Tag: Bills

Negotiable Instruments: Types, Classification, Importance!
Meaning of Negotiable Instrument: A negotiable instrument is a specialized type of “contract” for the payment of money that is unconditional and capable of transfer by negotiation. The Concept of the study Explains – Negotiable Instruments: Types of Negotiable Instruments, Classification of Negotiable Instruments, Importance of Negotiable Instruments. Common examples include cheques, banknotes (paper money), and commercial paper. Also learned, Negotiable Instruments: Types, Classification, Importance!

Explain and Learn, Negotiable Instruments: Types, Classification, Importance!

A promissory note: is a Written promise by the maker to pay money to the payee. the most common type of promissory note is a bank note, Which is defined as a promissory note made by a bank and payable to bearer on demand. Through promissory note a person i.e. maker (drawer) promise to pay the payee a specific amount on a specified date Without any condition. “o the important points in a promissory note are 1) it is unconditional order 2) a specific amount 3) payable to the order of a person or on demand.

A bill of exchange: is a Written order by the drawer to the drawee to pay money to the payee. The most common type of bill of exchange is the cheque, which is defined as a bill of exchange drawn on a banker and payable on demand. &ills of exchange are used primarily in international trade and are written orders by one person to his bank to pay the bearer a specific sum on a specific date sometime in the future.

A cheque: is an unconditional order in writing drawn upon a specified banker signed by the drawer, directing to the banker to pay on demand a certain sum of money to or to the order of a person named therein or to the bearer.

#Types of Negotiable Instruments:

Parties to various types of Negotiable Instruments:

Drawer or Drawee:

The maker of a bill of exchange or cheque is called the “drawer”; the person thereby directed to pay is called the “Drawee”.

Drawee in case of need:

When in the bill or in any endorsement thereon the name of any person is given in addition to the Drawee to be resorted to in case of need such person is called a “drawee in case of need”.

Acceptor:

After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on this behalf, he is called the “acceptor”.

The acceptor for the honor:

When a bill of exchange has been noted or protested for non-acceptance or for better security, and any person accepts is supra protest for the honor of the drawer or of any one of the endorsers, such person is called an “acceptor for honor”.

Payee:

The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the “payee”.

Holder:

The “holder” of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

Holder in due course:

“Holder in due course” means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorse thereof, if (payable to 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 derived his title.

Endorsement:

When the marker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, one 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”.

Capacity to make, etc., promissory notes, etc.: Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.

Minor:

A minor may draw, endorse, deliver and negotiate such instruments so as to bind all parties except himself. Nothing herein contained shall be deemed to empower a corporation to make, endorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered.

Agency:

Every person capable of binding himself or of being bound, as mentioned in section 26, may so bind himself or be bound by a duly authorized 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.

#Classification of Negotiable Instruments:

The Following Classification of Negotiable Instruments are:

Inland Instrument:

A promissory note, bill of exchange or cheque which is 1) both drawn or made in India and made payable in India, or 2) drawn upon any person resident in India, is deemed to be an inland instrument. A bill of exchange drawn upon a resident in India is an inland bill irrespective of the place where it was drawn.

Foreign Instrument:

An instrument, which is not an inland instrument, is deemed to be a foreign instrument. Foreign bills must be protested for dishonor if such protest is required by the law of the place where they are drawn. But protest in case of inland bills is optional.

Instruments payable on demand:

A cheque is always payable on demand and it cannot be expressed to be payable otherwise than on demand. A promissory note or bill of exchange is payable on demand:
- When no time for payment is specified in it.
- When it is expressed to be payable ‘on demand’, or ‘at sight’ or ‘on presentment’. The words ‘on demand’ is usually in a promissory note, the words ‘at sight’ are in a bill of exchange.
Ambiguous Instrument:

When an instrument owing to its faulty drafting may be interpreted either as a promissory note or a bill of exchange, it is called an ambiguous instrument. Its holder has to elect once for all whether he wants to treat it an as a promissory note or a bill of exchange. Once he does so he must abide by his election.

Forged Instrument:

An instrument is a forged when it is drawn, made or alternated in writing to prejudice another man’s rights. The most common form of forgery is signing another person’s signature, signing the name of the fictitious or none existing person. Fraudulently writing the name of an existing person is also the forgery.

Forgery is a nullity and, therefore, it passes no title. No holder of a forged instrument acquires any right on the instruments. Even a holder in due course gets no title if he comes into the possession of a forged instrument. A person has to pay money on a forged instrument by mistake, can recover it from the person to whom he has paid for it.

Bearer And Order Instruments:

An instrument is a bearer instrument when the amount payable thereon is payable to the bearer and him as a holder and in lawful possession, thereof is entitled to enforce payment due on it.

Negotiable Instruments: Types, Classification, Importance!

#Importance of Negotiable Instruments:

Negotiable Instrument is a certain type of document, which transfers the money. It makes easy to carry money from one place to another place. So, it is very important for the transfer of money in the business sector.

The following points can grasp as the importance of a Negotiable Instrument.
- Negotiable Instrument is an easier means of transfer of money.
- It is easy to delivery from one place to another place.
- It helps to flourish in the business sector.
- It creates the right of property.
- It has the easy negotiability and somewhere it provides the security.
- It makes the fast transaction of money.
- It makes the security of money as well as personal security in course of the transaction of money.
Negotiable Instrument is an easier way to transfer money from one place to another place. It provides a safe way to deliver the money. It has an important role to develop the way of money transaction as well as the business realm.

#Promissory Note:

A Promissory Note is an instrument in writing, except government note or bank currency, containing unconditional undertaking signed by the Maker to pay a certain sum of money only to, or to the order of or to the bearer or to a certain person related to the instrument. Section 2(f) of Negotiable Instrument Act, 2034 The person, who makes the promissory note or promises, is called a ‘Maker’ and he has to sign that document as a debtor.

The person to whom payment is to be made is called the ‘payee’. A promissory note is an unconditional promise to pay put into writing by a person or entity and signed by the borrower or person making the promise. Promissory notes are often created between a borrower and a lender in which the borrower promises to pay the lender a specific amount of money by the specified date.

A promissory note, similar to a contract, contains all of the details pertaining to the transaction such as the amount borrowed, late fees, interest rates, and so forth, and should contain the term “promissory note” within the body. In terms of enforceability, a promissory note lies somewhere between an informal IOU and a formal loan contract.

#Bill of Exchange:

Bill of exchange is another type of Negotiable Instrument. It is also in practice in the business sector. 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.

It is defined under section 2(g) of the Nepalese Negotiable Instrument Act, 2034. Section 2(g) defines as “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 to, or to the order of a person or to a person or to the bearer of the instrument”.

On the basis of the above definition, there are three parties in the bill of exchange, which are as below:
- Drawer: The maker of a bill of exchange.
- Drawee: The person, who is directed to pay.
- Payee: The person who receives the bill of exchange.
Another commonly used type of negotiable instrument is the bill of exchange. A bill of exchange is a financial document that states an individual or business will pay a certain amount on a specific date. The date may range from the date it is signed, to within six months into the future.

A bill of exchange must contain the signature of the individual promising to pay to be considered legally binding. Unlike a promissory note, a bill of exchange may be transferred to a third party, binding the payor to pay the third party who was not involved in the first place.

#Cheque:

The cheque is a very common form of negotiable instrument. If you have a savings bank account or current account in a bank, you can issue a cheque in your own name or in favor of others, thereby directing the bank to pay the specified amount to the person named in the cheque. Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque.

The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. From the above dentition, it appears that a cheque is an instrument in writing, containing an unconditional order, signed by the maker, directing a specified banker to pay, on demand, a certain sum of money only to, to the order of, a certain person or to the bearer of the instrument.

The person who draws a cheque is called the “Drawer”. The banker on whom it is drawn is the “Drawee” and the person in whose favor it is drawn is the “payee”. Actually, a cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.
June 20, 2018
Bill of Exchange: Content, Parties, and Advantages!
Explain and Learn, Bill of Exchange: Content, Parties, and Advantages!

The Concept of the study Explains – Bill of Exchange: Content of Bill of Exchange, Parties of Bill of Exchange, and Advantages of Bill of Exchange! Definition of Bill of Exchange: 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 designated 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. Also learned, Bill of Exchange: Content, Parties, and Advantages!

In a business transaction, when the goods are sold on credit to the buyer, the seller can make the bill and send it to the buyer for acceptance, which contains the details such as name and address of the seller and buyer, amount of bill, maturity date, signature, and so forth.

Features of Bill of Exchange:
- An instrument which a creditor draws upon his debtor.
- It carries an absolute order to pay a specified sum.
- The sum is payable to the person whose name is mentioned in the bill or to any other person, or the order of the drawer, or to the bearer of the instrument.
- It requires to be stamped, duly signed by the maker and accepted by the drawee.
- It contains the date by which the sum should be paid to the creditor.
For Example:

Sam gives a loan of Rs.1,00,000 to Alex, which Alex has to return after three months. Further, Joseph has bought certain goods from Peter, on credit for Rs. 1,00,000. Now, Joseph can create a document directing Alex, to pay Rs. 1,00,000 to Peter, after three months. The instrument will be called as Bill of Exchange, which is transferred to Peter, on whom the payment is due, for the goods purchased from him.

Parties to a Bill of Exchange:

There are three parties viz. ‘Drawer’, ‘Drawee’ and ‘Payee’ to a bill of exchange.
1. Drawer: A bill of exchange is drawn upon the buyer/debtor by the seller/creditor and the drawer is the person who makes and draws the bill. The drawer is entitled to receive money from the debtor.
2. Drawee: The person upon whom the bill of exchange is drawn is known as drawee. Bill of exchange is drawn on the drawee who is the purchaser of goods. The Drawee of a bill is called the acceptor when he writes the words “accepted” and puts his signatures on it. This process is known as acceptance. After acceptance, the bill of exchange becomes a legal document. This document now binds the drawee to honor the bill on the due date. This acceptance may be general or qualified. In the case of general acceptance, without stating any conditions, the only sign of the acceptor is required. However, in the case of qualified acceptance, the name of the bank or specified place for payment is mentioned.
3. Payee: The person to whom the payment is made is known as payee. In some cases, the drawer of the bill also becomes the payee when he himself keeps the bill till the date of maturity. Drawer and Payee is usually the same person.
However, in the following cases drawer and payee are two different persons:

(i) When the bill is discounted by the drawer, the person who discounted the bill becomes the payee.

(ii) When the bill is endorsed to a creditor, the endorsee will become the payee.

The content of Bills of Exchange:

The contents of bills of exchange are as under:
- Date: The date of the bill on which it is drawn should be written on the top right comer of the bill. This aspect is very important to determine the maturity date of the bill.
- Term: This is the tenure of the bill and runs from the date of the bill. This should be specified in the body of the bill. The grace period of three days should be given after the expiry of the term from the date of the bill.
- Amount: Amount of the bill should be given both in figures and words. The amount in figures should be mentioned on the top left corner of the bill and amount in words should be mentioned in the body of the bill.
- Stamp: Stamp of proper value which depends on the amount of bill shall be affixed on the bills of exchange.
- Parties: There may be three parties to the bills of exchange, drawer, drawee, and payee. However, in some cases, drawer and payee may be the same person. All the names of the parties and their addresses should also be invariably mentioned in the bills of exchange.
- For Value Received: This aspect is most important in the sense that law does not consider those agreements which have been made without consideration. Consideration means in lieu of and in the context of bills of exchange, it means that the bill has been issued in exchange of some consideration i.e., benefit has already been received.
Advantages of Bills of Exchange:

The bills of exchange are used frequently in business as an instrument of credit due to the following reasons:
- Legal Relationship: Issuing bills of exchange provides a framework which converts and establishes a legal relationship between seller and buyer, from creditor and debtor to drawer and drawee. In the case of any dispute between the parties, this relationship provides a conclusive proof in the court of law.
- Terms and Conditions: Bill of exchange contains all terms and conditions of payments viz., amount of the bill, date of payment, place of payment, interest to be paid if any. The maturity date of the bill is also known to the parties to the bill so they can make necessary arrangement for funds.
- Mode of Credit: Bill of exchange has been defined as a negotiable instrument under the Negotiable Instruments Act, 1881. The buyer can buy the goods on credit and pay after the period of credit with the help of bill of exchange. In case of urgency, the drawer can also get the payment by discounting the bill from the bank and without waiting for the maturity period.
- Easy Transferability: Bill of exchange can be used for settling the debt of the creditors. Mere delivery and endorsement of the bill give a valid title to the endorsee.
- Wider Acceptance: In case of the foreign bill, wider acceptance is given to the parties through which payments can be received and made easily.
- Mutual Accommodation: Sometimes, the bill can be issued for mutually accommodating the parties so that financial help can be given to each other.
June 19, 2018
Bill of Exchange: Meaning, Definition, and Features!
Explain and Learn, Bill of Exchange: Meaning, Definition, and Features!

A bill of exchange is generally drawn by the creditor on his debtor. The Concept of the study Explains – Bill of Exchange: What is a Bill of Exchange? Meaning of Bill of Exchange, Definition of Bill of Exchange, and Features of Bill of Exchange! It should be accepted either by the debtor or any person(s) on his/her behalf. It is worth mentioning that before its acceptance by the debtor, it is just a draft. It should be accepted either by a person upon whom it is drawn or someone else on his/her behalf. The stage at which the purchaser of goods signs the draft and writes ‘Accepted’ on it, it becomes a bill of exchange. Also learned, Bill of Exchange: Meaning, Definition, and Features!

What is a Bill of Exchange?

According to section 5 of the Negotiable Instruments Act, 1881, defines Bill Of Exchange as “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.”

A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time for payment of the amount or any installment thereof being expressed to be on the lapse of certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.

The sum payable may be “certain”, within the meaning of this section and section and section 4, although it includes future indicated rater of change, or is according to the course of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an installment, the balance unpaid shall become due.

The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person,” within the meaning of this section and section 4, although he is misnamed or designated by description only.

Meaning of Bill of Exchange:

T.P Mukherjee law Dictionary with pronunciation defines Bill of Exchange as under: “A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or the order of a specified person or to bearer.”

The legal and commercial dictionary defines Bill of Exchange as under: “Bill of Exchange includes a hundi and a cheque. 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 certain. The person or to the bearer of the instrument.”

Black‘s Law Dictionary defines Bill of Exchange as under: “Bill of Exchange. A three-party instrument in which the first party draws an order for the payment of a sum certain on the second party for payment to a third party at a definite future time.”

Wharton ‘s law lexicon Dictionary defines Bill of exchange as under: “As an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.”

K.J. Aiyers judicial Dictionary defines Bill of Exchange as under: “It is a written order or request by one person to another for the payment of money at a specified time absolutely and at all events. A bill of exchange is only a transfer of a chose in action according to the custom of merchants, it is an authority to one person to pay to another the sum which is due to the first.”

P.G. Osborn’s. The concise commercial Dictionary defines Bill of Exchange as under: “An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of, a specified person, or to bearer. A bill of exchange is a negotiable instrument.”

Mitra’s legal and commercial Dictionary defines Bill of Exchange as under: “A bill of exchange means a bill of exchange as defined in the Negotiable Instruments Act 1881, and includes also a hundi, and any other document entitling or purporting to entitle any person whether named therein or not, to payment by any other person of, or to draw upon any other person for, any sum of money.”

Stroud’s Judicial Dictionary defines Bill of Exchange as under: “An order to pay out of a particular fund is not unconditional within the meaning of this section, but an unqualified order to pay, coupled with (a) an indication of a particular fund out of which the drawee is to reimburse himself or a particular account to be debited with the amount, or (b) a statement of the transaction which gives rise to the bill, is unconditional.”

Jowitt’s Dictionary of English law defines Bill of Exchange as under: “An unconditional order in writing, addressed by one person (A) to another (B) signed by the person giving it, requiring the person to whom it is addressed to pay, on demand, or at a fixed or determinable future time, a sum certain in money to, or to the order of a specified person (c), or to bearer ( Bill of Exchange Act 1882, s3 ) A is called the drawee, B the drawer and C the payee. Sometimes, A the drawer is himself the payee. The holder of a bill may treat it as a promissory note (q.v) if the drawer and drawee are the same person s5(2), when B, the drawee, has, by accepting the bill, undertaken to pay it, he is called the acceptor.”

Definition of Bill of Exchange:

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 of the Negotiable Instruments Act, 1881.

Bill of exchange is a negotiable instrument which is payable either to order or to the bearer. Section 13 (1) of the Negotiable Instruments Act, 1881 defines negotiable instruments as “A promissory note, bill of exchange or cheque payable either to order or to bearer”.

Definition: 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 designated 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.

In a business transaction, when the goods are sold on credit to the buyer, the seller can make the bill and send it to the buyer for acceptance, which contains the details such as name and address of the seller and buyer, amount of bill, maturity date, signature, and so forth.

Features of Bill of Exchange:

The definition of a Bill of Exchange under the act is fairly exhaustive and almost covers all the aspects related to it at one place. A Bill of Exchange requires three parties.
1. The drawer, i.e. the person who is the maker of the bill and who gives the order.
2. The drawee, i.e. the person who is directed to pay the bill and who on affixing his signature becomes the acceptor; and
3. The payee, i.e. the person to whom or to whose order the amount of the instrument is payable unless the bill is payable to bearer.
To analysis of the definition shows the following essential requisites of a bill of exchange:
1. A Bill of Exchange must be in Writing: A bill of exchange may be written in any language, and any form of words may be used, provided the requirements of this section are complied with.
2. A Bill of Exchange must Contain an Order to Pay: When a bill of exchange is drawn, the presumption is that there are funds in the hands of the person to whom the order is given, which are payable in any case to the person giving the order. The essence of a bill of exchange is that the drawer orders the drawee to pay money to the payee. As a bill of exchange is an order, it is necessary that it must, in its terms, be imperative and not perceptive.
3. The Order Contained in the Bill Should be Unconditional: It is the essence of a bill that it should be payable at all events, A bill of exchange cannot be drawn so as to be payable conditionally. The drawer’s order to the drawee must be unconditional and should not make the payment of the bill dependent on some contingency. Where an instrument is payable on a contingency, it does not cease to be invalid by the happening of the event before the expiry of the period fixed for the performance of the obligation, for the instrument must be valid ab initio, and carry its validity on its face. A conditional bill of exchange is invalid. The addition of the words as per agreement does not make a note conditional.
4. Bills Payable Out of a Particular Fund: On the same principle, a bill expressed to be payable out of a particular fund is conditional and invalid, because it is uncertain whether the fund will be in existence or prove sufficient when the bill becomes payable. Thus a bill containing an order to pay ‘out of money due from A as soon as you receive it, or out of money remaining in your hands belonging to X company is invalid.
5. A Bill of Exchange must be Signed by the Drawer: A Bill is not valid unless the drawer signs it and if Drawer has not signed it no action can be maintained against the acceptor or any other party who has affixed his signature these too. If the drawer is unable to write his name, he can sign by a mark in lieu of a signature.
6. The Drawee must be Certain: The next requisite is that the instrument must order a person to pay the amount of the bill. The person to whom the bill is addressed is called the ‘drawee’ and he must be named or otherwise indicated in the bill with reasonable certainty. So that the payee knows the person to whom he should present the instrument for acceptance and payment. A bill cannot be addressed to two or more drawee in the alternative because it would create difficulties as to recourse if the bill were dishonored.
7. The Sum Payable must be Certain: The sum payable is certain even though it is required to be paid with interest, or at the indicated rate of exchange or by installment with the proviso that on the default in the payment of installment, the whole amount shall become due and payable.
8. The Instrument must Contain an Order to Pay Money and Money only: The medium of payment should be the legal tender i.e. money and nothing else. An instrument containing the order to pay money along with some other thing or merely some other thing is not a valid bill. An instrument ordering the delivery up of houses and a wharf in addition to the payment of a sum of money is not a valid bill.
9. The Payee must be Certain: A bill must state with certainty the person to whom payment is to be made. A bill of exchange ought to specify to whom the same is payable, for in no other way can the drawee, if he accepts it, know to whom he may properly pay it so as to discharge himself from all further liability. Where a bill is payable to bearer, the payee is indicated with certainty. Bills are rarely drawn payable to bearer, but cheques are commonly so drawn. A bill cannot be drawn payable to bearer on demand. Where in a bill the drawee or payee is misnamed or misdescribed, extrinsic evidence is admissible to identify him.
June 19, 2018
Commercial Bills: Meaning, Types, and Advantages
A Commercial Bill is one which arises out of a genuine trade transaction, i.e. credit transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due. As well as discuss the Treasury Bills, this article explains Commercial Bills. The Commercial Bills explain in their key points; meaning, types, and advantages. The buyer accepts it immediately agreeing to pay the amount mentioned therein after a certain specified date. Thus, a bill of exchange contains a written order from the creditor to the debtor, to pay a certain sum, to a certain person, after a creation period. A bill of exchange is a “self-liquidating” paper and negotiable/it is drawn always for a short period ranging between 3 months and 6 months.

Explain and Learn, Commercial Bills: Meaning, Types, and Advantages!

Meaning of Commercial Bills Market:

The commercial bills are issued by the seller (drawer) on the buyer (drawee) for the value of goods delivered by him. These bills are for 30 days, 60 days or 90 days maturity. If the seller needs funds, he may draw a bill and send it to the buyer for the seller needs funds, he may draw a bill and send it to the buyer for acceptance.

The buyer accepts the bill and promises to make the payment on the due date. He may also approach his bank to accept the bill. The bank charges a commission for the acceptance of the bill and promises to make the payment if the buyer defaults. Once this process is accomplished, the seller can sell it in the market. This way a commercial bill becomes a marketable investment.

Usually, the seller will go to the bank for discounting the bill. The bank will pay him after deducting the interest for the remaining period of the bill and service charges from the face value of the bill. The interest rate is called the discount rate on the bills. The commercial bill market is an important channel for providing short-term finance to business.

However, the instrument did not become popular because of two factors:
1. Cash credit scheme is still the main form of bank lending, and
2. Big buyers in the corporate sector are still unwilling to the payment mode of commercial bills.
Definition of Bill of Exchange:

“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 beater of the instrument”.

What is a Bill of Exchange?

According to section 5 of the Negotiable Instruments Act, 1881, defines Bill Of Exchange as,

“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.”

A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time for payment of the amount of any installment thereof being expressed to be on the lapse of certain period after the occurrence of a specified event which, according to the ordinary expectation of humanity, is certain to happen, although the time of its happening may be uncertain.

The sum payable may be “certain”, within the meaning of this section and section and section 4, although it includes future indicated rater of change, or is according to the course of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an installment, the balance unpaid shall become due.

The person to whom it is clear that the direction is given or that payment is to make maybe a “certain person,” within the meaning of this section and section 4, although he misnames or designated by description only.

Types of Commercial Bills:

Many types of commercial bills are in circulation in a bills market. They can broadly classify as follows:

Demand and Using Bills:

Demand bills are others call sight bills. These bills are payable immediately as soon as they present to the drawer. No time of payment specify and hence they are payable at sight. Using bills call time bills. These bills are payable immediately after the expiry of the period mentioned in the bills. The period varies according to the established trade custom or usage prevailing in the country.

Clean Bills and Documentary Bills:

When bills have to be accompanied by documents of title to goods like Railways, receipt, Lorry receipt, Bill of Lading, etc. the bills call documentary bills. These bills can further classify into D/A bills and D/P bills. In the case of D/A bills, the documents accompanying bills have to deliver to the drawee immediately after acceptance. Generally, D/A bills draw on parties who have good financial standing.

On the order hand, the documents have to hand over to the drawee only against payment in the case of D/P bills. The documents will retain by the banker. Till the payment of such bills. When bills are drawn without accompanying any documents they are called clean bills. In such a case, documents will be directly sent to the Drawee.

Inland and Foreign Bills:

Inland bills are those drawn upon a person resident in India and are payable in India. Foreign bills draw outside India and they may be payable either in India or outside India. They may draw upon a person resident in India also. Foreign boils have their origin outside India. They also include bills draw on India make payable outside India.

Export and Foreign Bills:

Export bills are those draw by Indian exports on importers outside India and import bills draw on Indian importers in India by exports outside India.

Indigenous Bills:

Indigenous bills are those draw and accept according to native custom or usage of trade. These bills are popular among indigenous bankers only. In India, they call “Hundis” the Hundis knows by various names such as – Shah Jog, Nam Jog, Jokhani, Termainjog, Darshani, Dhanijog, and so on.

Accommodation Bills and Supply Bills:

If bills do not arise out of genuine trade transactions, they call accommodation bills. They know as “kite bills” or “wind bills”. Two parties draw bills on each other purely for mutual financial accommodation. These bills are discount with bankers and the proceeds are sharing among themselves. On the due dates, they are paying.

Supply bills are those neither draw by suppliers or contractors on the government departments for the goods nor accompanied by documents of title to goods. So, they do not consider as negotiable instruments. These bills are useful only to get advances from commercial banks by creating a charge on these bills.

Operations in Commercial Bills Market:

From the operations point of view, the bills market can classify into two viz.
- Discount Market
- Acceptance Market
Discount Market:

Discount market refers to the market where short-term genuine trade bills discounts by financial intermediaries like commercial banks. When credit sales affect, the seller draws a bill on the buyer who accepts it promising to pay the specified sum at the specified period. The seller has to wait until the maturity of the bill for getting payment. But, the presence of a bill market enables him to get paid immediately.

The seller can ensure payment immediately by discounting the bill with some financial intermediary by paying a small amount of money called “Discount rate” on the date of maturity, the intermediary claims the amount of the bill from the person who has accepted the bill. In some countries, some financial intermediaries specialize in the field of discount.

For instance, in the London Money Market, there are specializing in the field discounting bills. Such institutions are conspicuously absent in India. Hence, commercial banks in India have to undertake the work of discounting. However, the DFHI has been establishing to activate this market.

Acceptance Market:

The acceptance market refers to the market where short-term genuine trade bills accept by financial intermediaries. All trade bills cannot discount easily because the parties to the bills may not be financially sound. In case such bills accept by financial intermediaries like banks, the bills earn a good name and reputation and such bills can readily discount anywhere.

In London, there are specialist firms call acceptance house which accepts bills draw by trades and import greater marketability to such bills. However, their importance has declined in recent times. In India, there are no acceptance houses. The commercial banks undertake the acceptance business to some extent.

Advantages of Commercial Bills:

Commercial bill market is an important source of short-term funds for trade and industry. It provides liquidity and activates the money market. In India, commercial banks lay a significant role in this market due to the following advantages:

Liquidity:

Bills are highly liquid assets. In times of necessity, bills can convert into cash readily using rediscounting them with the central bank. Bills are self-liquidating in character since they have fixed tenure. Moreover, they are negotiable instruments and hence they can transfer freely by mere delivery or by endorsement and delivery.

The certainty of Payment:

Bills draw and accept by business people. Generally, business people use to keeping their words and the use of the bills imposes strict financial discipline on them. Hence, bills would honor on the due date.

Ideal Investment:

Bills are for periods not exceeding 6 months. They represent advances for a definite period. This enables financial institutions to invest their surplus funds profitably by selecting bills of different maturities. For instance, commercial banks can invest their funds on bills in such a way that the maturity of these bills may coincide with the maturity of their fixed deposits.

Simple Legal Remedy:

In the case of the bills dishonor, the legal remedy is simple. Such dishonor bills have to simply note and protest and the whole amount should debit to the customer’s accounts.

High and Quick Yield:

The financial institutions earn a high quick yield. The discount dedicates at the time of discounting itself whereas, in the case of other loans and advances, interest is payable only when it is due. The discounts rate is also comparatively high.

Easy Central Bank Control:

The central bank can easily influence the money market by manipulating the bank rate or the rediscounting rate. Suitable monetary policy can take by adjusting the bank rate depending upon the monetary conditions prevailing in the market.

Commercial Bills: Meaning, Types, and Advantages.

Drawbacks of Commercial Bills:

In spite of these merits, the bills market has not been well developing in India. The reasons for the slow growth are the following:

The Absence of Bill Culture:

Business people in India prefer O.D and cash credit to bill financing, therefore, banks usually accept bills for the conversion of cash credits and overdrafts of their customers. Hence bills are not popular.

The absence of Rediscounting Among Banks:

There is no practice of re-discounting of bills between banks who need funds and those who have surplus funds. To enlarge the rediscounting facility, the RBI has permitted financial institutions like LIC, UTI, GIC, and ICICI to rediscount genuine eligible trade bills of commercial banks. Even then, bill financial is not popular.

Stamp Duty:

Stamp duty discourages the use of bills. Moreover, stamp papers of the required denomination are not available.

The Absence of Secondary Market:

There is no active secondary market for bills. The rediscounting facility is available in important centers and that too restrictive to the apex level financial institutions. Hence, the size of the bills market has been curtail to a large extent.

Difficulty in Ascertaining Genuine Trade Bills:

The financial institutions have to verify the bills to ascertain whether they are genuine trade bills and not accommodation bills. For this purpose, invoices have to scrutinize. It involves additional work.

Limited Foreign Trade:

In many developed countries, bill markets have been establishing mainly for financing foreign trade. Unfortunately, in India, foreign trade as a percentage to national income remains small and it is reflected in the bill market also.

The Absence of Acceptance Services:

There is no discount house or acceptance house in India. Hence specialized services are not available in the field of discounting or acceptance.

The attitude of Banks:

Banks are shy about rediscounting bills even the central bank. They tend to hold the bills till maturity and hence it affects the velocity of the circulation of bills. Again, banks prefer to purchase bills instead of discounting them.
June 19, 2018
Treasury Bills: Meaning, Features, Types, and Importance
Just like commercial bills which represent commercial debt, treasury bills represent short-term borrowings of the Government. As well as discuss the Commercial Bills, this article explains Treasury Bills. The Treasury Bills explain in their key points; meaning, features, types, and importance. Treasury bill market refers to the market where treasury bills buy and sell. Treasury bills are very popular and enjoy a higher degree of liquidity since they issue by the government.

Explain and Learn, Treasury Bills: Meaning, Features, Types, and Importance!

Meaning and Features of Treasury Bills:

A treasury bills nothing but promissory note issued by the Government under discount for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the beater of the instrument on the due date. The period does not exceed one year. It is purely a finance bill since it does not arise out of any trade transaction. It does not require any “grading” or “endorsement” or “acceptance” since it claims against the Government.

Treasury bill issues only by the RBI on behalf of the Government. Treasury bills issue for meeting temporary Government deficits. The Treasury bill rate of discount is fixed by the RBI from time-to-time. It is the lowest one in the entire structure of interest rates in the country because of short-term maturity and degree of liquidity and security.

Definition of Treasury Bills:

Treasury Bills, also known as T-bills are the short-term money market instrument, issued by the central bank on behalf of the government to curb temporary liquidity shortfalls. These do not yield any interest, but issued at a discount, at its redemption price, and repaid at par when it gets matured.

T-bills are the key segment of the financial market, which utilizes by the government to raise short-term funds, for fulfilling periodic discrepancies between its receipts and expenditure. The difference between the issue price and the redemption value indicates the interest on treasury bills, call as a discount. These are the safest investment instrument of its category, as the risk of default is negligible. Further, the date of issue predetermine, as well as the amount also fixed.

Features of Treasury Bills:

The following features of treasury bills below are;

Form:

T-bills are issued either in physical form as a promissory note or dematerialized form by a credit to Subsidiary General Ledger (SGL) Account.

Eligibility:

Individuals, firms, companies, trust, banks, insurance companies, provident funds, state government, and financial institutions are eligible to invest in treasury bills.

Minimum Bid:

The minimum amount of bid is Rs. 25000 and in multiples thereof.

Issue price:

T-bills are issued at a discount but redeemed at par.

Repayment:

The repayment of the bill is made at par on the maturity of the term.

Availability:

Treasury bills are highly liquid negotiable instruments, that are available in both financial markets, i.e. primary and secondary.

Method of the auction:

Uniform price auction method for 91 days T-bills, whereas multiple price auction method for 364 days T-bill.

Day count:

The day count is 364 days, in a year, for treasury bills.

Besides this, other characteristics of treasury bills include the market-driven discount rate, selling through auction, issued to meet short-term mismatches in cash flows, assured yield, low transaction cost, etc.

Types of Treasury Bills:

In India, there are two types of treasury bills viz.
- Ordinary or regular and
- “Ad hoc” known as “Ad Hoc’s” ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government.
These bills are freely marketable and they can buy and sell at any time and they have secondary market also.

On the other hand ‘ad Hoc’s’ are always issued in favor of the RBI only. They are not sold through tender or auction. Also, they are purchased by the RBI on top and the RBI authorizes to issue currency notes against them.

Government explains:

They are marketable sell them back to the RBI. Ad Hoc’s serve the Government in the following ways:
- They replenish the cash balances of the central Government. Just like State Government get advance (ways and means advances) from the RBI, the Central Government can raise finance through this Ad Hocs.
- They also provide an investment medium for investing the temporary surpluses of State Government, semi-government departments and foreign central banks.
Based on periodicity, treasury bills may classify into three they are:

91 days T-bills:

The tenor of these bills complete on 91 days. These are an auction on Wednesday, and the payment makes on the following Friday.

182 days T-bills:

These treasury bills get matured after 182 days, from the day of issue, and the auction is on Wednesday of non-reporting week. Moreover, these are repaying on following Friday, when the term expires.

364 days T-bills:

The maturity period of these bills is 364 days. The auction is on every Wednesday of reporting week and repay on the following Friday after the term gets over.

Treasury bills are backed by some advantages like no tax deducted at source, high liquidity and trade-ability, zero risks of default, transparency, a good return on investment and so on.

Ninety-one day’s treasury bills are issuing at a fixed discount rate of 4% as well as through auctions. 364 days bills do not carry any fixed rate. The discount rate on these bills quotes in the auction by the participants and accepted by the authorities. Such a rate calls cut off rate. In the same way, the rate is fixed for 91 days treasury bills sold through auction. 91 days treasury bills (top basis) can rediscount with the RBI at any time after 14 days of their purchase. Before 14 days a penal rate charges.

Operations and Participants:

The RBI holds day’s treasury bills (TBs) and they issue on top basis throughout the week. However, 364 days TBs are selling through the auction which conducts once in a fortnight. The date of auction and the last date of submission of tenders are notified by the RBI through a press release. Investors can submit more than one bid also.

On the next working day of the date auction, the accepted bids with prices are displaying. The successful bidders have to collect letters of acceptance from the RBI and deposit the same along with the cheque for the amount due on RBI within 24 hours of the announcement of auction results.

Institutional investors like commercial banks, DFHI, STCI, etc, maintain a subsidiary General Ledger (SGL) account with the RBI. Purchases and sales of TBs are automatically recording in this account invests who do not have SGL account can purchase and sell TBs through DFHI. The DFHI does this function on behalf of investors with the bits of the help of SGL transfer forms. The DFHI is actively participating in the auctions of TBs.

It is playing a significant role in the secondary market also by quoting daily buying and selling rates. It also gives buy-back and sell-back facilities for the period’s up to 14 days at an agreed rate of interest to institutional investors. The establishment of the DFHI has imported greater liquidity in the TB market.

The participants in this market are the followers:
1. RBI and SBI.
2. Commercial banks.
3. State Governments.
4. DFHI.
5. STCI.
6. Financial institutions like LIC, GIC, UTI, IDBI, ICICI, IFCI, NABARD, etc.
7. Corporate customers, and.
8. Public.
Through many participants are there, in actual practice, this market is in the hands of the banking sector. It accounts for nearly 90 % of the annual sale of TBs.

Importance of Treasury Bills:

The following importance of treasury bills below is:

Safety:

Investments in TBs are highly safe since the payment of interest and repayment of principal are assured by the Government. They carry zero default risk since they are issuing by the RBI for and on behalf of the Central Government.

Liquidity:

Investments in TBs are also highly liquid because they can convert into cash at any time at the option of the inverts. The DFHI announces daily buying and selling rates for TBs. They can discount with the RBI and further refinance facility is available from the RBI against TBs. Hence there is a market for TBs.

Ideal Short-Term Investment:

Idle cash can profitably invest for a very short period in TBs. TBs are available on top throughout the week at specified rates. Financial institutions can employ their surplus funds on any day. The yield on TBs also assures.

Ideal Fund Management:

TBs are available on top as well through periodical auctions. They are also available in the secondary market. Fund managers of financial institutions build the portfolio of TBs in such a way that the dates of maturities of TBs may match with the dates of payment on their liabilities like deposits of short-term maturities. Thus, TBs help financial manager’s it manages the funds effectively and profitably.

Statutory Liquidity Requirement:

As per the RBI directives, commercial banks have to maintain SLR (Statutory Liquidity Ratio) and for measuring this ratio of investments in TBs takes into account. TBs are eligible securities for SLR purposes. Moreover, to maintain CRR (Cash Reserve Ratio). TBs are very helpful. They can readily convert into cash and thereby CRR can maintain.

Source of Short-Term Funds:

The Government can raise short-term funds for meeting its temporary budget deficits through the issue of TBs. It is a source of cheap finance to the Government since the discount rates are very low.

Non-Inflationary Monetary Tool:

TBs enable the Central Government to support its monetary policy in the economy. For instance excess liquidity, if any, in the economy can absorb through the issue of TBs. Moreover, TBs are subscribing by investors other than the RBI. Hence they cannot mention and their issue does not lead to any inflationary pressure at all.

Hedging Facility:

TBs can use as a hedge against heavy interest rate fluctuations in the call loan market. When the call rates are very high, money can raise quickly against TBs and invest in the call money market and vice versa. TBs can use in ready forward transitions.

Defects of Treasury Bills:

The following defects of treasury bills below are;

Poor Yield:

The yield form TBs is the lowest. Long-term Government securities fetch more interest and hence subscriptions for TBs are on the decline in recent times.

Absence Of Competitive Bids:

Though TBs sell through auction to ensure market rates for the investors, in actual practice, competitive bids are conspicuously absent. The RBI compels to accept these non-competitive bids. Hence adequate return is not available. It makes TBs unpopular.

Absence Of Active Trading:

Generally, the investors hold TBs till maturity and they do not come for circulation. Hence, active trading in TBs adversely affects.
June 19, 2018