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Knowledge Corner
Here you find definition of banking terms and clear the concept which will help us to do our work soomthly. If you want to share some banking terms with us you can Write Here

  • KYC Customer Identification Procedure (CIP)   
  • (a) The policy approved by the Board of banks should clearly spell out the Customer
    Identification Procedure to be carried out at different stages i.e. while establishing a banking
    relationship, carrying out a financial transaction or when the bank has a doubt about the
    authenticity/veracity or the adequacy of the previously obtained customer identification data.
    Customer identification means identifying the customer and verifying his/her identity by using
    reliable, independent source documents, data or information. Banks need to obtain sufficient
    information necessary to establish, to their satisfaction, the identity of each new customer,whether regular or occasional, and the purpose of the intended nature of the banking
    relationship. Being satisfied means that the bank must be able to satisfy the competent
    authorities that due diligence was observed based on the risk profile of the customer in
    compliance with the extant guidelines in place. Such risk based approach is considered
    necessary to avoid disproportionate cost to banks and a burdensome regime for the
    customers. Besides risk perception, the nature of information/documents required would also
    depend on the type of customer (individual, corporate etc.). For customers that are natural
    persons, the banks should obtain sufficient identification data to verify the identity of the
    customer, his address/location, and also his recent photograph. For customers that are legal
    persons or entities, the bank should (i) verify the legal status of the legal person/entity through
    proper and relevant documents; (ii) verify that any person purporting to act on behalf of the
    legal person/entity is so authorized and identify and verify the identity of that person; (iii)
    understand the ownership and control structure of the customer and determine who are the
    natural persons who ultimately control the legal person. Customer identification requirements
    in respect of a few typical cases, especially, legal persons requiring an extra element of
    caution are given in paragraph below. Banks may, however, frame their own internal
    guidelines based on their experience of dealing with such persons/entities, normal bankers’
    prudence and the legal requirements as per established practices. If the bank decides to
    accept such accounts in terms of the Customer Acceptance Policy, the bank should take
    reasonable measures to identify the beneficial owner(s) and verify his/her/their identity in a
    manner so that it is satisfied that it knows who the beneficial owner(s) is/are.
    (b) Some close relatives, e.g. wife, son, daughter and parents etc. who live with their husband,
    father/mother and son/daughter, as the case may be, are finding it difficult to open account in
    some banks as the utility bills required for address verification are not in their name. In such
    cases, banks may obtain an identity document and a utility bill of the relative with whom the
    prospective customer is living along with a declaration from the relative that the said person
    (prospective customer) wanting to open an account is a relative and is staying with him/her.
    Banks may use any supplementary evidence such as a letter received through post for further
    verification of the address. While issuing operational instructions to the branches on the
    subject, banks should keep in mind the spirit of instructions issued by the Reserve Bank and
    avoid undue hardships to individuals who are, otherwise, classified as low risk customers.
    (c) Banks are advised that KYC once done by one branch of the bank should be valid for
    transfer of the account within the bank as long as full KYC has been done for the concerned
    account. The customer should be allowed to transfer his account from one branch to another
    branch without restrictions. In order to comply with KYC requirements of correct address of the
    person, fresh address proof may be obtained from him/her upon such transfer by the
    transferee branch.
    (d) A large number of customers with transferable jobs or those who migrate for jobs are
    unable to produce a utility bill or other documents in their name as address proof immediately
    after relocating. In such cases, banks may transfer existing accounts at the transferor branch
    to the transferee branch without insisting on fresh proof of address and on the basis of a selfdeclaration
    from the account holder about his/her current address, subject to submitting proof
    of address within a period of six months.
    (e) Banks should introduce a system of periodical updation of customer identification data
    (including photograph/s) after the account is opened. Full KYC exercise will be required to be
    done at least every two years for high risk individuals and entities. Full KYC exercise will be
    required to be done at least every ten years for low risk and at least every eight years for
    medium risk individuals and entities. Such verification should be done irrespective of whether
    the account has been transferred from one branch to another and banks are required to also
    maintain records of transactions as prescribed. Positive confirmation (obtaining KYC related
    updates through e-mail / letter / telephonic conversation / forms / interviews / visits, etc.) will berequired to be completed at least every two years for medium risk and at least every three
    years for low risk individuals and entities. Fresh photographs have to be obtained from minor
    customers on becoming majors.
    (f) An indicative list of the nature and type of documents/information that may be may be relied
    upon for customer identification is given in below . The said list is only indicative and not
    exhaustive. (a) if the address on the document submitted for identity proof by the prospective
    customer is same as that declared by him/her in the account opening form, the document may
    be accepted as a valid proof of both identity and address; (b) if the address indicated on the
    document submitted for identity proof differs from the current address mentioned in the
    account opening form, a separate proof of address should be obtained. For this purpose, a
    rent agreement indicating the address of the customer duly registered with State Government
    or similar registration authority may also be accepted as a proof of address. (c) Customers
    may submit only one documentary proof of address (either current or permanent) while
    opening a bank account or while undergoing periodic updation. In case the address mentioned
    as per proof of address undergoes a change, fresh proof of address may be submitted to the
    branch within a period of six months. (d) In case the proof of address furnished by the
    customer is not the local address or address where the customer is currently residing, the
    bank may take a declaration of the local address on which all correspondence will be made by
    the bank with the customer. No proof is required to be submitted for such address for
    correspondence / local address. This address may be verified by the bank through positive
    confirmation such as acknowledgment of receipt of (i) letter, cheque books, ATM cards; (ii)
    telephonic conversation; (iii) visits; etc. Customers should intimate the new address for
    correspondence to the bank within two weeks of such a change. While opening new accounts
    and while periodically updating KYC data an undertaking to this effect should be obtained.
    (g) Permanent correct address, as referred to in the below list, means the address at which a
    person usually resides and can be taken as the address as mentioned in a utility bill or any
    other document accepted by the bank for verification of the address of the customer.(h) Acceptance of Aadhaar letter for KYC purposes
    i. Unique Identification Authority of India (UIDAI) has advised Reserve Bank that banks
    are accepting Aadhaar letter issued by it as a proof of identity but not of address, for
    opening accounts. If the address provided by the account holder is the same as that on
    Aadhaar letter, it may be accepted as a proof of both identity and address.
    ii. In order to reduce the risk of identity fraud, document forgery and have paperless KYC
    verification, UIDAI has launched its e-KYC service. Accordingly, it has been decided to
    accept e-KYC service as a valid process for KYC verification under Prevention of
    Money Laundering (Maintenance of Records) Rules, 2005. Further, the information
    containing demographic details and photographs made available from UIDAI as a
    result of e-KYC process (“which is in an electronic form and accessible so as to be
    usable for a subsequent reference”) may be treated as an ‘Officially Valid Document’
    under PML Rules. While using e-KYC service of UIDAI, the individual user has to
    authorize the UIDAI, by explicit consent, to release her or his identity/address through
    biometric authentication to the bank branches/business correspondents (BCs). The
    UIDAI then transfers the data of the individual comprising name, age, gender, and
    photograph of the individual, electronically to the bank/BCs, which may be accepted as
    valid process for KYC verification.
    iii. Banks may accept e-Aadhaar downloaded from UIDAI website as an officially valid
    document subject to the following:
     If the prospective customer knows only his/her Aadhaar number, the bank may
    print the prospective customer’s e Aadhaar letter in the bank directly from the
    UIDAI portal; or adopt e-KYC procedure.If the prospective customer carries a copy of the e-Aadhaar downloaded
    elsewhere, the bank may print the prospective customer’s e-Aadhaar letter in the
    bank directly from the UIDAI portal; or adopt e-KYC procedure as mentioned in the
    circular referred in paragraph (b) above, or confirm identity and address of the
    resident through simple authentication service of UIDAI.
    (i) Acceptance of NREGA Job Card as KYC document for normal accounts
    In order to avoid inconvenience to customers from rural areas, banks may accept NREGA Job
    Card as an officially valid document for opening of bank accounts without the limitations
    applicable to Small Accounts.
    (j) Introduction not mandatory for opening accounts
    Before implementation of the system of document-based verification of identity, introduction
    from an existing customer of the bank was considered necessary for opening of bank
    accounts. In many banks, obtaining of introduction for opening of accounts is still a mandatory
    part of customer acceptance policy even though documents of identity and address as
    required under our instructions are provided. This poses difficulties for prospective customers
    in opening accounts as they find it difficult to obtain introduction from an existing account
    holder. Since introduction is not mandatory for opening of accounts under PML Act and Rules
    or Reserve Bank’s extant KYC instructions, banks should not insist on introduction for opening
    bank accounts of customers.
    (k) The increasing complexity and volume of financial transactions necessitate that customers
    do not have multiple identities within a bank, across the banking system and across the
    financial system. This can be achieved by introducing a unique identification code for each
    customer. The Unique Customer Identification Code (UCIC) will help banks to identify
    customers, track the facilities availed, monitor financial transactions in a holistic manner and
    enable banks to have a better approach to risk profiling of the customers. It would also
    smoothen banking operations for the customers. While some banks already use UCIC for their
    customers by providing them a relationship number, etc., other banks have not adopted this
    practice. Banks are, therefore, advised to allot UCIC to all their customers while entering into
    any new relationships for individual customers to begin with. Similarly, existing individual
    customers may also be allotted UCIC.

  • KYC Customer Acceptance Policy (CAP)   
  • (a) Every bank should develop a clear Customer Acceptance Policy laying down explicit
    criteria for acceptance of customers. The Customer Acceptance Policy must ensure that
    explicit guidelines are in place on the following aspects of customer relationship in the bank:
    (i) No account is opened in anonymous or fictitious/benami name(s);
    (ii) Parameters of risk perception are clearly defined in terms of the nature of business activity,
    location of customer and his clients, mode of payments, volume of turnover, social and
    financial status etc. to enable categorization of customers into low, medium and high risk
    (banks may choose any suitable nomenclature viz. level I, level II and level III). Customers
    requiring very high level of monitoring, e.g. Politically Exposed Persons (PEPs) may, if
    considered necessary, be categorized even higher;
    (iii) Documentation requirements and other information to be collected in respect of different
    categories of customers depending on perceived risk and keeping in mind the requirements of
    PML Act, 2002 and instructions/guidelines issued by Reserve Bank from time to time;
    (iv) No account is opened or an existing account is closed where the bank is unable to apply
    appropriate customer due diligence measures, i.e. the bank is unable to verify the identity and
    /or obtain documents required as per the risk categorization due to non-cooperation of the
    customer or non-reliability of the data/information furnished to the bank. It is, however,
    necessary to have suitable built-in safeguards to avoid harassment of the customer. Forexample, the decision by a bank to close an account should be taken at a reasonably high
    level after giving due notice to the customer explaining the reasons for such a decision;
    (v) Circumstances, in which a customer is permitted to act on behalf of another person/entity,
    should be clearly spelt out in conformity with the established law and practice of banking as
    there could be occasions when an account is operated by a mandate holder or where an
    account is opened by an intermediary in fiduciary capacity; and
    (vi) Necessary checks are carried out before opening a new account so as to ensure that the
    identity of the customer does not match with any person with known criminal background or
    with banned entities such as individual terrorists or terrorist organizations, etc.
    (b) Banks should prepare a profile for each new customer based on risk categorisation. The
    customer profile may contain information relating to customer’s identity, social/financial status,
    nature of business activity, information about his clients’ business and their location, etc. The
    nature and extent of due diligence will depend on the risk perceived by the bank.
    (c) For the purpose of risk categorization, individuals (other than High Net Worth) and entities
    whose identities and sources of wealth can be easily identified and transactions in whose
    accounts by and large conform to the known profile, may be categorized as low risk.
    Illustrative examples of low risk customers could be salaried employees whose salary
    structures are well defined, people belonging to lower economic strata of the society whose
    accounts show small balances and low turnover, Government Departments and Government
    owned companies, regulators and statutory bodies, etc. In such cases, the policy may require
    that only the basic requirements of verifying the identity and location of the customer are to be
    met. Customers that are likely to pose a higher than average risk to the bank should be
    categorized as medium or high risk depending on customers background, nature and location
    of activity, country of origin, sources of funds and his client profile, etc. Banks should apply
    enhanced due diligence measures based on the risk assessment, thereby requiring intensive
    ‘due diligence’ for higher risk customers, especially those for whom the sources of funds are
    not clear. Examples of customers requiring higher due diligence include (a) non-resident
    customers; (b) high net worth individuals; (c) trusts, charities, NGOs and organizations
    receiving donations; (d) companies having close family shareholding or beneficial ownership;
    (e) firms with ‘sleeping partners’; (f) politically exposed persons (PEPs) of foreign origin; (g)
    non-face-to-face customers, and (h) those with dubious reputation as per public information
    available, etc. NPOs/NGOs promoted by United Nations or its agencies may be classified as
    low risk customer.
    (d) It is important to bear in mind that the adoption of customer acceptance policy and its
    implementation should not become too restrictive and must not result in denial of banking
    services to general public, especially to those, who are financially or socially disadvantaged.

  • KYC Operation of Bank Accounts and Money Mules   
  • (a) “Money Mules” can be used to launder the proceeds of fraud schemes (e.g., phishing and
    identity theft) by criminals who gain illegal access to deposit accounts by recruiting third
    parties to act as “money mules.” In some cases these third parties may be innocent while in
    others they may be having complicity with the criminals.
    (b) In a money mule transaction, an individual with a bank account is recruited to receive
    cheque deposits or wire transfers and then transfer these funds to accounts held on behalf of
    another person or to other individuals, minus a certain commission payment. Money mules
    may be recruited by a variety of methods, including spam e-mails, advertisements on genuine
    recruitment web sites, social networking sites, instant messaging and advertisements in
    newspapers. When caught, these money mules often have their bank accounts suspended,
    causing inconvenience and potential financial loss, apart from facing likely legal action for
    being part of a fraud. Many a times the address and contact details of such mules are found to
    be fake or not up to date, making it difficult for enforcement agencies to locate the account
    holder.
    (c) The operations of such mule accounts can be minimised if banks follow the guidelines on
    opening of accounts and monitoring of transactions contained in this Master Circular. Banks
    are, therefore, advised to strictly adhere to the guidelines on KYC/AML/CFT issued from time
    to time and to those relating to periodical updation of customer identification data after the
    account is opened and also to monitoring of transactions in order to protect themselves and
    their customers from misuse by such fraudsters.

  • Letter Of Credit   
  • What is a Letter Of Credit

    A letter of credit is a letter from a bank guaranteeing that a buyers payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.

    BREAKING DOWN Letter Of Credit

    Because a letter of credit is typically a negotiable instrument, the issuing bank pays the beneficiary or any bank nominated by the beneficiary. If a letter of credit is transferable, the beneficiary may assign another entity, such as a corporate parent or a third party, the right to draw.

    Funding a Letter of Credit

    Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit. Banks also collect a fee for service, typically a percentage of the size of the letter of credit. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.

    Example of a Letter of Credit

    Citibank offers letters of credit for buyers in Latin America, Africa, Eastern Europe, Asia and the Middle East who may have difficulty obtaining international credit on their own. Citibank’s letters of credit help exporters minimize the importer’s country risk and the issuing bank’s commercial credit risk. Citibank can provide letters of credit typically within two business days, guaranteeing payment by the confirming Citibank branch. This benefit is especially valuable when a client is located in a potentially unstable economic environment.

    Types of Letters of Credit

    A commercial letter of credit is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.

    A revolving letter of credit lets the customer make any number of draws within a certain limit during a specific time period. A traveler’s letter of credit guarantees the issuing banks will honor drafts made at certain foreign banks.

    A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit. The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment under the letter of credit if the holder and the issuing bank default. The issuing bank in international transactions typically requests this arrangement.

     

  • Bond Terminology   
  • Characteristics of Bonds

     

    A bond is a long-term contract under which a borrower (the issuer) agrees to make payments of interest and principal, on specific dates, to the holders (creditors) of the bond.

     

    Bearer bond - Bonds that are not registered on the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent.

     

    Registered bond - A bond whose issuer records ownership and interest payments. Differs from a bearer bond, which is traded without record of ownership and whose possession is the only evidence of ownership.

     

    Par value - Also called the maturity value or face value; the amount that an issuer agrees to pay at the maturity date.

     

    Coupon interest rate - With bonds, notes, or other fixed income securities, the stated percentage rate of interest, usually paid twice a year (semiannually). Coupon payments - A bonds dollar interest payments.

     

    Maturity date - Date on which the principal amount of a bond or other debt instrument becomes due and payable.

     

    Call provision - An embedded option granting a bond issuer the right to buy back all or part of an issue prior to maturity.

     

    Bond indenture - Contract that sets forth the promises of a corporate bond issuer and the rights of investors.

     

    Sinking fund - A fund to which money is added on a regular basis that is used to ensure investor confidence that promised payments will be made and that is used to redeem debt securities or preferred stock issues.

     

    Sinking fund provision - A condition included in some corporate bond indentures that requires the issuer to retire a specified portion of debt each year.

     

    Convertible bond - General debt obligation of a corporation that can be exchanged for a set number of common shares of the issuing corporation at a prestated conversion price.

     

    Warrant - A security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price, usually one higher than current market price. Warrants are traded as securities whose price reflects the value of the

    underlying stock. Corporations often bundle warrants with another class of security to enhance the marketability of the

    other class. Warrants are like call options, but with much longer time spans-sometimes years. And, warrants are offered by

    corporations, while exchange-traded call options are not issued by firms.

     

    Bond terminology:

     

    kd = the bond’s market rate of interest or required rate of

    return; also called the yield to maturity (YTM); (can

    change many times over the bond’s life).

    N = the number of years before the bond matures.

     

    M = the par, or maturity, value of the bond (usually $1,000).

     

    CIR = the coupon interest rate (does not change over the bond’s

    life).

     

    INT = the dollar amount of interest the bond pays per year

    (INT = CIR x M).

     

     

     

    Zero Coupon bond valuation model:

     

    VZero = M/(1 + kd)n = M(PVIFkd,n)

     

    Bond Valuation: Important Relationships

     

    • A decrease in interest rates (required rates of return) will cause the value of a bond to increase; an interest rate increase will cause a decrease in value. The change in value caused by changing interest rates is called interest rate risk. A bondholder owning a long-term bond is exposed to greater interest rate risk than when owning a short-term bonds.

    • The market value of the bond will always approach its par value as its maturity date approaches, provided the firm does not go bankrupt.

    • If the bondholders required rate of return (current interest rate) equals the coupon interest rate, the bond will sell at "par," or maturity value.

    • If the current interest rate exceeds the bonds coupon rate, the bond will sell below par value or at a "discount."

    • If the current interest rate is less than the bonds coupon rate, the bond will sell above par value or at a "premium."

     

     

    Bond Yields

     

    Yield to maturity - The percentage rate of return paid on a bond, note, or other fixed income security if the investor buys and holds it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity, and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate.

     

    INT + [(M – VB)/n]

    Estimated YTM = --------------------------

    (M + 2VB)/3

     

     

    Current yield - The annual interest payment on a bond divided by the bonds current price.

     

    Current yield = INT/VB

     

    Capital gains (loss) yield - The price change portion of a bonds return.

     

    Capital gains (loss) yield = (VB+1 - VB)/VB

     

    Therefore, the total return on a bond is equal to the bonds YTM, and the YTM = Current yield + Capital gains (loss) yield.

     

    YTM = INT/VB + (VB+1 - VB)/VB

     

     

    Yield to call - The percentage rate of return on a bond or note if the investor buys and holds the security until the call date. This yield is valid only if the security is called prior to maturity. Generally bonds are callable over several years and normally are called at a slight premium. The calculation of yield to call is based on coupon rate, length of time to call, call price and market price.

     

    INT + [(Call Price – VB)/Years to Call]

    Estimated YTC = -----------------------------------------

    (Call Price + 2VB)/3

     

     

    Yield to maturity on a zero coupon bond:

     

    YTMZero = (M/VZero)1/n - 1.0

     

     

    Types of bonds

     

    • Treasury bonds - Debt obligations of the US Treasury that have maturities of 10 years or more.

    • Municipal bond - State or local governments offer muni bonds or municipals, as they are called, to pay for special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.

    • Foreign bond - A bond issued on the domestic capital market of another country.

    • Corporate bonds - Debt obligations issued by corporations.

     

      1. Mortgage bond - A bond in which the issuer has granted the owner a lien against the pledged assets.

      2. Debenture - Any debt obligation backed strictly by the borrowers integrity, e.g. an unsecured bond. A debenture is documented in an indenture.

      3. Subordinated debenture bond - An unsecured bond that ranks after secured debt, after debenture bonds, and often after some general creditors in its claim on assets and earnings.

     

     

     

     

    Coupon Yield

     

    Coupon yield is set when a bond is issued. It is the interest rate paid by the bond (for example, 5½%,7¾%), and it is listed as a percentage of par, or face value, which is the principal amount that will be owed at maturity.

     

    The coupon yield designates a fixed dollar amount that never changes through the life of the bond. If a $1,000 par value bond is described as having a 10% coupon, that coupon will always be $100 for each bond, paid out in two $50 increments for the entire life of the bond—no matter what happens to the price of the bond, or to interest rates. That is the reason bonds are called fixed-income securities.

     

    Current Yield

     

    Almost as soon as a bond starts trading in the secondary market, it ceases to trade at par due to changing interest rates. A bond’s current yield is its coupon divided by its market price.

     

    To illustrate, let us assume you purchased three bonds: the first you bought at par, for $1,000; the second you bought at a premium to par, and paid $1,200; the third you bought at a discount to par, for $800. Each bond has a 10% coupon, and so each pays $100 in annual coupons. Dividing the coupon ($100) by the price results in a current yield of 10% for the par bond; 8.33% for the premium bond; and 12.5% for the discount bond. Thus, the current yield is equal to coupon yield for the par bond; the current yield is lower than the coupon yield for the premium bond; and the current yield is higher than the coupon

    yield for the discount bond. Current yield is quoted for fixed-income securities of any maturity, whether short or long.

     

    Yield to Maturity

     

    You can see from the above description that current yield is based only on the coupon and the current market price. Current yield, therefore, fails to measure two important sources of income that investors earn from bonds: interest-on-interest and capital gains or losses.

     

    Yield to maturity (YTM) is a more comprehensive measure of potential earnings than “current yield.” It estimates the total amount that a bond will earn over the entire life of an individual bond, from all possible sources of income — coupon income, interest-on-interest, and capital gains or losses due to the difference between the price paid when the bond was purchased and par, the return of principal at maturity—based on a number of assumptions regarding the holding period, reinvested income and interest rates over the life of the bond.

     

    Yield to maturity calculations are not easily made using paper and pencil, but they can easily be determined using either a financial calculator, or by using the various calculators available on the Internet.

     

    YTM is the measure most widely quoted by brokers when selling individual bonds. However, it is not a prediction of what you will actually earn on a bond. Your actual return is likely to differ from the YTM, perhaps considerably, because the YTM will only be realized under certain conditions, which are:

     

    • That you hold the bond to maturity;

    • That the coupons are reinvested (rather than spent); and

    • That coupons are reinvested at an interest rate equal to the yield-to-maturity.

     

    Let’s look briefly at each assumption:

     

    -Holding to Maturity: The YTM quote is based on the redemption price of par (that is, $1,000). If you sell a bond before it matures at a price other than par, then the capital gain or loss will considerably alter what you actually earn.

     

    -Reinvesting Coupons: YTM calculations are based on the assumption that coupons are never spent; they are always

    reinvested. If you spend coupons, then you do not earn the interest-on-interest, and your return would be less than the anticipated YTM. How much less depends both on how many coupons

    you spend and on the maturity of the bonds.

     

    -Coupons are Reinvested at an Interest Rate Equal to the YTM: This may sound like double talk, but it means that if a bond has a YTM of 7%, it is assumed that each and every coupon is reinvested at a rate of 7%. However, if in reality you reinvest coupons at a higher rate than 7%, you will earn more than the bond’s stated YTM, while if you reinvest coupons at lower rates than 7%, you will earn less.

     

    Reinvestment Risk

     

    Reinvestment risk is the risk that coupons may have to be reinvested at a lower interest rate, in which case an investor’s actual return would then be lower than the YTM quoted at the time of purchase. On the other hand, the reinvestment risk may work in your favor if coupons are reinvested at a higher rate, and that would increase the actual return above the YTM quoted at the time of purchase.

    If YTM does not predict your actual return, what does it tell you? The chief usefulness of YTM quotes is that they allow you to compare different kinds of bonds—those with dissimilar coupons, different market prices relative to par (for instance, bonds selling at premiums or discounts), and different maturities.

     

    Default Risk

     

    The risk that an issuer of a bond may be unable to make timely principal and interest payments.

     

     

    Zero Coupon Bonds

     

    • Zero coupon bonds result from the separation of coupons from the body of a security.

    • Zeros sell at deep discounts from face value.

    • The difference between the purchase price of the zero and its face value when redeemed is the investors return.

    • Zeros can be purchased from private brokers and dealers, but not from the Federal Reserve or any government agency.

     

    Creating Zeros by Coupon Stripping - Coupon stripping is the act of detaching the interest payment coupons from a note or bond and treating the coupons and the body as separate securities. Each coupon, or interest payment, entitles its owner to a specified cash return on a specific date; the body of the security calls for repayment of the principal amount at maturity.

     

    The body of the stripped securities and the separate coupons are known as "zero coupons" or "zeros" because there are no periodic interest payments on each instrument. After stripping, the body and coupons are sold at a deep discount from their face values. An owner benefits only from the difference between the purchase price and the payment received upon sale or at maturity.

     

    For example, a 20 year bond with a face value of $20,000 and a 10% interest rate could be stripped into its principal and its 40-semi-annual interest payments. The result would be 41 separate zero coupon instruments, each with its own maturity date. The principal would be worth $20,000 upon maturity, and each interest coupon $1,000, or one-half the annual interest of 10% on $20,000. Each of the 41 securities, now possessing a distinct ID number, could be traded separately until its maturity date at prices determined by the market.

     

    Proliferation of Treasury STRIPS - Some Treasury securities were traded in the secondary market without one or more of their interest coupons in the late 1970s. Stripped securities offered investors a financial instrument that had abundant supply, no default risk, and low incidence of being "called," or paid off, before their maturity date. However, their popularity raised fears within the Treasury Department that zeros would result in a sizable loss of tax revenues.

     

    Detached coupons and the body of the security were sold at deep discounts, $.05 or $.10 on the dollar. After purchase, an investor claimed a capital loss on the difference between the sale price of the security and its face value, thus reducing the investors overall tax liability.

     

    The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 adjusted the tax treatment of stripped securities to reduce their tax advantage. The Treasury Department then withdrew its objections to coupon stripping, prompting several securities dealers to create new products incorporating receipts for stripped debt securities.

     

    TEFRA also required the Treasury to begin issuing all of its securities in book-entry (electronic)form only, beginning on January 1, 1983. This provision eliminated Treasury issues of bearer notes and bonds with coupons attached. Physical stripping would no longer be possible.

     

    In response, bond dealers began to market receipts that evidenced ownership of Treasury zeros held by a custodian. The first of these "receipt products" were named Treasury Investment Growth Receipts, or TIGRS. Similar products appeared in 1984, such as Certificates of Accrual on Treasury Securities (CATS) and Treasury Receipts (TRs). However, most of these securities were not exchangeable with other stripped securities, and thus lacked the liquidity customers had come to expect from "zero" instruments.

     

    In February 1985, the Treasury took a more active role by introducing its own coupon stripping program called STRIPS, an acronym for Separate Trading of Registered Interest and Principal of Securities. The STRIPS program was intended primarily to reduce the cost of financing the public debt "by facilitating competitive private market initiatives."

     

    Under the STRIPS program, U.S. government issues with maturities of ten years or more became eligible for transfer over Fedwire. The process involves wiring Treasury notes and bonds to the Federal Reserve Bank of New York and receiving separated components in return. This practice also reduced the legal and insurance costs customarily associated with the process of stripping a security. In May 1987, the Treasury began to allow the reconstitution of stripped securities.

     

    Part of a Balanced Portfolio - Stripped securities can be purchased only from private dealers and brokers. Although the Federal Reserve provides services to the zero coupon market, it does not actually sell these securities for the Treasury. Financial services companies decide when and what portion of an eligible security are stripped and sold.

     

    Because their increase in value is taxable yearly as it accrues, zeros have become most popular for investments on which taxes can be deferred, such as individual retirement accounts and pension plans, or for nontaxable accounts. However, their known cash value at specific future dates enables savers and investors to tailor their use to a wide range of portfolio objectives.

     

  • TERMS USED IN THE BUDGET   
  • Budget can be  divided in to two parts namely  (a) Capital and  (b) Revenue.  The first one broadly pertains  to one time expenditure,  whereas the latter one pertains to recurring expenditure.

    (A)Capital Budget :  It consists of capital receipts and payments and also incorporates transactions in the Public Account.

    • Capital receipts – Receipts by way of  (a) loans raised from the market, (b) borrowing from RBI, (c) external assistance from foreign Govt., (d) recoveries of loans and advances.

     

    • Capital expenditure – It is the expenditure incurred on  (i) acquisition of assets and investments, (ii) loans and advances to State Govts.

    (B) Revenue Budget :

    ·        Revenue receipts – Receipts by way of (a) direct and indirect taxes, (b)  interest, (c) dividends and (d) profits from investments, (e) fees and other receipts from services rendered by the Govt.

    • Revenue expenditure –These are expenses incurred for the (i)  normal running of the Govt. departments, (ii) interest charges on debt and subsidies.

     

    Central Plan : This refers to the government’s budgetary support to the plan and, the internal and extra budgetary resources raised by the public sector undertakings.

    • Plan expenditure – It is the outlay on schemes and programmes formulated by various Ministries under the 5-years plan.

     

    • Non- plan expenditure  - It is the expenditure outside that incurred in keeping with the programmes formulate under the 5-years plan.

     Types of Deficits :

    • Revenue deficit – It is the excess of Govt. revenue expenditure over revenue receipts.

     

    • Budgetary deficit: It is excess of total expenditure (capital and revenue) over total receipts, bridged through borrowings from the market and RBI.

     

    • Fiscal deficit : It is excess of total expenditure over revenue receipts and capital receipts after excluding borrowing

     

    • Primary deficit – it is the fiscal deficit reduced by expenditure on interest payment.

     

    • Current Account Deficit :  This deficit shows the difference between the nation’s exports and imports

     

    Types of Government Accounts :

    • Consolidated Fund: It is made up of all revenues received by the government, loans raised by it, and also its receipts from recoveries of loans granted by it. All expenditure of the government is incurred from the Consolidated Fund and no amount can be withdrawn from the Fund without authorisation from Parliament. 

     

    • Public Account:   There are certain receipts and expenditure which are beyond the normal receipts and expenditure of the government relating to the Consolidated Fund.  Such transactions come to Government’s account mostly as the government acts more as a banker rather than on permanent basis, for example, transactions relating to provident funds, small savings collections, other deposits etc.  Such money is kept in the Public Account and the disbursed as per rules.  Thus, it is an account in which money received through transactions not relating to the Consolidated Fund is kept.

     

    • Contingency fund :   This fund is similar to the savings which normally ladies in Indian households keep for emergencies.  There are occasions when government may have to meet urgent unforessen expenditure pending authorization from Parliament. The contingency fund is similar to an imprest account, and the same is  available at the disposal of the President to incur such unforeseen expenditure.  Parliamentary approval for such expenditure and for withdrawal of an equivalent amount from the fund is subsequently obtained  and the amount spent from the fund is recouped to the Fund.

     

    Zero based Budget (ZBB) ; begins with decision units that are the lowest levels in the organization for which a budget is prepared. A set of decision package is prepared for each unit, which basically describes various levels of service, that may be rendered by the decision unit. The frequently mentioned benefits of ZBB is the increased participation of managers in the budget-making process.

    Demands for grants :  It is a statement of estimates of expenditure from the Consolidated Fund  It is voted by Lok Sabha.  Generally one demand for grant is presented in respect of each ministry of department.

    Appropriation bill :   This is introduced in Parliament for approval after the general discussions on budget proposals and completion of the voting on grants.   Its approval is required so that government can withdraw from the Consolidated Fund of India, the amounts required for meeting the expenditure. 

     

    Some Other Glossory Relating to Finance Used During Budget Period

     

         I.             Corporate Tax :  This is the tax paid by corporate or firms on the incomes they earn

     II.            Countervailing Duties : This duty is levied on imports that may lead to price rise in the domestic market.   It is imposed with the intention of discouraging unfair trading practices by other countries.

    III.            Customs Duties : These duties are levied on goods whenever they are either brought into the country or exported from the country.  The importer or the exporters pay customs duties.   In case of such imported items, the cost to the domestic buyer goes up, and for exporters they prove as discouragement for exports as they become less viable for people abroad because of additional costs.

    IV.            Direct Taxes : These are taxes that are levied on the income and resources of individual or organizations.  Normally they are levied on wealth or income. Examples of direct taxes are income tax, corporate tax, capital gains tax or inheritance tax

       V.            Indirect Taxes : These are taxes that are imposed on goods manufactured, imported or exported,  Examples of indirect taxes are Excise Duties; Custom Duties

    VI.            Gross Domestic Product (GDP) : This is the total market value of the goods and services manufactured within the country in a financial year

    VII.            Gross National Product (GNP) : This is the total market value of the fiished goods and services manufactured within the country in a given financial year, plus income earned by the local residents from investments made abroad, minus the income earned by foreigners in the domestic market.

    VIII.            CENVAT : The full form is Central Value Added Tax.  It is an excise duty levied on manufacturers.   It was originally introduced in the 2000-01 Budget with a single rate of 16% across the board with special excise duty (SED) on various goods.   It is designed to reduce the cascading effect of indirect taxes on final products.  As a scheme CENVAT is more liberal and extensive than the erstwhile MODVAT, with mot goods being brought under its ambit and no declarations  or statutory records needed.

    IX.            Disinvestment : In India, it is used to denote the liquidation or sale of part or the whole of government’s stake in public sector undertakings.  This is used to bring in private management so as to improve the compnay’s performance, and it also adds to the government’s revenue.

      X.            Ad Valorem Duties : These duties are calculated as a certain percentage of the price of the product.

  • NEGOTIABLE INSTRUMENTS ACT   
  • Negotiable Instruments are money/cash equivalents.  These can be converted into liquid cash subject to certain conditions.  They play an important role in the economy in settlement of debts and claims. The transactions involving the Negotiable Instruments in our country are regulated by law and the framework of the Statute which governs the transaction of these instruments is known as The Negotiable Instruments Act.  This act was framed in our country in the year 1881 when the British ruled our country. Prior to 1881 the transactions governing Negotiable Instruments were regulated under the cover of Indian Contract Act 1872.  This act has been amended as many as 23 times to meet the needs of the time. The last amendment was made in 2002. 

    Preamble

    It became a statutory necessity to enact law governing Promissory Notes, Bills of Exchange and cheques.

    What is a Negotiable Instrument

    Section 13:- " A Negotiable instrument means a promissory note, bill of exchange or cheque either to order or bearer."

    This definition does not say anything about the characteristics of a negotiable instrument but it mentions about instruments, which can be legally called as a negotiable instrument. It fortunately, however does not prohibit any other instrument which satisfies the features of negotiability from being designated as negotiable instruments. Justice K.C.Wills  defines negotiable instrument as "ONE THE PROPERTY IN WHICH IS ACQUIRED BY ANY ONE WHO TAKES IT BONAFIED FOR VALUE, NOT WITHSTANDING ANY DEFECT OF TITLE IN THE PERSON FROM WHOM HE TOOK IT".

    Transferability

    A Negotiable instrument as a document of title to money is transferable either by the application of the law or by the custom of the trade concerned.

    Special feature of N.I

    The special feature of such an instrument is the privilege it confers to the person who receives it bonafide and for value, to possess good title thereto, even if the transferor has no title or had defective title to the instrument.

    Distinctive features of Negotiable Instruments

    - Easily transferable from one person to another

    - Confers absolute and good title on the transferee

    - The holder of a Negotiable Instrument (P.N./B.E./Cheque) is called as the holder in due course and possesses the right to sue upon the instrument in his own name.

    Types of Negotiable Instruments

    • Negotiable instruments by Statue are of three types, cheques, bills of exchange and promissory note.
    • Negotiable instruments by custom or usage :- Some other instruments have acquired the character of negotiability by the the custom or usage of trade. Section 137 of Transfer of Property Act 1882 also recognizes that an instrument may be negotiable by Law or Custom.  Thus in India Govt. Promissory notes, Shah Jog Hundis, Delivery Orders, Railway Receipts, Bill of Lading etc. have been held negotiable by usage or custom. These can be said as quasi statutory Negotiable Instruments.

    Exceptions

    Sometimes the Drawer and Holder can take away the negotiability of an instrument by expression such as "Not Negotiable", Pay to "A" only. Here "A" (the holder) cannot transfer a better title to the transferee.   

    Promissory Note

    Section 4: "A promissory note is an instrument in writing (not being a bank note or a currency note), containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument."

    Bill of Exchange

    Section 5: "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."

    According to Section 7, the maker/creator of the instrument is known as Drawer. The person to whom payment may be made is known as "Payee". The person who is directed to pay the amount is known as Drawee.  He accepts to pay the amount mentioned in the instrument. In case of a promissory note Drawer and Drawee are same.  In case of a cheque the Drawee is always a Banker.

    Cheque

    As per Section 6 "A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand." After 2002 amendment cheque includes " the electronic image of a truncated cheque and a cheque in the electronic form." In terms of Explanation I,

     (a) " a cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;

    (b) “ a truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing."

    M.I.C.R.Cheques/Drafts

    In MICR (Magnetic Ink Character Recognition) cheques:

    • First six number indicate the cheque number
    • Next three numbers indicate city code
    • Next three numbers indicate Bank code
    • Next three numbers indicate Branch code

     

    Characteristics of Cheque, Bill of Exchange and Promissory Note

    1)   Instrument in writing: Pencil writing is not forbidden by the law but to prevent alternation, etc. the custom and usage do not allow this.

    (2)  Unconditional order/promise: Cheque and bill of exchange are orders of creditors (Drawers) to the debtors (Drawee) to pay money. Instruments with expressions such as "I.O.U. Rs.500/-" is not a bill of exchange.  On the other hand a promise with following narration duly signed, dated and accepted by a drawee is a Bill of Exchange B/E – "I promise to pay B or order Rs.5,000/-"

    (3) Difference between cheque and bill of exchange: The main difference between a cheque and a bill of exchange is that the former is always drawn on and is payable by a banker specified therein.

    (4)     Certainty of the sum: The amount of the instrument must be certain.

    (5)     Payable to order or bearer: The instrument must be payable either to order or to bearer as per the provision of Section 13 of the Act. For example if a cheque is drawn with the expression " Pay to Ram Lal" it indicates that it can be paid to Ram Lal or any person as per his order. But if it is written pay to Ram Lal only it must be paid to Ram Lal only. A bill of exchange and cheque are payable to bearer if it is expressed to be so payable or if the only or the last endorsement is an endorsement in blank.

    (6) Payee must be a certain person: The term person includes besides individuals, bodies corporate, local authorities, Co-operative Societies, etc. and it also includes Registrar, Principal, director, Secretary, etc. of those institutions.  Payee may be more than one person

    (7)   Term of payment: A cheque is always payable on demand, though words to this effect are not mentioned therein. A bill may be payable at sight or after a period of time specified therein.   A promissory note or bill of exchange in which no time for payment is specified is payable on demand (Section 19). If the bill is payable after a certain period it must be accepted by a drawee. But no such acceptance is necessary in case of a cheque.

    (8) Signature of the drawer/promisor: The negotiable instrument is valid only if it bears the signature of the drawer/promisor.

    (9) Delivery of the instrument: The making, acceptance or endorsement of an instrument is completed by delivery in terms of Section 46 of the Act.  Stamping of promissory notes and bill of exchange is necessary. The Indian Stamp Act 1899 requires that the promissory note and the bill of exchange except cheques to be stamped.

    (11) Currency note: The currency note is a promissory note payable to bearer on demand. Section 21 of RBI Act prohibits creation of this type of promissory notes by others excepting the Reserve Bank of India.

    Holder and holder in due-course

    A negotiable instrument is transferable from person to person.  The Negotiable Instrument Act confers upon the person who acquires it bonafide and for value, the RIGHT TO POSSESS good title to the instrument. such a person is called HOLDER IN DUE COURSE.

    Each and every person in possession of a cheque or bill cannot be its holder in due course and cannot claim statutory protection available under the Act.

    In terms of Section 8, "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 and recover the amount due thereon from the parties thereto."

    Two fold entitlements

    • He must be entitled to the possession of the instrument in his own name and under legal title. Actual possession of the instrument is not essential; the holder must have legal right to possess the instrument in his own name.  He must have lawfully derived the title as an endorsee or payee.
    • He must be entitled to receive or recover the amount from the parties concerned in his own name.

    In case of order instruments, the name of the person must appear as its endorse or payee.

    Bearer/Order instrument

    In case of a bearer instrument, the bearer may claim the money without having his name mentioned on the cheque. In case a Bill, a Promissory note or a cheque is lost or destroyed its holder is the person so entitled at the time of such loss or destruction.

    Holder in due course

    As per Section 9, "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 payee or endorsee thereof if payable to order before the amount mentioned in it became defect in the title of the person from whom derived his title."

    Conditionalities

    A person becomes holder in due course if the following conditions are satisfied:-

    • The instrument must be in the possession of the holder in due course and in case of an order instrument he must be its payee or endorsee.
    • The negotiable instrument must be regular and complete in all aspects. Alterations if any must be authenticated.
    • The instrument must have been obtained for valuable consideration i.e. by paying its full value.

    Exceptions

    A person who receives a cheque (not being a gift cheque issued by banks) as a gift will not be called its holder in due course for want of consideration.

    If a cheque is given in respect of a debt incurred in gambling the consideration of the cheque is unlawful and hence cheque received on such consideration cannot make the payee thereof a holder in due course provided:

    • The instrument must have been obtained before the amount mentioned therein became payable.
    • He must have received it without having sufficient cause to believe that any defect existed in the title of the transferor.

    The title of a Negotiable Instrument is deemed to be defective if it is acquired by unfair means, e.g. fraud, coercion, undue influence or by any other illegal means.

    Section 9 thus lays heavy responsibility on the person accepting a negotiable instrument.

    Rights of a Holder

    •    An endorsement in blank may be converted by him into an endorsement in full.

    (2) He is entitled to cross a cheque either generally or specially with the words Not Negotiable.

    (3) He can negotiate a cheque to a third person.

    (4) He can obtain a duplicate of the lost instrument.

    Privileges of a Holder in Due Course

     (1) He possesses a better title free from all defects, which is the greatest privilege of all. Section 53 states that a holder of negotiable instrument who derives title from a holder in due course has rights thereon of that of a holder in due course.

     (2) Every prior party to negotiable instrument, i.e, maker or drawer, acceptor or endorser is liable thereon to a holder in due course until the instrument is duly satisfied. (Section 36).

     (3) If a negotiable instrument was originally inchoate (i.e. incomplete) instrument and a subsequent transfer completed the instrument for a sum greater than what was the intention of the maker, the right of a holder in due course to recover the money of the instrument is not affected at all.

    (4)  Right in case of fictitious instrument is unaffected.       

    (5) Right in case the instrument was obtained by unlawful means or for unlawful consideration is unaffected.

    (6) Estoppel against denying original validity of the instrument.

    (7) Estoppel against denying capacity of payee to endorsee.

    (8)  Estoppel against denying signature or capacity of prior party.

    Payment in due course

    Section 10 defines payment in due course as “Payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of amount mentioned therein.” The other important provisions relating to payment in due course are the following.

    i.  The payment should be made in accordance with the apparent tenor of the instrument i.e. according to the true intentions of the parties.

    ii.  The payment should be made in good faith and without negligence.

    iii.  The payment should be made to the person in possession of the instrument in circumstances, which do not arouse suspicion about his title to possess the instrument and to receive payment thereof.

    Negotiation

    According to Section 14 an instrument is said to have been negotiated when a promissory note,   of exchange or cheque is transferred to any person so as to constitute the person the holder thereof, the instrument is said to be negotiated.

    Negotiation can be done in any of the two indicated below –

    I. By delivery – A promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof (Section 47)

    II By endorsement and delivery – AP/N, B/E or cheque payable to order is negotiable by the holder by endorsement and delivery (Section 48)

    Endorsement

    Definition of Endorsement

    When the maker or holder of negotiable instrument signs the same, otherwise than as maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, or signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called the endorser. Endorsement consists of the signature of the maker (or drawer) payee of a negotiable instrument with the intention of negotiation.

    Provisions Regarding Endorsement

    Effect of endorsement

    The endorsement of a negotiable instrument followed by delivery transfers to the endorsee the property therein with the right of further negotiation.

    Endorsee – an agent

    The section permits that an instrument may also be endorsed so as to constitute the endorsee an agent of the endorser.

    Right to endorse

    Every sole maker, drawer, payee or endorsee or all of several joint makers, drawers, payees or endorsees of an negotiable instrument m ay endorse and negotiate the same.

    Time limit for endorsement

    A negotiable instrument may be negotiated until its payment has been made by the banker, drawee or acceptor.    (Section 60)

    Endorsement for a part amount

    Endorsement for a part amount is prohibited (Section 56) but instruments which have been partly paid can be negotiated for the balance amount.

    No right to legal representative

    The Legal representative of the deceased cannot endorse the instrument.   

    Order of endorsement

    Unless contrary is proved, it is presumed under Section 118 that the endorsements appearing upon a negotiable instrument were made in order in which they appear thereon (Section 118)

    General Rules regarding the form of Endorsements

    1.  Signature of the     endorser on the document for the purpose of endorsement must be that of the endorser or any other person who is duly authorized to endorse on his behalf.

    2. Spelling: The endorser should spell his name in the same way as his name appears on the instrument as its payee or endorsee.

    3. No addition or omission of initial of the name. For example, J.C. Mishra cannot endorse as J.Mitra.

    4.  Prefixes and suffixes to be struck out (Mr., M/s, Miss, Shri, Smt. Lala, Babu,General, Dr., Major)

    Payee                                      Regular                                           Irregular

                                                    Endorsement                                  Endorsement    

    Mrs. Asha Gupta                    Asha Gupta                                   Mrs. Asha Gupta        

    If a cheque is payable to a woman in her maiden name e.g. to Miss Jyoti Mishra now married to Mrs.S.C.Das may endorse it as follows.

    Jyoti Mishra

    (Now Mrs.S.C.Das)

    or

    Jyoti Das

    nee (or formerly) Jyoti Mishra

     

    Illiterate Person

    If the payee of a negotiable instrument is an illiterate person, he may endorse the instrument by affixing his thumb impression duly witnessed or attested by somebody who should give his full address.

    Thumb Impression of A

    Attested and witnessed by XYZ, Advocate

    111, G.K.Road, Pune-16

    Partnership Firm

    In case of a partnership firm, the name of the firm must be signed by a person (partner, manager etc.) who is duly authorized to sign on behalf of the partnership firm. For example a cheque payable to M/s Krishen Chand Raja Ram may be endorsed in any of the following ways:-

    (Per pro) (For) Kishan Chand Raja Ram

    For (on behalf of)

    Raja Ram (Sd/-)

    Partner

    Agent

    A person may duly authorize his agent to endorse the cheque on his behalf

    Kinds of Endorsements

    1. Endorsement in blank

    If the endorser signs his name only, endorsement is said to be in blank (Section-16). The endorser does not specify the name of the endorsee with the effect that an instrument endorsed in blank becomes payable to bearer, even though originally payable to order (Section 54) and no further endorsement is required for negotiation.

    2.  Endorsement in full

    If in addition to signature, the endorser adds a direction to pay the amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be endorsement in full.

    3Conditional Endorsement

    If the endorser of a negotiable instrument by express words in the endorsement makes his liability or the right of the endorsee to receive the amount due thereon is called a conditional endorsement.

    Restrictive Endorsement (Section 50)

    Examples:

    a)  Pay the contents to C only

    b) Pay to C for my use

    Endorsement Sans Recourse (Section 52)

    Example: (i) Pay to A or order at his own risk

                                                   Sd/-R

        (ii)     Pay to B without recourse to me

                                                       Sd/C

    Crossing of Cheques : Section 123 to Section 131

    Types of Crossing

    General Crossing

    Section 123: Where a cheque bears across its face an addition of words and company or any abbreviation thereof, between two parallel transverse lines or of two pair parallel lines simply, either, with or without the words Not Negotiable that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.

    What constitutes a crossing

    • It is an addition
    • The addition is of two transverse parallel lines in cross direction
    • The words "&Co." may or may not be enclosed in between the parallel lines.

    The effect of general crossing is that the cheque must be presented to the paying banker through any banker and not by payee himself at the counter. The collecting banker credits the proceeds to the account of the payee or the holder of the cheque. It is a direction to the paying banker.

    Special crossing

    According to Section 124:- Where a cheque bears across its face an addition of the name of a banker either with or without the words not negotiable, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker.

    It should be noted that in addition to these minimum statutory requirements for two types of crossing addition of words or lines may also be A/c payee, "Not Negotiable".

    What does Not Constitute Crossing

    (i) When a cheque bears the words Not Negotiable or A/c payee without two parallel lines or the name of the bank it not treated as crossed.

    (ii) If a cheque bears single line across is face or simply an X mark, the cheque is not treated as crossed cheque.

    Note that the inclusion of any other word/words within two parallel lines is irrelevant and the cheque is still deemed to be a crossed cheque.

    Under Rupees One hundred  % Co., Pune

    Specimen of General crossing  Specimen of special Crossing

    1.  and Co.                                                                    1.Punjab National Bank

    2. A/c Payee                                                                  2.State Bank of India

    Persons who can cross the cheque

    Crossing is a direction to the paying banker regarding the mode of payment.

    i. The Drawer can    cross

    ii. The holder can cross

    iii.The banker to whom the cheque is crossed specially may again cross it specially to       another banker as his agent or collection only.   

    Liability of the Paying Banker (Section 126)

    Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. And where a cheque is crossed specially, the banker on whom it is drawn shall not pay it other wise than to the banker to whom it is crossed or his agent for collection.

    Any banker paying a cheque crossed generally, otherwise than to a banker, or a cheque crossed specially, otherwise than to the banker to whom the same is crossed, or his agent for collection being banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.[Sec.129]

    1. Liability to the True Owner of the cheque.

    2. Liability to the Drawer

    Not Negotiable crossing

    A person taking a cheque crossed generally or specially bearing in either case the words not negotiable shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had.[Sec.130]

    The effect of the words not negotiable in the crossing will be clear from the following examples:

    (1)  A draws a crossed cheque on his banker in favour of B without the words not negotiable therein C steals it from the house of B and endorses it to D who receives it for value and in good faith from C (i.e. without the knowledge of the fact that C had no title to the cheque). D will be its holder in due course and will have valid title, though his transferor (endorser) had no title thereto.

    (2) In the above, example if the cheque bears the words "NOT NEGOTABLE" then D will not have a valid title even if all the above circumstances are satisfied.

    Collection of 3rd Party Crossed bearer cheques

    In trade circles particularly in Mumbai in textile trade it was observed that as per practice the crossed bearer cheques were circulated exchanged freely for trade transactions and were in the past collected by bank through the instrument was issued in the name of third parties and were presented by the customers of the bank for credit to their account without endorsement on the reverse of the instrument. The issue whether collecting banker can get protection under Section 131 of NI Act 1881 in such cases had been examined and it is opined that the negotiability of a bearer cheque is not affected by the crossing. Under section 47 of the Act ibid a cheque payable to bearer is negotiable even by a mere delivery and section 47 does not exempt (forbid) crossed cheques. As such it is permissible to negotiate crossed bearer cheques by delivery thereof without endorsement.

    Case laws on liability of the paying bankers

    • When customers signature is forged there is no mandate to the bank to pay. As such the bank is not entitled to debit customers account on such forged note cheque. [Canara Bank vs. Canara Sales Corporation & others 1987, SC]
    • In a joint account if one of the signatures is forged then there is no mandate and banker cannot make payment. [Bihta Coop. Development and Cane Marketing Union Ltd. vs. Bank of Bihar, SC]
    • Payment should be made in due course to seek protection under Sec. 85 [Bank of Bihar vs. Mahabir Lal 1964, SC]
    • Where there are no circumstances which afforded any reasonable ground for believing that the payee was not entitled to receive payment of the cheques, the bank is deemed to have made payment in due course. [Bhutoria Trading Co. vs. Allahabad Bank 1977, Calcutta HC]
    • Payment made to a liquidator against the cheques presented across the counter was not payment in due course. [Madras Provincial Coop. Bank Ltd. vs. Official Liquidator, South Indian Match factory Ltd. 1945, Madras HC]
    • Bank is protected if payment was made in good faith without negligence of a cheque on which alteration was not apparent. [Bank of Maharashtra vs. M/s Automotive Engineering Co. 1993, SC]
    • The bank is liable where payment was made on cheques on which alterations were authenticated by not all but some of the drawers. [Brahma Shumshere Jung Bahadur vs. Chartered Bank of India, Australia & China 1956 Calcutta HC]

    Case laws on liability of the paying bankers

    Under Section 131 a collecting bank is protected if following conditions are met.

    • The collecting banker should have acted in good faith
    • .He should have acted without negligence
    • He should receive payment for customer
    • The check should have been crossed generally or specially to the bank.

    Some important case laws are following:

    It is the duty of the bank to open account with references. [Syndicate Bank vs. Jaishree Industries & others, 1994 Karnataka HC, Indian Bank vs. Catholic Syrian Bank, 1981, Madras HC]

    Duty to follow up references where referee is not known. [Harding vs. London Joint Stock Bank, 1914]

    Duty to ensure crossing in favour of the bank. [Crumpling vs. London Joint Stock Bank Ltd. 1911]

    Duty to verify instruments or any apparent defect in instruments [Underwood Ltd. vs. Bank of Liverpool Martin Ltd. 1924, Savory Co. vs. Lloyds Bank 1932, ANZ Bank vs. Ateliers de Constructions Electriques Cherleroi, 1967 etc.]

     

     

    Appendix

    THE NEGOTIABLE INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS) BILL,  2002

    a

    BILL

    further to amend the Negotiable Instruments Act, 1881, the Bankers Books Evidence Act, 1891 and the Information Technology Act, 2000.

    Be  it enacted by Parliament in the Fifty-third Year of the Republic of India as follows:—

    CHAPTER I

    Preliminary

    1. Short title and commencement.-(1) This Act may be called the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002.

    (2)  It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act.

    CHAPTER  II

    Amendments to the Negotiable Instruments Act, 1881

    2. Substitution of new section for section 6.-For section 6 of the Negotiable Instruments Act, 1881 (26 of 1881) (hereinafter referred to as the principal Act), the following section shall be substituted, namely:—

    ‘6. “Cheque”.-A “cheque” is 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.

    Explanation I.—For the purposes of this section, the expression—

    (a) “a cheque in the electronic form” means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;

    (b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

    Explanation II.—For the purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.’.

    3. Amendment of section 64.-Section 64 of the principal Act shall be re-numbered as sub-section (1) thereof,  and after sub-section (1) as so re-numbered, the following sub-section shall be inserted, namely:—

    “(2) Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification:

    Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment is made accordingly.”.

    4. Amendment of section 81.-Section 81 of the principal Act shall be re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted, namely:—

    “(2) Where the cheque is an electronic image of a truncated cheque, even after the payment the banker who received the payment shall be entitled to retain the truncated cheque.

    (3) A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who paid the instrument, shall be prima facie proof of such payment.”.

    5.  Amendment of section 89.-Section 89 of the principal Act shall be re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted, namely:—

    “(2)   Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image.

    (3)   Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.”.

    6. Amendment of section 131.-In section 131 of the principal Act, Explanation shall be re-numbered as Explanation I thereof, and after Explanation I as so re-numbered, the following Explanation shall be inserted, namely:—

    Explanation II.—It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.”.

    7. Amendment of section 138.-In section 138 of the principal Act,—

    (a) for the words “a term which may be extended to one year”, the words “a term which may be extended to two years” shall be substituted;

    (b)  in the proviso, in clause (b),  for the words “within fifteen days”, the words “within thirty days” shall be substituted.

    8. Amendment of section 141.-In section 141 of the principal Act, in sub-section (1), after the proviso, the following proviso shall be inserted, namely:—

    “Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.”.

    9. Amendment of section 142.-In section 142 of the principal Act, after clause (b), the following proviso shall be inserted, namely:—

    “Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period.”.

    10. Insertion of new sections after section 142.-After section 142 of  the principal Act, the following sections shall be inserted, namely:—

    “143. Power of Court to try cases summarily.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), all offences under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials:

    Provided that in the case of any conviction in a summary trial under this section, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand rupees:

    Provided further that when at the commencement of, or in the course of, a summary trial under this section, it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the said Code.

    (2)  The trial of a case under this section shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing.

    (3)  Every trial under this section shall be conducted as expeditiously as possible and an endeavour shall be made to conclude the trial within six months from the date of filing of the complaint.

    144. Mode of service of summons.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), and for the purposes of this Chapter, a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session.

    (2)  Where an acknowledgement purporting to be signed by the accused or the witness  or an endorsement purported to be made by any person authorised by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the Court issuing the summons may declare that the summons has been duly served.

    145. Evidence on affidavit.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), the evidence of the complainant may be given by him on affidavit and may, subject to all just  exceptions be read in evidence in any enquiry, trial or other proceeding under the said Code.

    (2)  The Court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the facts contained therein.

    146. Bank’s slip prima facie evidence of certain facts.-The Court shall, in respect of every proceeding under this Chapter, on production of bank’s slip or memo having thereon the official mark denoting that the cheque has been dishonoured, presume the fact of dishonour of such cheque, unless and until such fact is disproved.

    147. Offences to be compoundable.-Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), every offence punishable under this Act shall be compoundable.

    CHAPTER III

    Amendment to the Bankers’ Books Evidence Act, 1891

    11. Amendment of section 2.-In section 2 of the Bankers’ Books Evidence Act, 1891 (18 of 1891),—

    (a) for clause (3), the following clause shall be substituted, namely:—

    ‘(3) “bankers’ books” include ledgers, day-books, cash-books, account-books and all other records used in the ordinary business of the bank, whether these records are kept in written form or stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism, either onsite or at any offsite location including a back-up or disaster recovery site of both’.”

    (b)  in clause (8), after sub-clause (b), the following sub-clause shall be inserted, namely:—

    “(c) a printout of any entry in the books of a bank stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism obtained by a mechanical or other process which in itself ensures the accuracy of such printout as a copy of such entry and such printout contains the certificate in accordance with the provisions of section 2A.”.

    CHAPTER  IV

    Amendments to the Information Technology Act, 2000

    12. Amendment of section 1.-In the Information Technology Act, 2000 (21 of 2000) (hereinafter referred to as the principal Act),  in section 1, in sub-section (4), for clause (a), the following clause shall be substituted, namely:—

    “(a) a negotiable instrument (other than a cheque) as defined in section 13 of the Negotiable Instruments Act, 1881 (26 of 1881);”.

    13. Insertion of a new section 81A.-After section 81 of the principal Act, the following section shall be inserted, namely:—

    ‘81A. Application of the Act to electronic cheque and truncated cheque.-(1) The provisions of this Act, for the time being in force, shall apply to, or in relation to, electronic cheques and the truncated cheques subject to such modifications and amendments as may be necessary for carrying out the purposes of the Negotiable Instruments Act, 1881 (26 of 1881) by the Central Government, in consultation with the Reserve Bank of India, by notification in the Official Gazette.

    (2)  Every notification made by the Central Government under sub-section (1) shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the notification or both Houses agree that the notification should not be made, the notification shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that notification.

    Explanation.—For the purposes of this Act, the expressions “electronic cheque” and “truncated cheque” shall have the same meaning as assigned to them in section 6 of the Negotiable Instruments Act, 1881 (26 of 1881).’.

    Statement of objects and reasons

    The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque. These provisions were incorporated with a view to encourge the culture of use of cheques and enhancing the credibility of the instrument. The existing provisions in the Negotiable Instruments Act,1881, namely, sections 138 to 142 in Chapter XVII have been found deficient in dealing with dishonour of cheques. Not only the punishment provided in the Act has proved to be inadequate, the procedure prescribed for the Courts to deal with such matters has been found to be cumbersome. The Courts are unable to dispose of such cases expeditiously in a time bound manner in view of the procedure contained in the Act.

    2. A large number of cases are reported to be pending under sections 138 to 142 of the Negotiable Instruments Act in various courts in the country. Keeping in view the large number of complaints under the said Act pending in various courts, a Working Group was constituted to reveiw section 138 of the Negotiable Instruments Act, 1881 and make recommendations as to what changes were needed to effectively achieve the purpose of that section.

    3. The recommendations of the Working Group along with other representations from various institutions and organisations were examined by the Government in consultation with the Reserve Bank of India and other legal experts, and a Bill, namely, the Negotiable Instruments (Amendment) Bill, 2001 was introduced in the Lok Sabha on 24th July, 2001. The Bill was referred to Standing Committee on Finance which made certain recommendations in its report submitted to Lok Sabha in November, 2001.

    4. Keeping in veiw the recommendations of the Standing Committee on Finance and other representations, it has been decided to bring out, inter alia, the following amendments in the Negotiable Instruments Act,1881, namely:—

    (i) to increase the punishment as prescribed under the Act from one year to two years;

    (ii) to increase the period for issue of notice by the payee to the drawer from 15 days to 30 days;

    (iii) to provide discretion to the Court to waive the period of one month, which has been prescribed for taking cognizance of the case under the Act;

    (iv) to prescribe procedure for dispensing with preliminary evidence of the complainant;

    (v) to prescribe procedure for servicing of summons to the accused or witness by the Court through speed post or empanelled private couriers;

    (vi) to provide for summary trial of the cases under the Act with a view to speeding up disposal of cases;

    (vii) to make the offences under the Act compoundable;

    (viii) to exempt those directors from prosecution under section 141 of the Act who are nominated as directors of a company by virtue of their holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government, or the State Government, as the case may be;

    (ix) to provide that the Magistrate trying an offence shall have power to pass sentence of imprisonment for a term exceeding one year and amount of fine exceeding five thousand rupees;

    (x) to make the Information Technology Act, 2000 applicable to the Negotiable Instruments Act,1881 in relation to electronic cheques and truncated cheques subject to such modifications and amendments as the Central Government, in consultation with the Reserve Bank of India, considers necessary for carrying out the purposes of the Act, by notification in the Official Gazette; and

    (xi) to amend definitions of "bankers books" and "certified copy" given in the Bankers Books Evidence Act,1891.

    5. The proposed amendments in the Act are aimed at early disposal of cases relating to dishonour of cheques, enhancing punishment for offenders, introducing electronic image of a truncated cheque and a cheque in the electronic form as well as exempting an official nominee director from prosecution under the Negotiable Instruments Act,1881.

    6. The Bill seeks to achieve the above objects.

    New Delhi;
    JASWANT SINGH
    .

    The 9th July, 2002.

    Prepared by Shri J C Mishra, Member of Faculty.

    Updated by Shri A K Chowdhury, Faculty Member, CAB, Pune (2007). Please read with 2002 amendments in Appendix.

  • Bearer Instruments   
  • Once a Bearer Instruments Always a Bearer Instruments:
    A bearer instruments means an instrument, the ownership in which can be transferred from one person to another by mere delivery of the instrument. The instrument can be made originally payable to the bearer or it may be made bearer subsequently by holder making a blank endorsement. The bearer character of the instrument will not be lost ever in those cases where a blank endorsement is followed by a full endorsement. The instrument continues to be transferable by mere delivery in all such cases. However, under Section-50, bearer instrument can legally be changed to an order one by a restrictive endorsement. In such a case the relations between endorser and endorse are substantially those of principal and agent. The endorse gets a right to receive payment of the instrument and to sue and party to the instrument that the endorser could have sued, but has no power to transfer his right to any other person unless he is expressly authorised to do so.

  • Endorsement   
  • The signature of the payee or holder on the back of a cheque/draft is called an endorsement.

    Kinds of Endorsement:

    01. Blank endorsement
    02. Full endorsement
    03. Partial endorsement
    04. Restrictive endorsement
    05. Conditional endorsement
    06. Endorsement Sans Recourse
    07. Facultative endorsement

    01. Blank Endorsement:
    When the endorser signs his namely only (Mashud)

    02. Full Endorsement:
    When the endorsement adds the name of the endorsee above his signature, with a direction to pay him or to his order. A blank endorsement may be converted into full endorsement by writing the name of the endorsee over the signature of endorser. It is also called special endorsement : Pay to M/S. Liberty Impex.

    03. Partial Endorsement:
    Where only a part of the amount of the bill is transferred to a particular endorsee.

    04. Restrictive Endorsement:
    Where the endorser prohibits further negotiation.

  • Material Alteration   
  • Material Alteration:
    Material alteration is that change in the negotiable instrument which causes it to speak a different language in legal effect from that which it had originally spoken. Change in order to be material  must alter the business effect to the instrument. These changes may relate to the legal identity or character of the instrument either in the terms or in the legal relation to the parties to it. All changes which alter the operation of the instrument or the rights and liabilities of the parties shall be material, it will be immaterial whether the alteration is for the detriment to any party to the instruments.

    Effect of Material Alteration:
    A material alteration shall discharge all parties who are liable on the instruments at the time of alteration and who do not consent to such alteration. But an alteration shall not affect the liability of persons becoming parties subsequent to the alteration. Besides this, section-89 provides that where a negotiable instruments has been materially altered but does not appear to have been so altered, payment thereof 

    (a) by a person or banker liable to pay

    (b) paying the same in good faith and

    (c) according to the apparent tenor thereof and without negligence, shall discharge such person or banker from all liability thereon.

  • Ganishee Order   
  • Garnishee Order is issued by the Court is two parts:

    01. Rule/Order Nishi.
    (a) Asks the banker to freeze the debtors account.
    (b) Asks the banker to explain why the funds in the account so freezed should not be used for payment of judgement creditor.
    On receipt of such an  order the bank should immediately inform the customer so that he may make the necessary arrangements for payments of the debts due by him.

    02. Absolute:
    This order directs the banker to pay either the whole or a part of the funds lying in the account against which "Order Nishi" has been issued to the judgement creditor.

    (i) The amount attached: The Garnishee Order may provide for the attachment of the whole or a part of the funds of the judgement debtors account with the bank. The bank should not make payment out of the account so freezed in contravention of the courts order otherwise it will be liable for defying the order of the court.

    Illustration: A fails to pay his creditor B a sum of $6000 usd, B brings a Garnishee Order against the bank where A has an account having a balance of $ 10000 usd prohibiting any payment out of this account. Inspite of this the banker subsequently honours As cheque for $5000 usd. The banker is liable for defying courts order and will have to compensate B for any loss that he may suffer on account of non-recovery of the full amount due to him.

    In case only a part of the sum standing to the credit of the judgement debtors account has been attached on account of Garnishee Order, the banker may transfer that much of amount to a suspense account and the customers account may be permitted  to be operated with the balance.

    In case certain cheques drawn by the judgment debtor were certified as "good for payment" by banker before the receipt of Garnishee Order by the bank, they can be paid in spite of subsequent Garnishee Order.

    (ii) Order applicable only against the debt due or accruing due: The banker is restrained by the Garnishee Order only to make payment of such debts which have already become to the customer or which are not at which at present payable but for the payment of which an obligation exists. An amount which is not a debt due by the banker cannot be attached by such an order. For example, a banker has agreed to allow an overdraft of $5000 usd to a customer, he has overdrawn only $3000 usd so far, remaining $2000 usd cannot be attached  by the Garnishee Order.

    (iii) Bankers claim to Set Off: In case a banker has a definite claim against the debtor, it can claim the set off of such claim against the customers balance with it in spite of the Garnishee Order.

    (iv) Amounts not covered by the Garnishee Order: The Garnishee Order attaches only that balance which is lying in the judgement debtors account at the time when the order is served on the banker. It, therefore, does not apply to :
    (a) cheques, bill of exchange etc. deposited with the banker for collection but not yet collected.
    (b) sale proceeds of securities etc. of the customer not yet collected.
    (c) deposits made subsequent to the serving of the Garnishee Order.
    (d) payments made by the banker before serving of the Garnishee Order.
    (e) money held abroad by the judgement debtor.
    (f) securities lying in safe custody with the banker.

    (v)  Serving of Garnishee Order: Garnishee Order may be served on the Head Office of the Bank and it will serve as a notice to all branches where the judgement debtor may have his accounts. However, the Head Office will have to be given a reasonable time  so as to enable it to inform the branches. Any payment made by the branches before receipt of information regarding Garnishee Order, will be taken as a valid payment.

    Different Types of Accounts and Garnishee Order
    01. Joint Account : A joint account is one which is opened in the names of two or more persons. Such an account can be attached only when all the joint account holders are joint judgement debtors. However, in case of a joint debt, the individual accounts of the judgement debtors can be attached since their liability for a joint debts is joint as well as several.

    Illustration : (i) A owes a sum of $3,000USD to B. A has a joint account with C with City Bank Ltd. The balance standing in the account cannot be attached for the above debt.
    (ii) A and C jointly owe a sum of $ 3,000USD to B. Each one of them has separate accounts with City Bank Ltd. Their individual accounts can be attached for the above debt.

    02. Partnership Accounts : The personal account of a partner can be attached for payment of a firms debt. But the firms account cannot be attached for the payment of a personal loan of a partner.

    03. Trust Accounts : The money lying in a trust account though opened in the trustees name cannot be attached for payment of personal liabilities of the trustees. The bank in such an eventuality should inform the court that the funds lying in the account are trust funds.

    Garnishee Order is issued by the Court is two parts:

    01. Rule/Order Nishi.
    (a) Asks the banker to freeze the debtors account.
    (b) Asks the banker to explain why the funds in the account, so freezed should not be used for payment of judgement creditor.
    On receipt of such an  order the bank should immediately inform the customer so that he may make the necessary arrangements for payments of the debts due by him.

    02. Absolute:
    This order directs the banker to pay either the whole or a part of the funds lying in the account against which "Order Nishi" has been issued to the judgement creditor.

    (i) The amount attached: The Garnishee Order may provide for the attachment of the whole or a part of the funds of the judgement debtors account with the bank. The bank should not make payment out of the account so freezed in contravention of the courts order otherwise it will be liable for defying the order of the court.

    Illustration: A fails to pay his creditor B a sum of $6000 usd, B brings a Garnishee Order against the bank where A has an account having a balance of $ 10000 usd prohibiting any payment out of this account. Inspite of this the banker subsequently honours As cheque for $5000 usd. The banker is liable for defying courts order and will have to compensate B for any loss that he may suffer on account of non-recovery of the full amount due to him.

    In case only a part of the sum standing to the credit of the judgement debtors account has been attached on account of Garnishee Order, the banker may transfer that much of amount to a suspense account and the customers account may be permitted  to be operated with the balance.

    In case certain cheques drawn by the judgment debtor were certified as "good for payment" by banker before the receipt of Garnishee Order by the bank, they can be paid in spite of subsequent Garnishee Order.

    (ii) Order applicable only against the debt due or accruing due: The banker is restrained by the Garnishee Order only to make payment of such debts which have already become to the customer or which are not at which at present payable but for the payment of which an obligation exists. An amount which is not a debt due by the banker cannot be attached by such an order. For example, a banker has agreed to allow an overdraft of $5000 usd to a customer, he has overdrawn only $3000 usd so far, remaining $2000 usd cannot be attached  by the Garnishee Order.

    (iii) Bankers claim to Set Off: In case a banker has a definite claim against the debtor, it can claim the set off of such claim against the customers balance with it in spite of the Garnishee Order.

    (iv) Amounts not covered by the Garnishee Order: The Garnishee Order attaches only that balance which is lying in the judgement debtors account at the time when the order is served on the banker. It, therefore, does not apply to :
    (a) cheques, bill of exchange etc. deposited with the banker for collection but not yet collected.
    (b) sale proceeds of securities etc. of the customer not yet collected.
    (c) deposits made subsequent to the serving of the Garnishee Order.
    (d) payments made by the banker before serving of the Garnishee Order.
    (e) money held abroad by the judgement debtor.
    (f) securities lying in safe custody with the banker.

    (v)  Serving of Garnishee Order: Garnishee Order may be served on the Head Office of the Bank and it will serve as a notice to all branches where the judgement debtor may have his accounts. However, the Head Office will have to be given a reasonable time  so as to enable it to inform the branches. Any payment made by the branches before receipt of information regarding Garnishee Order, will be taken as a valid payment.

    Different Types of Accounts and Garnishee Order
    01. Joint Account : A joint account is one which is opened in the names of two or more persons. Such an account can be attached only when all the joint account holders are joint judgement debtors. However, in case of a joint debt, the individual accounts of the judgement debtors can be attached since their liability for a joint debts is joint as well as several.

    Illustration : (i) A owes a sum of $3,000USD to B. A has a joint account with C with City Bank Ltd. The balance standing in the account cannot be attached for the above debt.
    (ii) A and C jointly owe a sum of $ 3,000USD to B. Each one of them has separate accounts with City Bank Ltd. Their individual accounts can be attached for the above debt.

    02. Partnership Accounts : The personal account of a partner can be attached for payment of a firms debt. But the firms account cannot be attached for the payment of a personal loan of a partner.

    03. Trust Accounts : The money lying in a trust account though opened in the trustees name cannot be attached for payment of personal liabilities of the trustees. The bank in such an eventuality should inform the court that the funds lying in the account are trust funds.

    Garnishee Order is issued by the Court is two parts:

    01. Rule/Order Nishi.
    (a) Asks the banker to freeze the debtors account.
    (b) Asks the banker to explain why the funds in the account, so freezed should not be used for payment of judgement creditor.
    On receipt of such an  order the bank should immediately inform the customer so that he may make the necessary arrangements for payments of the debts due by him.

    02. Absolute:
    This order directs the banker to pay either the whole or a part of the funds lying in the account against which "Order Nishi" has been issued to the judgement creditor.

    (i) The amount attached: The Garnishee Order may provide for the attachment of the whole or a part of the funds of the judgement debtors account with the bank. The bank should not make payment out of the account so freezed in contravention of the courts order otherwise it will be liable for defying the order of the court.

    Illustration: A fails to pay his creditor B a sum of $6000 usd, B brings a Garnishee Order against the bank where A has an account having a balance of $ 10000 usd prohibiting any payment out of this account. Inspite of this the banker subsequently honours As cheque for $5000 usd. The banker is liable for defying courts order and will have to compensate B for any loss that he may suffer on account of non-recovery of the full amount due to him.

    In case only a part of the sum standing to the credit of the judgement debtors account has been attached on account of Garnishee Order, the banker may transfer that much of amount to a suspense account and the customers account may be permitted  to be operated with the balance.

    In case certain cheques drawn by the judgment debtor were certified as "good for payment" by banker before the receipt of Garnishee Order by the bank, they can be paid in spite of subsequent Garnishee Order.

    (ii) Order applicable only against the debt due or accruing due: The banker is restrained by the Garnishee Order only to make payment of such debts which have already become to the customer or which are not at which at present payable but for the payment of which an obligation exists. An amount which is not a debt due by the banker cannot be attached by such an order. For example, a banker has agreed to allow an overdraft of $5000 usd to a customer, he has overdrawn only $3000 usd so far, remaining $2000 usd cannot be attached  by the Garnishee Order.

    (iii) Bankers claim to Set Off: In case a banker has a definite claim against the debtor, it can claim the set off of such claim against the customers balance with it in spite of the Garnishee Order.

    (iv) Amounts not covered by the Garnishee Order: The Garnishee Order attaches only that balance which is lying in the judgement debtors account at the time when the order is served on the banker. It, therefore, does not apply to :
    (a) cheques, bill of exchange etc. deposited with the banker for collection but not yet collected.
    (b) sale proceeds of securities etc. of the customer not yet collected.
    (c) deposits made subsequent to the serving of the Garnishee Order.
    (d) payments made by the banker before serving of the Garnishee Order.
    (e) money held abroad by the judgement debtor.
    (f) securities lying in safe custody with the banker.

    (v)  Serving of Garnishee Order: Garnishee Order may be served on the Head Office of the Bank and it will serve as a notice to all branches where the judgement debtor may have his accounts. However, the Head Office will have to be given a reasonable time  so as to enable it to inform the branches. Any payment made by the branches before receipt of information regarding Garnishee Order, will be taken as a valid payment.

    Different Types of Accounts and Garnishee Order
    01. Joint Account : A joint account is one which is opened in the names of two or more persons. Such an account can be attached only when all the joint account holders are joint judgement debtors. However, in case of a joint debt, the individual accounts of the judgement debtors can be attached since their liability for a joint debts is joint as well as several.

    Illustration : (i) A owes a sum of $3,000USD to B. A has a joint account with C with City Bank Ltd. The balance standing in the account cannot be attached for the above debt.
    (ii) A and C jointly owe a sum of $ 3,000USD to B. Each one of them has separate accounts with City Bank Ltd. Their individual accounts can be attached for the above debt.

    02. Partnership Accounts : The personal account of a partner can be attached for payment of a firms debt. But the firms account cannot be attached for the payment of a personal loan of a partner.

    03. Trust Accounts : The money lying in a trust account though opened in the trustees name cannot be attached for payment of personal liabilities of the trustees. The bank in such an eventuality should inform the court that the funds lying in the account are trust funds.