, to whom it is made, when it comes, to hisknowledge.

Examples: (1) A proposes, by letter, to sell a house to B at a certain price. The communication

of the proposal is complete when B receives the letter.

(2) B accepts As proposal by a letter sent by post. The communication of the acceptance is

complete, as against A when the letter is posted as against B, when the letter is received by A.

(3) A revokes his proposal by telegram. The revocation is complete as against A when the telegram

is despatched. It is complete as against B when B receives it. B revokes his acceptance by

telegram. Bs revocation is complete as against B when the telegram is despatched, and as

against A when it reaches him.

Section 5-Revocation of proposals and acceptances

A proposal may be revoked at any time before the communication of its acceptance is complete

as against the proposer, but not afterwards.

An acceptance may be revoked at any time before the communication of the acceptance is

complete as against the acceptor, but not afterwards.

Examples: A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal by

a letter sent by post.

A may revoke his proposal at any time before or at the moment when B posts his letter ofacceptance, but not afterwards.


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B may revoke his acceptance at any time before or at the moment when the letter communicating

it reaches A, but not afterwards.

Section 6-Revocation how made

A proposal is revoked-(1) by the communication of notice of revocation by the proposer to the other party-

(2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is

so prescribed, by the lapse of a reasonable time, without communication of the acceptance;

(3) by the failure of the acceptor to fulfil a condition precedent to acceptance; or

(4) by the death or insanity of the proposer, if the fact of his death or insanity comes to the

knowledge of the acceptor before acceptance.

Section 7-Acceptance must be absolute

In order to convert a proposal into a promise, the acceptance must-

(1) be absolute and unqualified;(2) be expressed in Some usual and reasonable manner, unless the proposal prescribes the

manner in which it is to be accepted. If the proposal prescribes a manner in which it is

to be accepted, and the acceptance is not made in such manner, the proposer may,

within a reasonable time after the acceptance is communicated to him, insist that his

proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to

do so, he accepts the acceptance.

Section 8-Acceptance by performing conditions, or receiving consideration

Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal

promise which may be offered with a proposal, is an acceptance of the proposal.

Section 9-Promises, express and impliedIn so far as the proposal or acceptance of any promise is made in words, the promise is said to be

express. In so far as such proposal or acceptance is made otherwise

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