BANKING LAW AND OPERATIONS

1. BANKING LAW AND OPERATIONS The objective is to familiarize the students with the law and operations of Banking.

2. Unit 1: NEGOTIABLE INSTRUMENTS Introduction – Meaning & Definition – Features – Kinds of Negotiable Instruments: Meaning, Definition & Features of Promissory Notes, Bills of Exchange, Cheques - Crossing of Cheques – Types of Crossing – Endorsements: Meaning, Essentials & Kinds of Endorsement. • CUSTOMERS AND ACCOUNT HOLDERS Types of Customers and Account Holders - Procedure and Practice in opening and operating accounts of different customers including Minors - Meaning & Operations of Joint Account Holders, Partnership Firms, Joint Stock companies, Executors and Trustees, Clubs and Associations and Joint Hindu Undivided Family.

3. What is Banking law and operations Banking Law and Practice discusses a range of topics that have a direct bearing on the day-to-day operations of banks, from contracts to how to ensure safe and secure lending. It examines the development and current state of banking legislation and regulation and facilitates bankers and their institutions to shape their practice to meet all the necessary legal and regulatory requirements.

4. NEGOTIABLE INSTRUMENTS • “Negotiable” means transferable by delivery and • “Instrument” means a written document by which a right is created in favor of some person.  Thus, negotiable instrument means a document which is transferable by delivery. • Meaning: A negotiable instrument is that document that includes a ‘promise to pay’ a certain amount of money to the bearer of the document. Its a mode of transferring a debt from one person to another. Negotiable instruments are always in written form. • Definition: According to section 13(a) of negotiable instrument act, “negotiable instrument means a promissory note, bill of exchange or cheque payable either to order to bearer, whether the word “order” or “bearer” appear on the instrument or not”.

5. Features or characteristics of negotiable instruments • Must be in writing- A negotiable instrument must be in writing. This includes handwriting, typing, computer print out and engraving, etc. • Signature- A negotiable instrument must bear the signature of its maker. Without the signature of the drawer or the maker, the instrument shall not be a valid one. • Unconditional order- in every negotiable instrument there must be an unconditional order or promise for payment. • Payment- the instrument must involve payment of a certain sum of money only and nothing else. • Delivery- delivery of the instrument is essential. Any negotiable instrument like a cheque or a promissory note is not complete till it is delivered to its payee. • The time of payment must be certain- it means that the instrument must be payable at a time which is certain to arrive. • The payee must be a certain person- it means that the person in whose favour the instrument is made must be named or described with reasonable certainty.

6. Title- negotiability confers absolute and good title on the transferee. It means that a person who receives a negotiable instrument has a clear and undisputable title to the instrument. such a person is known as a holder in due course. • Easy transferability- A negotiable instrument is freely transferable. • Notice: it is not necessary to give notice of transfer of a negotiable instrument to the party liable to pay. The transferee can sue in his own name. PRESUMPTIONS ABOUT NEGOTIABLE INSTRUMENTS • Consideration: it is presumed that every negotiable instrument has been made or drawn for the consideration. When a negotiable instrument is accepted, endorsed, negotiated or transferred, it is also presumed that it was so accepted, endorsed for a consideration. • Date: In case of a dated negotiable instrument it is presumed that it has been made or drawn on the date that appears on it. • Time of acceptance: That every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity.

7. Time of transfer-that every transfer of a negotiable instrument was made before its maturity. • Order of endorsements-that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon. • Stamps-that in case a lost or destroyed promissory note, bill of exchange or cheque was duly stamped. • Holder in due course: the holder of a negotiable instrument is a holder in due course. But when a negotiable instrument is obtained by a person from its lawful holder by means of an offence or fraud or for unlawful holder by means of an offence or fraud or for unlawful consideration, the holder will have to prove that he is a holder in due course. • Proof of protest: in a suit upon an instrument which has been dishonored, the court on proof of the protest, presume the fact of dishonor, unless and until such fact is disproved.

8. Types or kinds of negotiable instruments • Negotiable instruments recognized by statute are : • 1. Promissory notes • 2. Bills of exchange • 3. Cheques 2. Negotiable instruments recognized by usage or custom are : • Hundis • Share warrants • Dividend warrants • Bankers draft • Circular notes • Bearer debentures • Debentures of bombay port trust • Railway receipts • Delivery orders.

9. Promissory note: 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.” The person who makes the promissory note and promises to pay is called the maker. The person to whom the payment is to be made is called the payee.

10. CHARACTERISTICS OF A PROMISSORY NOTE • It is an instrument in writing • It is a promise to pay • Signed by the maker • Definite and unconditional promise • Promise to pay money only • Maker must be a certain person • Payee must be certain • Sum payable must be certain • It may be payable on demand or after a definite period of time • It cannot be made payable to bearer on demand

11. Parties to a promissory note • Maker: he is the person who promises to pay the amount stated in the note. He is the debtor. • Payee: he is the person to whom the amount is payable i.e. The creditor. • Holder: he is the payee or the person to whom the note might have been indorsed. 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”. It is also called a draft. Special benefits of bill of exchange: • A bill of exchange is a double secured instrument. • In case of immediate requirement, a bill may be discounted with a bank.

12. Parties of bills of exchange • Drawer: the maker of a bill of exchange is called the ‘drawer’. • Drawee: the person directed to pay the money by the drawer is called the ‘drawee’. • Payee: the person named in the instrument, to whom the money is directed to be paid by the instrument is called the ‘payee’. • Holder: a person who is legally entitled to the possession of the negotiable instrument in his own name and to receive the amount thereof, is called a ‘holder’. • Acceptor: the person who accepts the bill is termed as acceptor. He is none other than the drawee.

14. Essential elements of a bill of exchange • The instrument must be in writing. • The instrument must be signed by the drawer. • The instrument must contain an order to pay, which is express and unconditional. • The drawer, drawee and the payee must be certain and definite individuals. • The amount of money to be paid must be certain. • The payment must be in the legal tender currency of India. (Money only) • It must be in the form of an order to the drawee. • A bill of exchange must be properly stamped.

15. Types of bill of exchange on the basis of period: On the basis of period bills are of two types: Demand bills Term bills • Demand bills of exchange: There is no fixed date for the payment of such bill. They become payable at ay time, when they are presented before payee by the holder. • Term bills of exchange: These bills are payable after specified period of time. The period after which these bill become due for payment is called tenor. Types of bill of exchange on the basis of object: On the basis of purpose of writing the bills, the bills can be classified as: Trade bills Accommodation bills

16. Trade bills: These bills are drawn and accepted against the sale and purchase of goods on credit. These are drawn by the seller (creditor) and accepted by the buyer (debtor). • Accommodation bills: Such bills do not involve any sale and purchase of goods, rather they are drawn without any consideration. The purpose of such bills is to help one party or both the parties financially. Other classification of bills: The bills can be classified into two classes given as under: • Inland bill: These bills are drawn in a country upon person living in the same country or made payable in the same country. Both drawer and the drawee reside in the same country. • Foreign bills: These bills are drawn in one country and accepted and payable in another country, e.g. A bill drawn in england and accepted and payable in india.

18. Cheque: "Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign 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." • Section 5 of the Indian negotiable instrument act of 1881 defines the cheque as “a bill of exchange drawn specially on a specified banker and not on expressed to be payable otherwise than on demand”... Specimen of Cheque:

19. Essentials of Cheque • It is an instrument in writing, i.e., It must be written in ink and not by pencil. • It must be drawn on particular bank. It is drawn by a customer who has deposited money with the bank. • It must not contains any conditions. • It must be signed by the account holder. • It is always payable on demand. • It must contain an order to pay certain sum of money • a cheque is payable to a specified person only

21. Parties of cheques: Drawer: A person who draws a cheque. Drawee: A bank to whom cheque is drawn. Payee: A person in whose favour the cheque is drawn. Types of cheque • Bearer cheque • order cheque • Open cheque • crossed cheque • anti-dated cheque • post-dated cheque • stale cheque

22. Bearer cheque The words “or bearer” printed on the cheque, & it is not cancelled, then the cheque is called a bearer cheque. • A bearer cheque is made payable to the bearer i.e. It is payable to the person who presents it to the bank for encashment. • In simple words a cheque which is payable to any person who presents it for payment at the bank counter is called ‘bearer cheque’

23. Order Cheque The word "or order" is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred).

24. Open Cheque When a cheque is not crossed, it is known as an “open cheque” or an “uncrossed cheque”. • These cheques may be cashed at any bank and the payment of these cheques can be obtained at the counter of the bank or transferred to the bank account of the bearer. • An open cheque may be a bearer cheque or an order cheque.

25. Crossed Cheque Crossed cheque means drawing two parallel lines on the left corner of the cheque with or without additional words like “account payee only” or “not negotiable”. • A crossed cheque cannot be en-cashed at the cash counter of a bank but it can only be credited to the payee’s account. This is a safer way of transferring money then an uncrossed or open

26. Anti-dated cheque Cheque in which the drawer mentions the date earlier than the date on which it is presented to the bank, it is called as “anti-dated cheque”. • Such a cheque is valid upto three months from the date of the cheque drawn.

27. Post-dated cheque Cheque on which drawer mentions a date which is yet to come (future date) to the date on which it is presented, is called postdated cheque. • For example – if a cheque presented on 10th jan 2012 bears a date of 25th jan 2012, it is a post-dated cheque. The bank will make payment only on or after 25th jan 2012.

28. STALE CHEQUE • If a cheque is presented for payment after three months from the date of the cheque, it is called stale cheque. After expiry of that period, no payment will be made by banks against that cheque. A stale cheque is not honored by the bank.

29. CROSSING OF CHEQUE • crossing of a cheque means "drawing two parallel lines" across the face of the cheque. Thus, crossing is necessary in order to have safety. • Crossed cheques must be presented through the bank only because they are not paid at the counter. • Crossing is a popular device for protecting the drawer and payee of a cheque. • Types of crossing : • General crossing • Special crossing • Double crossing • Restrictive crossing

30. GENERAL CROSSING • There are two transverse parallel lines, marked across its face, or – the cheque bears an abbreviation "& co. "Between the two parallel lines, or – the cheque bears the words "not negotiable" between the two parallel lines, or – the cheque bears the words "A/c. Payee" between the two parallel lines.

31. SPECIAL CROSSING • Crossing is that the bank makes payment only to the banker whose name is written in the crossing. Specially crossed cheques are more safe than a generally crossed cheques.

32. DOUBLE CROSSING: • When a cheque bears two separate special crossing, it is said to have been doubly crossed. • As per section-127, of NIA “where a cheque is crossed specially to more than one banker except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.” • What it means is that, if the cheque is drawn account payee to say Mr x, the payee cannot further cross it as payable to account of ‘ y’; such a crossing is valid only when ‘y is the agent banker who is acting as the collecting banker of Mr x; • Thus a paying banker shall pay a cheque doubly crossed only when the second banker is acting only as the agent of the first collecting banker and this has been made clear on the instrument. Canara Bank To Karnataka Bank As agent for collection

33. RESTRICTIVE CROSSING: It includes words like A/c payee, Ashok only etc between traverse parallel lines. The effect is that the collecting banker is supposed to credit the amount of the cheque to the account of the payee only & nobody else. A/c Payee Not negotiable Vijaya Bank A/c Venkatesha

34. Who may cross a cheque? A)A cheque may be crossed generally or specially by the drawer. B) Holder may also cross it. C) Holder may turn a general crossing into special crossing. D) A banker may cross an uncrossed cheque & it may cross it especially to itself or to another banker for purpose of collection through it.

36. Indorsement (endorsement) Endorsement means signature of the holder (an individual who has lawfully received possession) made with object of transferring the document. The signature & message on the back of a cheque to either cash it, deposit it or to handover the rights of the cheque to someone else. Who may endorse: The payee of an instrument is the rightful person to make the first endorsement. Thereafter, the instrument may be endorsed by any party who has become the holder of the instrument (sec.15).

37. Essential Elements of Endorsement • Ordinarily endorsement is made on the face of the instrument but it may be made on its back also. However, if there is no space left on the instrument itself, an endorsement may be made on an attached slip of paper. Such a slip is known as allonge. • If the instrument is made with an intention of transferring the instrument but only the signature is made thereon without any other words, it is said to be endorsement in blank. • No particular words are necessary for an endorsement in full.. • An endorsement must be genuine and not fraud. • If the payee’s or the endorsee’s name is spelt wrongly, he should sign the name as spelt in the instrument and write the correct spelling within brackets. • A negotiable instrument endorsed in blank is payable to the bearer thereof even though originally payable to order (sec 54). But this does not apply to crossed cheques. • The endorsement must be signed by the holder or his duly authorized agent. • The maker, acceptor or endorser may, before the instrument is delivered, cancel or revoke his signature, but not afterwards.

38. 9. Endorsements should be signed in ink. 10. Complimentary prefix like shri or smt is usually not written in negotiable instrument. 11. In case of an illiterate person, he may endorse the instrument by putting his thumb impression of his left hand endorsed by witnesses who must also sign. 12. It must be completed by the delivery of the instrument. TYPES OF ENDORSEMENT • Blank or General endorsement – endorser signs his name without mentioning the name of the person to whom the cheque is endorsed.

39. Restrictive endorsement - the endorser restricts the further negotiation of the cheque by expressing in words at the back of the cheque.

40. Pay B.S. Anand Sd/B.CAHNDRASHEKAR Full or Special Endorsement– Endorser not only write his name but also the name of the person to whom cheque is endorsed. Conditional or qualified endorsement – the endorsement may be preceded by certain condition which should be fulfilled by the endorsee to receive the payment. “Pay Ram or Order on the arrival of Sumit at J.P nagar, Mumbai by 30 September,2008. Sd/B. Chandrasekhar

41. Conditional endorsement are of the following types- • Sans recourse endorsement: An endorsement that says that the endorser does not want to incur any liability if the document is not honored. It is also called without recourse or at the endorsee’s own risk. • If party A (the "endorser") signs a bill of exchange containing a sans recourse endorsement with party B (the "endorsee") over a financial instrument, party B signs into an agreement with party C over the same instrument, and the instrument is dishonored, the party B cannot seek payment from party A.

42. Sans frais endorsement: ‘Sans Frais’ means ‘without expense.’ Here, the endorser does not want any expense to be incurred on his account on the instrument. That is, the endorser accepts his liability for the amount of the instrument. But, he does not want any additional expenditures like noting and protesting charges to be borne by him. Example: A cheque payable to Rashid endorses the cheque as follows: Pay to Rahim order without expense to me’ – Rashid.

43. Facultative endorsement: It is an endorsement, whereby, the en­dorser waives some of his rights on the instrument. •  Example: Rashid, the holder of a bill, makes the following endorsement on the bill. • “Pay to Raja or order. Notice of dishonor waived” – Rashid. • Liability of endorser depends upon a contingency: The liability of the endorser depends upon the happening of an event. If the event does not take place, the liability of the endorser does not arise. For example, if Mr. A makes an endorsement as “pay Mr. B on his arrival”.

44. Partial endorsement : • If only a part of the amount of the instrument is endorsed, it is a case of partial endorsement. According to sec C. 56 of the N.I.A. – “No writing on a negotiable instrument is valid for the purpose of negotiability, if such a writing purport to transfer only a part of the amount appearing to be due on the instrument.” Thus partial endorsement is invalid. • For example, a cheque for tk. 5000/- payable to ‘jamal’ is endorsed by him as follows: • “Pay to kamal tk. 1000/- only” – jamal. • Suppose the same cheque is endorsed as follows: • “Pay to kamal tk. 3000/- and rahim tk. 2000/-“ jamal. • This endorsement is also invalid. Neither kamal nor rahim can sue or further endorse.

45. Intentional Cancellation of Endorsement: When the holder of negotiable instrument intentionally strikes off the endorsement with the object of discharging the person liable to make payment from liability, such a party will be discharged from liability to the bolder and to all parties claiming title under such holder. Example: ‘A’ endorses a negotiable instrument to ‘B’, ‘B’ endorses it to ‘C’ and endorses it to ‘D’. D of his own accord cancels the name of ‘B’ as an endorser. The liability of ‘B’ as well as that of C comes to an end.

46. HUNDIES: A hundi is a financial instrument used in trade and credit transactions. Hundis are used as a form of remittance instrument to transfer money from place to place, as a form of credit instrument to borrow money and as a bill of exchange in trade transactions. The reserve bank of India describes the hundi as "an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order.

47. SHARE WARRANT: A share warrant is a document issued by the company under its common seal, stating that its bearer is entitled to the shares or stock specified therein. Share warrants are negotiable instruments.

48. DIVIDEND WARRANTS: A dividend warrant is an instrument by which a company pays dividend in the form of cash back to its share holders from the profit it has been made out of its business operations.

49. Bank draft: A bank draft is a cheque which you can buy from a bank in order to pay someone who is not willing to accept a personal cheque. A bank draft is a payment on behalf of a payer that is guaranteed by the issuing bank. A draft is used when payee wants a highly secure form of payments.

50. Circular notes: It is a written request by a bank to its foreign correspondents to pay a specified sum of money to a named person.