A negotiable instrument is a signed document that promises a sum of payment to a specified person or the assignee. In other words, it is a transferable, signed document that promises to pay the bearer a sum of money at a future date or on-demand. The payee, who is the person receiving the payment, must be named or otherwise indicated on the instrument.
In India, the negotiable instruments are regulated by the Negotiable Instrument Act, 1881 as amended from time to time. The different types of negotiable instruments recognized by the act include -:
Promissory note: An instrument in writing 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 the bearer of the instrument. There are two parties, i.e. drawer and payee.
Bill of exchange (demand draft): It is a written instrument showing the indebtedness of a buyer towards the seller of goods. There are three parties, i.e. drawer, drawee and payee.
Cheque: It is an order by the account holder of the bank directing his banker to pay on demand the specified amount, to or to the order of the person named therein or to the bearer.
Currency Note: It is a legal tender which gives the holder the right to receive the value of its denomination on exchange. So “holding” determines the entitlement. Even if somebody steals the currency he/she becomes the holder and so entitled to the rights. On the other hand, a negotiable instrument is a document which guarantee a specific sum of money to the payee whose name is mentioned in the instrument itself.