What are the different kinds of negotiable instruments?
- Siva Prasad Bose
- Sep 17, 2021
- 2 min read
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A negotiable instrument refers to any document that contains a signed promise of payment of a fixed sum of money to order or to the bearer of the instrument. The promise must be unconditional. They are used widely in commercial transactions. In India, the negotiable instruments act 1881 and its various amendments govern the usage of such instruments.
In case of some kinds of negotiable instruments, they can be treated as forms of money, since the bearer of the document is entitled to receive the money, and therefore can transfer the document (before the promised money is received) to some other person who will become the new bearer. Note: in case of cheques and some bills of exchange this may not hold, as the name of the drawer may be mentioned on the instrument and so the money can only be paid to the named person.
The major types of negotiable instruments include
Bill of exchange: contains a direction to a third party to pay a fixed sum of money to a certain person or to the bearer of the instrument.
Promissory note: contains an unconditional promise to pay a fixed sum of money to the bearer of the instrument.
Cheque (special kind of bill of exchange): directs a banker to pay a fixed sum of money to the bearer or to a specific person whose name is mentioned on the cheque. The payment has to be immediate, i.e. on demand. Cheques are the most popular and widely used kind of negotiable instruments.
Money order: It is an order to pay a person a specified amount of money, the money having been pre-paid in advance. They are usually handled by post offices.
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