Negotiable Instruments Meaning, Basics, Types and Effects


The Negotiable Instruments Act came into action, in 1881. Before the act was enacted, the sections of the English legal instrument Act were applicable in India, and therefore the present Act is there in relied on the English Act with certain modifications.  This Act is applicable to the whole of India except Kashmir.

The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934. Section 31 of the Reserve Bank of India Act provides that no individual in India aside from the Bank or as expressly authorised by this Act, the Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note, or engagement for the payment of money payable to the bearer on demand and also further provides that no one except the RBI or the Central Government can make or issue a promissory note expressed to be payable or demand or after a definite time[1]. Section 32 of the Reserve Bank of India Act makes the issue of such bills or notes punishable with a fine which can reach the amount of the instrument[2].


1. Promissory Notes:

The essential requirement for a promissory note is that it should be in writing and must be in a form which can not be changed easily. The net requirement is that it must have a clear intention regarding the payment of the said amount and most importantly for the said instrument to be valid it should be signed by the person making the same.

2. Bill of Exchange:

This said form of instrument is defined in Section 5 of the Negotiable Instruments Act. The conditions are that it should be a certain condition and both the payer and the payee should be certain and most importantly the amount must not be subject to change.

3. Cheques:

This is defined in Section 6 of the Negotiable Instruments Act. There are only two requirements for this that should be payable on demand and that it should be addressed to a specified bank.


An individual cannot have a stronger title in the property than being the rightful owner. An individual who finds goods or is in possession of items and goods which are stolen from others does not have the right to be a true owner and does not get this said title. The actual owner can recover it not only from him but from any individual to whom he may have sold it. But there is a difference between the transfer of normal goods and the negotiation of negotiable instruments. The Negotiable Instruments Act provides protection to those persons who acquire the instruments in honesty and for valuable consideration. A holder in due course who has who in no way has committed any fraud or received the instrument can be accounted for no rightful possession even if the others before him had, as the principle of good faith comes into play and his rights are protected.


The maker or drawer cannot endorse or negotiate an instrument unless he is in lawful possession of the instrument or is that the holder thereof. A payee or Endorsee cannot endorse or negotiate unless he’s the holder thereof.

An endorsement may be: Blank or general, Special or full., Partial, Restrictive, Conditional.


The effect of negotiation by endorsement and delivery is by the following:

(i) to transfer property within the instrument from the endorser to the endorsee.

(ii) to vest within the latter the proper of further negotiation, and

(iii) a right to sue on the instrument in his own name against all the other parties.[3]


When the holder of a negotiable instrument, without the consent of the endorser terminates or harms the endorser’s remedy against the party who had it beforehand, the endorser is discharged from liability to the holder to an equivalent extent as if the instrument had been paid at maturity.[4]


A negotiable instrument maybe a piece of paper which entitles an individual to a sum of cash and which is transferable from person to person by mere delivery or by endorsement and delivery. The person to whom it’s so transferred becomes entitled to the cash also to the proper to further transfer it. Thus, negotiable instruments play a serious role in the trading world.

The main purpose of negotiable instruments is to avoid the carriage of the upper amount of cash and to reduce the danger of theft; robbery etc.

To give legal effect to negotiable instruments there’s legislation and therefore the name of that legislation is that the Negotiable Instruments Act, 1881.

The above discussion makes clear that Negotiable instruments are the documents which are associated with business transactions. Negotiable instruments play a serious role in the trading world. we will use negotiable instruments for international trades. These instruments can either be negotiable or non-negotiable. But they need to come under one of the two categories.

An instrument can become negotiable either by way of law or by usage. These instruments are in written form so just in case of non-payment the person to whom the payment to be made can sue the opposite person by whom the payment shall be made. Bill of exchange, cheque and promissory notes are three important negotiable instruments with different attributes.

[1] Section 31, RBI Act

[2] Section 32, RBI Act

[3] Section 50, Negotiable Instruments Act

[4] Section 40, Negotiable Instruments Act

This Article is Authored by Chandana Pradeep, 3rd Year BBA LLB(H) Student at School of Law, University of Petroleum and Energy Studies, Dehradun.

Also Read – Basics of Negotiable Instruments Act, 1881

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