Friday, January 30, 2015

Negotiable Instruments - Part I

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What is a negotiable instrument?

Negotiability of an instrument depends on 2 criteria -
  1. Price Rigidity - The price of the instrument is not firmly established, and can be adjusted depending on the circumstances. If it cannot be adjusted or be changed, then it is non-negotiable.
  2. Transferability - The instrument can be transferred from one party to another, provided all proper documentation are included and valid. But if the ownership cannot be transferred, then it is deemed to be a non-negotiable instrument.
For example, Certificate of Deposit (CD) is a negotiable instrument, whereas Indian Government Savings bonds are non-negotiable instruments.

Negotiable Instruments Act, 1881 (India)

It is a British colonial age act that is still in use. It defines 3 types of negotiable instruments that are widely used in Indian market - Promissory Notes, Bills of exchange, Cheques.

Before going into the topics, let some concepts be cleared first -
  • Unconditional Undertaking / Promise - You are promising or undertaking to pay without any condition
  • Unconditional Order - You are providing an order (to someone, or some institution, or bank) to pay without any condition
Two more concepts -
  • Pay to Bearer - Pay the amount to, whoever comes with (bears) the instrument and demands to be paid
  • Pay to Order - Pay to a certain person, not anybody

to be continued.. (Negotiable Instruments - Part II)

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