Negotiable Instruments Act, 1881

Introduction
Instrument : A written document by which a right is created in favour of another person. Instrument is called negotiable if it possess the following features
Freely Transferable Holders title free from defects Holder can sue in his own name Can be transferred infinitum

Elements of a Negotiable Instrument

It must be in writing Must be signed by person maker or drawer Must be an unconditional promise or order to pay Must involve payment of a certain sum of money only and nothing else

Contd
Must be payable at a time which is certain to arrive In case of bills or cheques the drawee must be described with reasonable certainty Can be transferred by delivery or delivery and endorsement

Types of Negotiable Instruments

Promissory Notes Bills of Exchange Cheques

Promissory Note
It is an instrument in writing 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 instrument
Rs. 10,000 New Delhi 110001 Nov 21, 2006 On demand [ or six months after date] I promise to pay X or order the sum of rupees ten thousand w ith interest at 12 percent per annum only for value received . To : X Sd/ - A Address . Stamp

Bills of Exchange
It 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
Rs. 10,000 New Delhi 110001 Nov 21, 2006

Six months after date pay to A or order/ bearer the sum of ten thousand rupees only for the value received To : X Sd/ - Y Address . Stamp

Cheque
It is a bill of exchange with two added features viz.
It is always drawn on a specified banker It is always payable on demand and not otherwise
XYZ Bank Date :________ Pay ___________________________ or bearer Rupees _____________________________ A/ c No. ________________ Sd/ -

Rs. __________

Bill or Hundi

It is a short term financing Instrument

Vendor (Drawer) raises Hundi Customer (Drawee) accepts the Hundi Vendor discounts Hundi with his banker

Vendors Bill Discounting - Objectives

L&Ts benefit :
Enhanced Vendors Credit
Higher ROCE

Vendors benefit :
Finance at cheaper cost

Instant funding

On L&Ts recommendation

Banks benefit :
Higher Business & Return

Win-Win Situation for All

Increase in ROCE - an example

Details Sales PBIT Net Erngs (PBIT - Tax) Cap Emp ROCE

Alt 1 2000 250 200 1500 13%

Alt 2 Alt 3 2000 2000 250 250 200 200 1400 1300 14% 15%

How it Operates
1. L&T accepts Hundi drawn by Vendor

L&T
2. L&T sends accepted Hundi to Bank 5. L&T pays to Bank on maturity date. 3.Vendor approaches Bank for Hundi discounting

Vendor

4.Bank issues Pay order on the same day

BANK

Sample Hundi

Documents to be submitted
Covering letter in the Standard Format on the letterhead of the Supplier/Drawer. To be duly signed by the authorised signatory of the Supplier. Hundi in the Standard Format. On the letterhead of the Supplier/Drawer. To be duly signed by the authorised signatory of the Supplier. To be duly accepted by the authorised signatory of the drawee.

Documents to be submitted
Original copy of the INVOICE. Original copy of Delivery Challan. Lorry Receipt duly stamped for receipt of the goods in Good Condition by the Purchaser (Drawee). Any changes / overwriting on the above documents have to bear the signatures of both drawee and the drawer.

Discounting Period
Discounting Date :
Date of presentation of Hundi to Bank

Maturity Date :
Material Receipt Dt. + Payment Terms (say 60 Days)

Discounting Period :

Maturity Date - Discounting Date

e, g t im n t i n p e r i od r e se t in g n he p er t D iscou rt Sh o r t he e l on g

Thank You