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Law of Banking and Negotiable Instruments Act

Bills of Exchange

Meaning:

Bill of Exchange can be understood as a written negotiable instrument, that carries an unconditional order to pay a specified sum of money to a person or the holder of the instrument, as directed in the instrument by the maker. The bill of exchange is
either payable on demand, or after a specified term.

Definition:

A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain person or to the bearer of the instrument. (Section 5)

Parties to the Bill of exchange


a. Drawer: The maker of a bill of exchange.
b. Drawee: The person directed by the drawer to pay is called the ‘drawee’. He is the person on whom the bill is drawn. On acceptance of the bill he is called an acceptor and is liable for the payment of the bill. His liability is primary and unconditional.
c. Payee: The person named in the instrument, to whom or to whose order the money is, by the instrument, directed to be paid

Essential characteristics of bill of exchange


a) It must be in writing
b) Must contain an express order to pay
c) The order to pay must be definite and unconditional
d) The drawer must sign the instrument
e) Drawer, drawee and payee must be certain. All these three parties may not necessarily be three different persons. One can play the role of two. But there must be two distinct persons in any case. As per Section 31 of RBI Act, 1934, a bill of exchange cannot be made payable to bearer on demand.
f) The sum must be certain
g) The order must be to pay money only
h) It must be stamped.

Requirements of Bills of Exchange:

  1. There must be an order to pay. It is the essence of the bill that its drawer orders the drawee to pay money to the payee. Order in this section does not mean a command, but a direction for payment.
  2. This order must be unconditional, as the bill is payable at all events. Thus, it is absolutely necessary for the drawer’s order to the drawee to be unconditional. The order must not make the payment of the bill dependent on a contingent event. A conditional bill of exchange is invalid.
  3. Bill should not be made payable out of a particular fund, as thereby the payment is made dependent upon the existence or sufficiency of such fund. Where a bill contains an order to pay the amount specified therein out of a particular fund it will be conditional and therefore invalid.
  4. The drawer must sign the instrument. The instrument without the proper signature will be inchoate and hence ineffective. It is permissible to add the signature at any time after the issue of the bill. But if it is not so added, the instrument remains ineffectual.
  5. The drawer, the drawee (acceptor) and the payee are the necessary parties to a bill and are to be specified in the instrument with reasonable certainty. You should remember that all these three parties may not necessarily be three different persons. One can play the role of two. But there must be two distinct persons in any case.
  6. The sum must be certain.
  7. The medium of payment must be money and money only. The distinctive order to pay anything in kind will vitiate the bill. Thus, a bill must contain an order to pay in terms of money only and should be definite amount of money. The bill must be delivered to the payee, otherwise the bill be inchoate and hence ineffective.

Note:

Bills of exchange were originally used for payment of debts by traders residing in one country to another country
with a view to avoid transmission of coin. Now-a-days they are used more as trade bills both in connection with
domestic trade and foreign trade and are called inland bills and foreign bills respectively.

Kinds of Bills:

Inland Bills (Sections 11 and 12)

A bill of exchange is an inland instrument if it is (i) drawn or made and payable in India, or (ii) drawn in India upon any person who is a resident in India, even though it is made payable in a foreign country. But a promissory note to be an inland should be drawn and payable in India, as it has no drawee.
Two essential conditions to make an inland instrument are:
(i) the instrument must have been drawn or made in India; and
(ii) the instrument must be payable in India or the drawee must be in India.
Examples: A bill drawn in India, payable in USA, upon a person in India is an inland instrument. A bill drawn in India
and payable in India but drawn on a person in USA is also an inland instrument.

Foreign Bills

All bills which are not inland are deemed to be foreign bills. Normally foreign bills are drawn in sets of three copies.
Trade Bill
A bill drawn and accepted for a genuine trade transaction is termed as a trade bill. When a trader sells goods on credit, he may make use of a bill of exchange. Suppose A sells goods worth Rs. 1,000 to B and allows him 90 days time to pay the price, A will draw a bill of exchange on B, on the following terms: “Ninety days after date pay A or order, the sum of one thousand rupees only for value received”. A will sign the bill and then present it to B for acceptance. This is necessary because, until a bill is accepted by the drawee, nobody has either rights or obligations. If B agrees to obey the order of A, he will accept the bill by writing across its face the word “accepted” and signing his name underneath and then delivering the bill to the holder. B, the drawee, now becomes the acceptor of the bill and liable to its holders. Such a bill is a genuine trade bill.
Accommodation Bill
All bills are not genuine trade bills, as they are often drawn for accommodating a party. An accommodation bill is a bill in which a person lends or gives his name to oblige a friend or some person whom he knows or otherwise. In other words, a bill which is drawn, accepted or endorsed without consideration is called an accommodation bill. The party lending his name to oblige the other party is known as the accommodating or accommodation party, and the party so obliged is called the party accommodated. An accommodation party is not liable on the instrument to the party accommodated because as between them there was no consideration and the instrument was merely to help. But the accommodation party is liable to a holder for value, who takes the accommodation bill for value, though such holder may not be a holder in due course. Thus, A may be in need of money and approach his friends B and C who, instead of lending the money directly, propose to draw an “Accommodation Bill” in his favour.

Bills in Sets (Section 132 and 133)
Foreign bills are usually drawn in sets to avoid the danger of loss. They are drawn in sets of three, each of which is called “Via” and as soon as any one of them is paid, the others become inoperative. All these parts form one bill and the drawer must sign and deliver all of them to the payee. The stamp is affixed only on one part and one part is required to be accepted. But if the drawer mistakenly accepts all the parts of the same bill, he will be liable on each part accepted as if it were a separate bill.


Right to Duplicate Bill
The individual who held a bill of exchange may ask the drawer for another bill of the same tenor if it was lost before it became past due. A duplicate of a bill, promissory note, or check may only be requested by the holder.

Bank Draft:

Another term for a bill of exchange is a draft. When a bill of exchange is drawn by one bank on another bank or by the bank alone on its own branch and is a negotiable instrument, it is referred to as a bank draft. There are three similarities and three differences between it and the check. Only a bank, typically its own branch, is permitted to draw a bank draft on another bank. It cannot be overruled with such ease. It cannot be paid to the bearer.

Difference between Promissory Note and Bills of Exchange

  1. Number of parties: In a promissory note there are only two parties – the maker (debtor) and the payee (creditor). In a bill
    of exchange, there are three parties; drawer, drawee and payee; although any two out of the three may be filled by one
    and the same person,
  2. Payment to the maker: A promissory note cannot be made payable the maker himself, while in a bill of exchange to the
    drawer and payee or drawee and payee may be same person.
  3. Unconditional promise: A promissory note contains an unconditional promise by the maker to pay to the payee or
    his order, whereas in a bill of exchange, there is an unconditional order to the drawee to pay according to the direction of the drawer.
  4. Prior acceptance: A note is presented for payment without any prior acceptance by the maker. A bill of exchange is
    payable after sight must be accepted by the drawee or someone else on his behalf, before it can be presented for
    payment.
  5. Primary or absolute liability: The liability of the maker of a promissory note is primary and absolute, but the liability of
    the drawer of a bill of exchange is secondary and conditional.
  6. Relation: The maker of the promissory note stands in immediate relation with the payee, while the maker or
    drawer of an accepted bill stands in immediate relations with the acceptor and not the payee.
  7. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such protest is required to be
    made by the law of the country where they are drawn, but no such protest is needed in the case of a promissory note.
  8. Notice of dishonour: When a bill is dishonoured, due notice of dishonour is to be given by the holder to the drawer and the intermediate indorsers, but no such notice need be given in the case of a note.

Promissory Note

A written and signed commitment to pay back money in exchange for a loan or other funding is known as a promissory note. The principle debt amount, interest rate, maturity date, payment schedule, date and location of issuance, and the issuer’s signature are all commonly included in a promissory note.

Section 4 of the Act defines, “A promissory note is an instrument in writing (note being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments.”

What to include in a promissory note

The promissory note form should include

  • Name and address of borrower and lender
  • Maturity date
  • Sum borrowed
  • Payment schedule
  • Interest rate and how interest is calculated
  • Prepayments process
  • Overdue payment interest charged
  • Default
  • Waivers, amendments, and governing law for the promissory note

Parties of Promissory Note

All promissory notes constitute three primary parties. These include the drawee, drawer and payee.

  • Drawer: A drawer is a person who agrees to pay the drawee a certain amount of money on the maturity of the promissory note. He/she is also known as maker.
  • Drawee: She/He is an individual, in whose favour the note is prepared. In usual cases the drawee is also the payee until and unless the promissory note is transferred specifically in favour of the payee. For e.g. Ram is considered a drawer if he promises to pay Shyam Rs.5000 (Shyam is the drawee). However, if the same promissory note is transferred in favour of Rohan, then Rohan becomes the payee.
  • Payee: A payee is someone to whom the payment is made.

Most of the times, the payee and drawee are the same people to whom the cash is paid. The party who has loaned the money keeps the promissory note, and when the due is cleared, the payee or drawee cancels the note and gives it to the drawer/payee.

Features of Promissory Note

  • Printed/Written Agreement – A promissory should be in writing, and an oral promise to pay money is not accepted.
  • Pay Defined Amount – It is a promise to pay the money on a particular time or when demanded. The mentioned amount can neither be added or subtracted.
  • Signed Documents – The document is duly signed and drawn by the drawer and stamped.
  • Unconditional Promise – The promise to pay a certain amount of money must be absolute in all cases. In such notes, a conditional guarantee is not accepted.
  • Legal Composition – All the payment should be made in the nation’s legal currency.
  • Detailed Information – The note has all the required information including the name of the drawer and payee, date of maturity, terms of repayment, issue date, name of the drawee, name, and signature of the drawer, principal amount, and the rate of interest, etc.

Types of Promissory Notes

Depending upon the kind of promissory loan, notes are of different types. Few are mentioned below.

  • Personal Promissory Notes – This is a particular loan taken from family or friends. Though people avoid legal writings when seeking a loan from close contact, the promissory note shows belief and trust in the interest of the borrower.
  • Commercial – Here, the note is made when dealing with commercial lenders such as banks. Most of the commercial promissory agreement is similar to personal notes.
  • Real Estate â€“ This is similar to commercial notes in terms of nonpayment consequences. If the borrower becomes a defaulter, then the party has the right to keep the property until the debt is cleared. It is a little risky as all the essential details become public, which can hinder the borrower’s credit history in the future.
  • Investments – The promissory note is occasionally used to raise funds for the business. It is used as a security purpose and managed by securities laws. It includes terms and conditions related to returns of investment.

When is a promissory note invalid?

In general a promissory note is valid for 3 years starting from the date of execution. However there are other ways as well by which a promissory note becomes invalid. Let me answer what makes a promissory note invalid in India pointwise for your convenience. Here:

  • Incomplete or wrongly signed promissory note
  • Missing the date or amount in the note
  • Missing the interest rate
  • Missing the original copy
  • Clauses being unclear
  • Terms not clear enough
  • Changes made without drafting  new agreement
  • Passing the limited period of 3 years.

How Can You Prove Promissory Note Validity?

In the process of checking the validity of your note, the court will check the following things:

  • The Form of the Promissory Note

A written contract is required for a promissory note to be enforceable and valid; a verbal promise will not be considered a promissory note in court. As a result, lenders often employ standard forms as promissory notes that have been worded according to state law.

  • The Monetary Aspect

How long and under what circumstances is a promissory note valid? For as long as it takes to repay the borrowed amount. The sum should be expressed in a legitimate currency, according to the law. Apart from the principle of the loan, it should include:

  • a statement of the interest rate (if any)
  • the frequency with which scheduled payments will be made
  • the date on which the loan will mature (also known as the promissory note maximum duration)

If the note does not include this vital information relating to the loan’s repayment, it cannot be legally enforced.

  • The Signature

Even if a promissory note states the sum in the proper currency and has the most comprehensive of terms, if it’s not signed, that’s one of the cases when a promissory note is invalid.

After all, a promissory note is a kind of contract, therefore it will only be binding if the borrower signs the document. The signatures of both parties are important to indicate that they have accepted the terms of the agreement.

Cheque and its kinds

In legal terms, cheque is a negotiable instrument. “Negotiable” means transferable. A cheque given in the name of one person can be transferred to the ownership of another person, by merely putting a signature on the backside of the cheque. The second owner can also transfer it to a third person, by putting his signature below the signature of the first owner. This process is called “Negotiation” and the instrument is called “Negotiable Instrument”. A cheque is a negotiable instrument which is supplied by a banker to the customer who opens a savings or current account in a bank.


Definition of a cheque


According to Section 6 of the Negotiable Instruments Act, 1881, “a cheque is a bill of exchange, drawn on a specified banker and not expressed to be payable, otherwise than on demand”.
From the above definition; we come to know that,
 A cheque is always drawn upon a banker
 It is always payable on demand
Another definition of a Cheque
“Cheque is an instrument in writing containing an unconditional order, addressed to a banker, signed by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument.”


ESSENTIAL ELEMENTS / CHARACTERISTICS OF CHEQUE


Essential characteristics of a cheque
If we take a close look at the definition of a cheque, it becomes clear that a cheque has the following 10 essential elements or characteristics.

  1. It must be in writing: A cheque must be in writing. An oral order to pay does not constitute a cheque.
  2. It should be drawn on a banker: It is always drawn on a specified banker. A cheque can be drawn on a bank where the drawer has an account (saving bank or current account).
  3. It contains an unconditional order to pay: A cheque cannot be drawn so as to be payable conditionally. The drawer’s order to the drawee bank must be unconditional and should not make the cheque payable dependent on a contingency. A conditional cheque shall be invalid. (Example: Pay only if presented by Ram in person) This is conditional. So the cheque become not valid for payment, though presented properly.
  4. The cheque must have an order to pay a certain sum: The cheque should contain an order to pay a certain sum of money only. If a cheque is drawn to do something in addition to, or other than to pay money, it cannot be a cheque. For example, if a cheque contains ‘Pay USD 500 and a TV worth USD 500 to A’ it is not a cheque.
  5. It should be signed by the drawer and should be dated: A cheque does not carry any validity unless signed by the original drawer. It should be dated as well.
  6. It is payable on demand: A cheque is always payable on demand.
  7. Validity: A cheque is normally valid for three months from the date it bears. Thereafter it is termed as stale cheque. A post-dated cheque will not be valid. In both cases, the validity of the cheque is presumed to commence from the date mentioned on it.
  8. It may be payable to the drawer himself: Cheques may be payable to the drawer himself/herself. It may be drawn payable to bearer on demand unlike a bill or a pronote.
  9. Banker is liable only to the drawer: The banker on whom the cheque is drawn shall be liable only to the drawer. A holder or bearer has no remedy against the banker if a cheque is dishonoured.
  10. It does not require acceptance and stamp: Unlike a bill of exchange, a cheque does not require acceptance on part of the drawee. There is, however, a custom among banks to mark cheques as ‘good’ for the purpose of clearance. But this marking is not an acceptance. Similarly no revenue stamp is required to be affixed on cheques.

A Cheque payment involves three parties:


 The drawer of the cheque – Bank Account Holder
 Drawee of the cheque – on whom the cheque is drawn. It is the bank branch which has issued the cheque book. That bank branch, ultimately pays the cheque.
 Payee of the cheque /
Beneficiary of the cheque – The person to whom the amount of cheque is paid.

Form of the Cheque:

A cheque can take the form of an order written on an ordinary piece of paper. But generally the banks will supply printed cheque forms to the customer while opening the account and the customers as a rule must use only the printed cheque forms supplied only as that rule, if the order is made on piece of paper the bank will refuse payment.
Issue of Cheque: A cheque is said to be issued when the drawer parts it to another person. The issue of cheque is very important because the drawer is not liable on a cheque until he has issued it. Even if drawer is induced by fraud, it is deemed to be duly issued.
Dating of Cheque: A cheque is not invalid simply because it is not dated. But dating of a cheque is essential to find whether it is stale cheque or not. A stale cheque is one which is not presented for payment before three months from the date of issue of cheque.
Drawing of a Cheque
If the drawer makes the cheque properly and if the balance of the drawer at the bank permits, the bank must pay the amount of cheque as soon as it is presented. If the drawer does not make the cheque properly, the bank rejects payment. Hence, to make the cheque properly,
the following points or rules must be considered.

  1. Date: Date should be mentioned on the cheque properly. If the cheque is more than three months old or contains future date then the bank will not pay the amount.
  2. Name of the Payee: The name of the payee should be mentioned on the cheque.
  3. Amount of the Cheque: The amount of the cheque should be mentioned both in words and figures clearly. The amount written in the word should tally with the amount written in figures.
  4. Signature: The drawer should sign the cheque properly. The signature given on the cheque should tally with the signature given on the signature specification card. The signature specification card is kept by the bank.
  5. Account Number: The drawer should mention his account number clearly and correctly.
  6. Minimum Balance: The amount mentioned on the cheque should not be more than the amount deposited in the bank. Beside it, a certain amount of minimum balance should always be there in the account as per the rule of the bank.
  7. Overwriting: There should not be any overwriting in the cheque.
  8. Condition of the Cheque: Cheque should be in proper condition. If the cheque is torn, wet and spotted, it will not be acceptable to the bank.
  9. Endorsement: The ordered and crossed cheques should be transferred by proper endorsement and delivery. Otherwise, the amount of cheque will not be paid by the bank.

Kinds of Cheque:

Bearer Cheque:

Bearer cheques are the cheques which are used to withdraw money by the cheque’s owner. These types of cheques normally used for a cash transaction.


Order Cheque

Order cheque are the cheques which are withdrawn for the payee (the cheque withdrawn for another person). Before paying the amount to that payee, banks cross check the identity of the payee.


Crossed Cheque

Crossed cheques are cheques which bear, two parallel line made on the left top part of the cheques. Then that cheques formed to crossed cheques. In this type of cheques, payment is not made in cash while the payment of that type of cheque transferred to the payee’s account or to the person’s account recommended by the holder of the cheque.


Account Payee Cheque


When two parallel lines along with a crossing made on the cheque and the word ‘Account Payee’ written between these lines, then that types of cheques are called account payee cheque. The payment of the account payee cheque should be made to the person, firm or company on whose name the cheque was issued.


Company Crossed Cheque


When two parallel lines along with a cross made on the cheque and the word ‘Company’ written between these lines, then that types of cheques are called company crossed cheques. Normally crossed cheque and company crossed cheque are same.


Stale Cheque

If any cheque issued by a holder does not get withdrawn from the bank till three months, then that type of cheques are called stale cheque.


Post Dated Cheque

If any cheque issued by a holder to the payee given with a later date, then that type of cheques are called post-dated cheque.


Anti-Dated Cheque


If a cheque contains a date, prior to the date of presentation it is called Ante-Dated cheque Banker will honour this cheque till the completion of 3 months from the date of the cheque.

Endorsement

A negotiable instrument holder may endorse the instrument by signing his or her name on the reverse of the document, which mimics the transfer of ownership of the instrument. You can give someone or anything your endorsement by maintaining their good standing. As a result, we can conclude that an endorsement facilitates the transfer of property to another person or legal body. In this context, we shall learn about the various ways that legal endorsement of instruments is carried out.

In an act of endorsement, there are mainly two persons – Endorser and Endorsee who initiates the act overall. 

The person to whom the instrument is being endorsed is known as the endorsee.

 While the person who is making the endorsement is known as the endorser. 

Essentials of Endorsement –

 There are following Essentials of a valid endorsement –

(1) Endorsement must be on the instrument itself. If no space is left on the instrument, it must be on a separate slip of paper and entered to the instrument.

(2)The Endorser may endorse an instrument by simply writing his name on it, by stating his name specifically on it, or by adding a note to the effect that the instrument is payable on the order of the person to whom he has given his endorsement. No specific wording is required for the endorsement..

(3) The delivery of the instrument into your possession constitutes full endorsement. It’s crucial to deliver possession of the document with the goal of transferring the property to the endorsee. It should be noted that the endorser or someone acting on his behalf must make the delivery of possession..

(4) Endorsement must contain an order to pay. In need not contain any complementary prefixes and suffixes

Types of Endorsement

There are essentially two types of endorsements: The Signature in Blank According to Section 16 of the Negotiable Instrument Act of 1881, if the endorser simply signs his name, the underwriting is presumed to be clear. However, if he adds a heading requesting payment of the amount specified in the instrument to or on behalf of a specific person, the endorsement is presumed to be in full, and the person named in the heading is referred to as the endorsee of the document. The following list includes a number of established but lesser-known types.

There are six types of endorsement.These are applicable for endorsement in banking and various types of endorsement cheques: 

  1. Blank or General Endorsement
  2. Full Endorsement or Special Endorsement.
  3. Conditional Endorsement.
  4. Restrictive Endorsement.
  5. Partial Endorsement.
  6. Facultivate Endorsement. 
  1. Blank or General Endorsement

An endorsement is supposed to be blank or general endorsement when the endorser puts his unmistakable just on the instrument and doesn’t compose the name of anybody to whom or to whose request the installment is to be made. Thus, where a bill is payable to “Ram or order”, and he writes on its back “Ram”, it is an endorsement in blank by Ram and the property in the bill can pass by a mere presentation.

 2. Full Endorsement or Special Endorsement 

When the endorser includes the name of the person at whose request the payment is to be made in addition to his mark, this is known as a special endorsement or full endorsement. The person named as the endorsee of the instrument, who has now become its payee and is eligible to suit for the money owed on the instrument, has a heading added by endorsement.

A bill made payable to Ram or order, and endorsed “pay to the order of Shyam” would be specially endorsed and Shyam endorses it further. We can turn a blank endorsement into a special one by adding an order making the bill payable to the transferee.

3. Conditional Endorsement

A restrictive endorsement is an arrangement that has effects only when a specific event occurs and nothing else. According to Section 52 of the Negotiable Instrument Act of 1881, the endorser of a disputed instrument has the option to expressly reject his own risk in the future or to condition the endorsee’s right to receive the amount due on the occurrence of a predetermined event, even though such an event may never take place. All intermediate endorsers are obligated to him in the event that an endorser so limits his risk and thereafter becomes the holder of the instrument.

An endorsement may be made conditional in any of the following forms; 

( i) Sans Recourse Endorsement– An endorser may express by words to exclude his own liability on the negotiable instrument to the endorsee or any subsequent holder in case of dishonor of the instrument.  

(ii) Facultative Endorsement– An endorser in such type of endorsement expressly gives up some of his rights under the negotiable instrument. For instance, Pay X or order, notice of dishonor is waived.  

(iii) Sans Frais Endorsement– In this kind of endorsement an endorser does not want the endorsee or any holder of the instrument to incur any expense on his account.  

4. Restrictive Endorsement

A restrictive endorsement aims to eliminate a Negotiable Instrument’s key characteristics and ends further negotiation. This may seem a little out of the ordinary, but the endorsee is especially within his rights if he signs that the subsequent action is restricted. This eliminates the possibility of an unapproved person losing money by fraudulently obtaining an instalment and misrepresenting themselves.

Example of restrictive endorsement: “Pay to Mrs. Geeta only” or “Pay to Mrs Geeta for my use” or “Pay to Mrs Geeta on account of Reeta” or “Pay to Mrs. Geeta or order for collection”.

 5. Partial Endorsement

When the endorser suggests to transfer to the endorsee, simply a portion of the amount payable, an endorsement is supposed to be a partial endorsement. Halfway underwriting is the simple name for support that facilitates transferring to the endorsee a portion of the amount due.. Example: Mr. Mohan holds a bill for Rs. 5,000 and endorses it as “Pay Sohan or order Rs. 2500”. The endorsement is partial and invalid.

6. Facultative Endorsement 

Underwriting that involves the endorser deferring a privilege to which he is entitled is known as facultative endorsement. For instance, the endorsee may withdraw out of scorn for the endorser, and normally, the endorser’s inability to withdraw will absolve him of his risk.

EFFECTS OF ENDORSEMENT 

  1. Transfer- The property in instrument is transferred from endorser to endorsee. 
  2. Right to negotiate- The endorsee gets the right to negotiate the instrument. 
  3. Right to sue- The endorsee gets the right to sue in his own name to all other parties. 

Negotiation Back

Where an endorser negotiates an instrument and again becomes its holder, we know it as negotiation back to that endorser. After negotiation back, none of the intermediary endorsees are then liable to him.

For example, Ram, the holder of a bill endorses it to Bala, Bala endorses to Kala, and Kala to Lala, and endorses it again to Ram. Ram, being a holder in due course of the bill by the second endorsement by Lala, can recover the amount thereof from Bala, Kala, or Lala and himself being a prior party is liable to all of them.

Therefore, Ram having been relegated by the second endorsement to his original position, cannot sue Bala, Kala, and Lala. Where an endorser so excludes his liability and afterwards becomes the holder of the instrument, all the intermediate endorsers are liable to him. “the italicized portion of the above Section is important”.

An illustration will make the point clear. Ram is the payee of a negotiable instrument. He endorses the instrument ‘sans recourse’ to Bala, Bala endorses to Kala, Kala to Lala, and Lala again endorses it to Ram. In this case, Ram is not only reinstated in his former rights but has the right of an endorsee against Bala, Kala, and Lala.

Negotiation of Lost Instrument or that Obtained by Unlawful Means

No possessor or endorsee is entitled to receive the sum owed on a negotiable instrument from a maker, acceptor, or holder from any party anterior to such holder if the instrument was lost or gained from such a party by fraud, illicit methods, or otherwise. He is not permitted to do so unless the possessor or endorsee is, or someone he claims to be, a holder in due course.

Forged Endorsement

When an instrument is fully endorsed, we are unable to negotiate it without an endorsement that is dated and signed by the person to or whose order the instrument is payable. The reason for this is that the endorsee only acquires title through his endorsement. The endorsee does not obtain ownership even though he is a purchaser for value and in good faith if an instrument is negotiated using a forged endorsement since the endorsement is invalid.

Forgery doesn’t confer a title. The holder obtains his title independently of the fake endorsement, however, where the instrument is a bearer instrument or has been endorsed in blank. Additionally, he has the right to pursue payment from any signatory to the instrument.

For example, a bill is endorsed, “Pay A or order”. A endorses it in the blank, and it comes into the hands of B, who simply delivers it to C. C forges B’s endorsement and transfer it to D. Here, D, as the holder does not derive his title through the forged endorsement of B, but through the genuine endorsement of A. Thus, he can claim payment from any of the parties in spite of the intervening forged endorsement.

Conclusion

The holder of a negotiable instrument may sign his or her name on the back of that instrument, which replicates the transfer of title or ownership of that negotiable instrument, this process is termed as an endorsement. An endorsement can be done by keeping another individual or an entity in a favorable position. Thus, we can say that an endorsement helps in the transfer of the property to another individual or a legal entity.

E-banking system in the banking sector

 Introduction


The process of globalization and liberalization has virtually transformed the way of business across the globe. The technological innovation of improvements in the communication networking helped the banking sector activities through re-engineer its works. E-Banking is considered as an important input for rapid growth of economic development by providing mechanism of electronic inputs to the banking sector. E-banking is the banking of new era. The term Internet Banking or E-Banking Internet both are used as supplement. E-Banking system makes the banking transactions easy for the bankers as well as customers in the modern world where all persons are busy with their hectic schedule. In fact, banks have been using electronic and telecommunication Networks for delivering a wide range of value added products and services. 

 Development of E-Banking System

The wind of globalization has affected each and every sector of its economy and entered into all the activities of the banking sector. Though the E-Banking system developed in the late ‘1980s and referred to the use of a terminal, keyboard and TV (or monitor) to access the banking system using a phone line. ‘Home banking’ can also refer to the use of a numeric keypad to send tones down a phone line with instructions to the bank. Online services started in ‘New York’ in 1981 when four of the city’s major banks (Citibank, Chase Manhattan, Chemical and Manufacturers Hanover) offered home banking services using the videotex system, television system and telephonic system. The UK’s first home online banking services were set up by the ‘Bank of Scotland’ in year 1983. The system (known as ‘Homelink’) allowed on-line viewing of statements, bank transfers and bill payments. In order to make bank transfers and bill payments. Though E-Banking system was more popularized amidst of the foreign countries later on in the early 1990’s E-Banking system developed in India too and development was not possible without creating sufficient infrastructure or presence of sufficient number of users. The experience of ICICI Bank Ltd. and HDFC Bank Ltd. shows that the number of transactions carried out on the internet is very limited in India.

Definition of E-Banking:

E-banking is defined as the automated delivery of new and traditional banking products and services directly to customers through electronic, interactive communication channels. E-banking includes the systems that enable financial institution customers, individuals or businesses, to access accounts, transact business, or obtain information on financial products and services through a public or private network, including the Internet. Customers access e-banking services using an intelligent electronic device, such as a personal computer (PC), personal digital assistant (PDA), automated teller machine (ATM), kiosk, or Touch Tone telephone. While the risks and controls are similar for the various e-banking access channels.

Services covered under E-Banking

E-Banking has numerous benefits to offer. Nowadays, all banks provide online banking facility to their customers as an additional advantage. Gone are the days, when one has to transact with a bank which was only in his local limits. Online banking has opened the doors for all customers, to operate beyond boundaries. The popular services covered under E-banking include :-

  •  Automated Teller Machines(ATM)
  •  Credit Cards
  •  Debit Cards
  •  Smart Cards
  •  Electronic Funds Transfer (EFT) System
  •  Cheques Truncation Payment System
  •  Mobile Banking
  • Telephone Banking 
  •  Internet Banking

Problems While Using E-Banking Facilities

E-Banking system removes the traditionally geographical basis as it could reach out to all the customers of different countries and regions. The popularity of internet banking is growing rapidly as the transactions are becoming faster and more convenient. Internet banking is the latest development that has added a new dimension to banking transactions by making it more convenient, which has eliminated the long wearisome queues. But, there are some serious problems that a customer may encounter while banking through the internet, due to which many still prefer to go directly to the banks instead of availing this facility. There are certain problems of E-Banking system which are as follows:

 Computer and Internet knowledge is very much required for using the facility of E-Banking by the customer because of which limits number of persons willing to avail this facility. Therefore it is the major problem in the country like India where literacy ratio is low.

While banking through the internet, you have to be careful about the security of your internet bank account. The security of your internet bank account depends to a great extent on the security of your computer, password and pin number. Any leakage of information regarding your password or pin number and banking transactions can allow computer hackers to gain access to your bank account, which is the most common internet banking problem. This can even lead to unauthorized and criminal transactions being conducted without your knowledge. By the time you get your bank statement and detect such transactions, it may be too late.

  •  Some proxy websites can easily access customer’s bank account, if they can crack one’s user name, password or pin number. Due to such security problems, many people are apprehensive about internet banking.
  •  Though E-Banking system saves the time of customers but it is very difficult to use this facility by customers who do  Lack of trust on d machines provided by the banks may be another problem as there is no safety of money through online banking.
  •  Technical problems with respect to the computers and internet facilities may be one of the problems which must be taken into consideration.
  •  Customer is always in problem with respect to the security of its password, pin number and bank related information.
  •  Customer care service also does not provide accurate information always as numbers of transactions are increasing along with customers.

Advantages of E-Banking System

E-banking system has gained wide acceptance internationally and it can be considered as a remarkable development in the banking sector. In India also the things are changing fast and most of the banks are providing E-Banking services to their customers and there are many advantages of using E-Banking service to the customers which are as follows:

  •  Paying Bills Online is the major advantage to the customer’s who can pay bills i.e. telephone, electricity, shopping, loans amount (EMI) and payment of tickets booking online.
  •  Time saving and easy to get information of bank account.
  •  Customers are no longer required to wait in those long and crowded queues of the banks to request a financial transaction or statement.
  •  E-Banking offers convenience to the customers as they are not required to go to the bank’s premises.
  •  E-Banking provides monthly e-statement facilities to the customers which saves the time of bankers as well as customers.
  •  Low incidence of errors increases the number of users/customers of E-Banking which results in the great advantage.
  •  The customers can obtain funds at any time from ATM machines.
  •  The credit cards and debit cards enables the Customers to obtain discounts from retail outlets.
  •  Reduction in the administrative costs and paperwork related to the transactions. Besides, banks can also cater to the needs of thousands of customers at the same time. All these factors have significantly increased the profit margins of commercial banks by lowering their operating costs.
  •   Transactions of transferring of funds from one person account to another person’s account became much more   faster and convenient both national and international level.
  •       Accessing bank account information at any day or any time irrespective of banks off working hours.
  •       Quickest way to check and see if a transaction has cleared your account. This can help you to find out the amount of a transaction after you have lost your receipt.
  •      E-Banking also allows customers to find out about unauthorized transactions of their accounts more quickly and to resolve the issues more quickly.

Disadvantages of E-Banking System:

In today’s cyber world where when people do not have much time even for their personal work, E-Banking appears as a boon. Internet banking has become very popular in the recent years, as it is quick and easy. Though E-Banking provides more advantages than traditional banking however, it has some disadvantages too which are as listed:

  •  Setting up an account in the bank may take time though the E-Banking facility is provided by the banks.
  •  Internet account of customer with an Internet Service Provider (ISP) which may be another hectic experience.
  •  Banking sites can be difficult to navigate at first by the customers who do not have knowledge of computer and internet so getting acquitted with the banking sites software may require some time to read the tutorials in order to become comfortable in persons virtual lobby. There may be some difficulties to the customer for learning these activities of E-Banking.
  •  Some alterations or changes made in the banks sites due to technological advancement may lead to a problem to customers who have to provide all the personal information once again through online transaction.
  •  E-Banking is time consuming for the customers, though there is option of online transactions, in the end customers have to run to the ATM for withdrawing the cash.
  •  No personal contact with any of the bank staff, and if talk to any bank staff through the telephone, there is no guarantee to the customers that they had talked with a right person or not.
  •  â€œHackers” who may access customer’s bank account is the main disadvantage to the customers who takes E-Banking facility very casually.
  •  Security concern is the important issue as cybercrimes activities are clutching up which decreases the number of customers to avail the benefit of e- banking. 
  • technical breakdowns where online banking websites sometimes go down. If this happens then, if customer wishes to close his bank account then he will definitely go penniless.
  •  Switching banks due to technical faults can be a major disadvantage of using E-Banking system to the customer.
  •  Increasing online frauds and attacks i.e. Trojan horse (Remote Attacker) are a major disadvantage of using E-Banking.
  •  However, in the case of Internet banking, one will find oneself making endless calls to the customer service department. There have been cases, where the person is put on hold or has been passed around from one person to another.
  •  Hackers and crackers attack on the bank account of customer by stealing passwords or using fake credit cards to cheat a person which will cause loss to the customer’s wealth.

Guidelines By Reserve Bank of India

Reserve Bank of India being the highest authoritative bank and main head of all the nationalized banks in India, had set up a ‘Working Group on Internet Banking’ to examine different aspects of Electronic Banking (E-banking). The Group had focused on three major areas of E-banking, i.e. (i) technology and security issues, (ii) legal issues and (iii) regulatory and supervisory issues. Accordingly, the following guidelines are issued for implementation by banks. Banks are also advised that they may be guided by the original report, for a detailed guidance on different issues. These issues can be defined as:

  1.  Technology and Security Issues: Banks should designate a network and database administrator with clearly defined roles as indicated in the Group’s report. Banks should have a security policy duly approved by the Board of Directors. There should be a segregation of duty of Security Officer exclusively with information systems security and Information Technology Division which actually implements the computer systems. Further, Banks should also adopt and implement some new policies relating to security check ups and should inform customers about new technologies concerning E-Banking. Banks should also take steps to
  2.  Legal Issues: There is always an obligation on the parts of banks to keep the proper records of its customers manually as well as electronic. While opening an account of customer by internet a complete identification documents must be collected by the customer and a physical verification need to be done so that it will assist bank to avoid any legal risk. From a legal prospective, security procedure adopted by banks for authenticating users needs to be recognized by law as a substitute for signature. There must be strict rules regarding instructions by the customers for stop-payment and banks should clearly state the consequences in which stop-payment instruction could be accepted by the bank.
  3.  Regulatory and Supervisory Issues: Only such banks which are licensed and supervised in India and have a physical presence in India will be permitted to offer Internet banking products to residents of India. The products and schemes of the bank should be limited to the account holders only but not to the extra territorial jurisdictional account holders. Indian overseas banks must be permitted to offer internet services. A supervisory authority need to be appointed so that it will assist in avoiding any illegal transactions.

Risk Involved In Using E-Banking

E-Banking poses some different risks as compared to the traditional banking. These risks are more pronounced in the case of Internet banking. Firstly, the risk of technological changes has to be carefully watched. This is essential to update technologies and remain cost effective and customer friendly. The banks have to be careful about risks involved in agreements with third parties. The security is an important area of risk. In fact it will be very crucial for the expansion of Net Banking. Another important area will emerge out of cross-border implications as ‘E- Banking’ breaks the geographical boundaries. Imposing regularity conditions on such transactions will be a difficult task

E-Banking Frauds

Fraudsters are continuing their switch from traditional card fraud to raiding online bank accounts. According to the new research Fraud losses on UK credit and debit cards totalled £440m in 2009 – a drop of 28% compared with the previous year – the UK Cards Association said. But the number of “phishing” attacks rose by 16% in the same period. This is when fraudsters trick people into entering their personal details on a website or in e-mails. As there is expansion in the illegal activities of the hackers, crackers and Trojan horse there must be a strict law to punish such criminals. Online frauds are very common nowadays because it is easy to access or to obtain password, pin code and account number of customers by hackers. Recently there is a case which is known as ‘ICICI Bank Fraud Case’ where Rs/- 150000 was stolen by the person’s bank account and it was a heavy loss of money to the account holder though the complaint was filed by the account holder but banks are still silent on that issue as banks too have no idea how these activities are taking place.

Conclusion

E –Banking has changed the traditional patterns of bank operations. These changes in technology, competition and lifestyles all have an impact on how banks operate today. Actually the customer had to physically visit the bank office in order to carry out banking operations. With the introduction of e – banking customers are saving money and time since they don’t have to physically visit the bank office. Every bank realizes that they must provide some kind of e – banking to their customers in order to survive. Through e –banking banks can better maintain the relationship with customers because with e – banking customers tend to interact more with provided services. It also increases the revenues of banks and can easily gain competitive advantage through differentiation of banking services and thereby an image improvement. In true E -banking, any inquiry or transaction is processed online without any reference to the branch In true E -banking, any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time. Providing internet banking is increasingly becoming a ‘need to have’ than a ‘nice to have’ services.

ENDORSEMENT

An endorsement may be a signature authorizing the legal transfer of a negotiable instrument between parties, or it can be an amendment to a contract or document, such as a life insurance policy or a driver’s license. A public declaration of support for a person, product, or service is also called an endorsement.

Endorsement means signing at the back of the instrument for the purpose of negotiation. The act of the signing a cheque, for the purpose of transferring to the someone else, is called the endorsement of Cheque. The endorsement is usually made on the back of the cheque. If no space is left on the Cheque, the Endorsement may be made on a separate slip to be attached to the Cheque.

Definition of Endorsement

According to Section 15 of the Negotiable Instruments Act 1881, When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the “endorser”.

The person to whom the instrument is being endorsed is known as the endorsee. While the person who is making the endorsement is known as the endorser.

Essentials of Endorsement

There are following Essentials of a valid endorsement –

(1) Endorsement must be on the instrument itself. If no space is left on the instrument, it must be on a separate slip of paper and entered to the instrument.

(2) Endorsement may be made by the Endorser either by merely signing his name on the instrument or by specifying his name on the instrument or by specifying in addition to his signature on the person to whom on to whose order the instrument is payable. No particular form of words is necessary for the endorsement.

(3) Endorsement must be completed by the delivery of possession of the instrument. The delivery of possession of the instrument with intention of passing the property to endorsee is important. It is worth mentioning that the delivery of possession must be made by the endorser himself or by someone on his behalf.

(4) Endorsement must contain an order to pay. In need not contain any complementary prefixes and suffixes

Types of Endorsement

An endorsement is basically of two sorts:The Endorsement in Blank The Endorsement in full As indicated by Section 16 of the Negotiable Instrument Act, 1881, if the endorser signs his name just, the underwriting is supposed to be in the clear, and on the off chance that he adds a heading to pay the sum referenced in the instrument to, or to the request for, a predetermined individual, the Endorsement is supposed to be in full, and the individual so determined is known as the endorsee of the instrument. There are some different sorts which are established, however, not well known, which are given underneath.There are six Kinds of Endorsement i) Endorsement in Blank / General ii) Endorsement in Full / Special iii) Conditional Endorsement iv) Restrictive Endorsement v) Endorsement Sans Recourse vi) Facultative Endorsement.

  1. Blank or General Endorsement

An endorsement is supposed to be blank or general endorsement when the endorser puts his unmistakable just on the instrument and doesn’t compose the name of anybody to whom or to whose request the installment is to be made. Thus, where a bill is payable to “Ram or order”, and he writes on its back “Ram”, it is an endorsement in blank by Ram and the property in the bill can pass by a mere presentation.

 2. Full Endorsement or Special Endorsement 

A special Endorsement or full Endorsement is when the endorser, notwithstanding his mark, additionally notices the name of the individual to whom or to whose request the installment is to be made. There is a heading added by Endorsement to the individual indicated called the endorsee of the instrument who presently turns into its payee qualified to sue for the cash due on the instrument.  

A bill made payable to Ram or order, and endorsed “pay to the order of Shyam” would be specially endorsed and Shyam endorses it further. We can turn a blank endorsement into a special one by adding an order making the bill payable to the transferee.

3. Conditional Endorsement

 The restrictive endorsement is an arrangement that produces results on the occurrence of an expressed occasion, or not something else. Segment 52 of the Negotiable Instrument Act 1881 gives the endorser of a debatable instrument may, by express words in the Endorsement, reject his own risk subsequently, or make such obligation or the privilege of the endorsee to get the sum due consequently rely on the occurrence of a predetermined occasion, albeit such occasion may never occur. Where an endorser so prohibits his risk and a short time later turns into the holder of the instrument, all intermediates endorsers are obligated to him.

An endorsement may be made conditional in any of the following forms; 

( i) Sans Recourse Endorsement– An endorser may express by words to exclude his own liability on the negotiable instrument to the endorsee or any subsequent holder in case of dishonor of the instrument.  

(ii) Facultative Endorsement– An endorser in such type of endorsement expressly gives up some of his rights under the negotiable instrument. For instance, Pay X or order, notice of dishonor is waived.  

(iii) Sans Frais Endorsement– In this kind of endorsement an endorser does not want the endorsee or any holder of the instrument to incur any expense on his account.  

4. Restrictive Endorsement

 Restrictive Endorsement tries to end the chief qualities of a Negotiable Instrument and seals its further debatability. This may sound somewhat unordinary, yet the endorsee is especially inside his privileges on the off chance that he so signs that its resulting move is limited. This forestalls the danger of unapproved individual acquiring installment through misrepresentation or falsification and losing their cash. 

Example of restrictive endorsement: “Pay to Mrs. Geeta only” or “Pay to Mrs Geeta for my use” or “Pay to Mrs Geeta on account of Reeta” or “Pay to Mrs. Geeta or order for collection”.

 5. Partial Endorsement

An endorsement is supposed to be a partial endorsement when the endorser indicates to move to the endorsee, just an aspect of the sum payable. In straightforward terms, support which permits moving to the endorsee an aspect of the sum payable is known as halfway underwriting.

Example: Mr. Mohan holds a bill for Rs. 5,000 and endorses it as “Pay Sohan or order Rs. 2500”. The endorsement is partial and invalid.

6. Facultative Endorsement 

Facultative Endorsement is an underwriting where the endorser defers some privilege to which he is entitled. For instance, the endorsee is subject to pull out of disrespect to the endorser, and typically inability to pull out will vindicate the endorser from his risk.

EFFECTS OF ENDORSEMENT 

  1. Transfer- The property in instrument is transferred from endorser to endorsee. 
  2. Right to negotiate- The endorsee gets the right to negotiate the instrument. 
  3. Right to sue- The endorsee gets the right to sue in his own name to all other parties. 

Negotiation Back

Where an endorser negotiates an instrument and again becomes its holder, we know it as negotiation back to that endorser. After negotiation back, none of the intermediary endorsees are then liable to him.

For example, Ram, the holder of a bill endorses it to Bala, Bala endorses to Kala, and Kala to Lala, and endorses it again to Ram. Ram, being a holder in due course of the bill by the second endorsement by Lala, can recover the amount thereof from Bala, Kala, or Lala and himself being a prior party is liable to all of them.

Therefore, Ram having been relegated by the second endorsement to his original position, cannot sue Bala, Kala, and Lala. Where an endorser so excludes his liability and afterwards becomes the holder of the instrument, all the intermediate endorsers are liable to him. “the italicized portion of the above Section is important”.

An illustration will make the point clear. Ram is the payee of a negotiable instrument. He endorses the instrument ‘sans recourse’ to Bala, Bala endorses to Kala, Kala to Lala, and Lala again endorses it to Ram.

In this case, Ram is not only reinstated in his former rights but has the right of an endorsee against Bala, Kala, and Lala.

Negotiation of Lost Instrument or that Obtained by Unlawful Means

When a negotiable instrument has been lost or has been obtained from a maker, acceptor or holder by means of fraud, or for an unlawful act, no possessor or endorsee, is entitled to receive the amount due thereon from such maker, acceptor, or holder from any party prior to such holder.

He cannot do so unless such possessor or endorsee is, or some person through whom he claims was, a holder in due course.

Forged Endorsement

If an instrument is endorsed in full, we cannot negotiate it except by an endorsement signed by the person to whom or to whose order the instrument is payable.

This is so because the endorsee obtains title only through his endorsement. Thus, if an instrument is negotiated by means of a forged endorsement, the endorsee acquires no title even though he is a purchaser for value and in good faith, as the endorsement is a nullity.

Forgery conveys no title. But where the instrument is a bearer instrument or has been endorsed in blank, it can be negotiated by mere delivery, and the holder derives his title independent of the forged endorsement. Also, he can claim the amount from any of the parties to the instrument.

For example, a bill is endorsed, “Pay A or order”. A endorses it in the blank, and it comes into the hands of B, who simply delivers it to C. C forges B’s endorsement and transfer it to D. Here, D, as the holder does not derive his title through the forged endorsement of B, but through the genuine endorsement of A. Thus, he can claim payment from any of the parties in spite of the intervening forged endorsement.