Cheque as a negotiable instrument
A Cheque is defined as a document that is issued by the bank and work as an instrument for the transfer of money in favor of the bearer of that cheque. Basically, it is a type of negotiable instrument that helps to make a payment and complete a particular transaction between two parties.
Section- 3 of 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 and it includes the electronic image of a truncated cheque and a cheque in the electronic form.” Section- 13 of the Negotiable Instruments Act mentions three kinds of negotiable instruments namely; Promissory notes. Bills of exchange and cheques. Among these three, cheques are the most widely and commonly used negotiable instrument in the recent times, hence it is important to understand the basic fundamental principles upon which, the issuance of cheques is based.
Every banking authority has its own cheques and instruments but the functioning aspect remains the same and it is the duty of every bank to accept the cheques of the other banks as well subject to certain rules and regulations.
Cheque transaction: process and principles
Transfer of money via cheques is a hassle-free process in cases where the amount involved is high. Secondly, these transactions maintain the true nature of the funds and help to keep a record of the payments made.
The process of issuing a cheque can be understood as follows:
- In order to issue a cheque, it is important that the person is holding a bank account (Current/saving) in any branch of a particular bank which issues a cheque-book to the account holder.
- A payment through cheque is made in favor of another person by writing his name upon a cheque or the name given by him to the bank for his/her account. The amount is to be mentioned both, in numeric as well as in words.
- The cheque should be then, deposited in the bank for its clearance which completes the process of transfer of money from one account to another within 2-3 days.
Particulars on a cheque
- Date- The date mentioned on the cheque is the date on which it is made by the party. As per the guidelines of the Reserve Bank of India, the validity period of the cheques has been reduced to 3 months from a period of 6 months with effect from 1st April, 2012.
- Signature- The bank officials, at the time of opening any account keeps the record of the signature of the account holder in order to verify the same from the cheques. The signature on the cheque must match to the registered signature with the bank officials for the clearance.
- Account Number- Every account holder is given a unique account number for his bank account. It is a unique number and different banks across the world have different set-ups of these account numbers. They generally represent the branch code along with the other important details in this number.
- IFSC- It stands for Indian financial system code. It is an alpha-numeric code given on every cheque and is mostly used in transferring money online by NEFT, IMPS, RTGS etc.
Parties involved in a ‘cheque’ transaction
Generally, there are three parties involved in a single cheque transaction i.e. a Drawer, Drawee and a Payee. The roles, rights and duties of the above-mentioned parties are as follows:
1. Drawer– The person who draws/drafts a cheque in favor of another person is known as the Drawer. He issues the cheque and has the power to enter the amount in it along with the signature.
2. Drawee- Generally, the bank acts as a drawee as it is the holder of the funds of the drawer and whenever a cheque is issued, the amount is to be discharged by the bank officials.
3. Payee- The payee is the person in favor of whom the cheque is drawn. He/she is the beneficiary in the process of transaction.
Types of cheques
On the basis of the usage of cheques in the market, following are the types:
- Crossed– These are the safest types of cheques as they cannot be drawn on the cash counter of the bank. It basically means that these cheques cannot be converted into cash and lead to direct bank to bank transfer. The two parallel lines on the top-left of the cheque represents the crossing of a cheque.
- Dishonored– When the bank refuses to pay the requisite amount to the payee due to insufficient balance in the account of the Drawee of the cheque, the cheque is said to be dishonored by the bank authorities.
- Bearer– A bearer cheque is a cheque which enables the holder of the cheque to encash it. The possession of the cheque is the mere requirement to convert the cheque into cash.
- Order– When the bearer cheque is cancelled and a particular name is mentioned upon the cheque, it is known as the order cheque. These kinds of cheque can be encashed in name of the person written on the cheque.
- Anti/Postdated/Stale-A cheque which is brought to the bank after the mentioned date is known as anti-dated cheque. These cheques remain valid up to the period of three months.
On the other hand, a post-dated cheque is a cheque on which, the mentioned date is yet to come and can be used only when the mentioned date arrives.
A stale cheque or an expired cheque refers to the cheque which is brought to the bank after 3 months i.e. the expiration period. These cheques cannot be credited.
Legislations governing ‘cheque’ transactions
The Negotiable Instruments Act governs plethora of rules and regulations including the information regarding the parties to the cheques, presentment, payment and interests in case of cheques. Also, the provisions regarding the discharge of liabilities on cheques along with the notice in case of dishonors, is included in this act.
The circular by the Reserve Bank of India on the procedure to be followed by the scheduled banks in case of dishonored cheques is given in the Negotiable Instruments Act.
The concept of E-cheques has also been introduced by the government which rules out the mere disadvantages of cheques i.e. it has to be present in the physical form in order to get encashed.
The number of existing cases for dishonored cheques in the courts is very high which is alarming and shows that there is still a whole lot scope of improvement in the legislations relating to cheques.
Frequently asked questions
1. What are the advantages of a cheque?
Cheques have many advantages which includes-
- Easy to carry if the amount is high
- Traceable since each cheque has a unique number and cannot be easily lost
- Many options are available with the cheque holder as to how the payment is to be made via cheque
- There is no such limitation as to the validity of a cheque until a specific date is mention on it after which, it is valid for only three months.
What is a Demand draft?
It is a type of negotiable instrument which is issued by the bank and can be considered as a more secured form of a cheque. In a demand draft, the drawer of the DD is expected to pay the amount beforehand whereas in case of a cheque, the amount is paid after the cheque is issued.
Edited by Shikhar Shrivastava
Approved & Published – Sakshi Raje