Business Law

Sampatkumar. B. Aratti
07.11.2015
Sessions 11 & 12
This SemesterUnit 3 (Security
Legislations) & Unit 4 (Property
Law)
This Class

Negotiable Instruments Act: Promissory
notes , Bills and cheques, Crossing of
cheques, Negotiation, Presentment of
negotiable instrument

Banking: SARFESI Act (securitization and
reconstruction of financial assets and
enforcement of Security Interest Act, 2002),
Purpose, Introduction and risk management
in securitization, Debt recovery tribunals its
objectives and its purposes
This Class

Prevention of Money Laundering Act
(objectives and purposes)

Insurance Act - Essential Elements of
Insurance Contracts
Negotiable Instruments Act 1881

Act enacted in 1881

Came into effect force from 01.03.1882
 Introduction

What is the essence of Business?

Consideration

What is Consideration?

In simple wordsIts the price that the

buyer pays to the Seller
 Negotiable Instrument

What do you understand by NI?

A negotiable instrument is a document

guaranteeing the payment of a specific
amount of money, either on demand, or
at a set time, with the payer named on
the document.
 Negotiable Instrument

More specifically, it is a document contemplated by
or consisting of a contract, which promises the
payment of money without condition, which may
be paid either on demand or at a future date. The
term can have different meanings, depending on
what law is being applied and what country it is
used in and what context it is used in.

Examples of negotiable instruments :

include promissory notes, bills of
exchange, banknotes, and cheques.
 Negotiable Instrument

Document of title or evidence of
indebtedness that is freely (unconditionally)
transferable in trading as a substitute
for money.

Negotiable instruments are
unconditional orders or promise to pay, and
include checks, drafts, bearer bonds,
some certificates of deposit, promissory
notes, and bank notes (currency).
 Negotiable Instrument
A negotiable instrument has three principal attributes:
(1) an asset or property (that is the subject matter of the
instrument) passes from the transferor to
the transferee by mere delivery and/or endorsement of the
instrument,

(2) a transferee accepting the instrument in good faith and

for value (and who has no notice of any defect in
the title of the transferor) obtains an indefeasible title and
may sue on the instrument in his or her name, and

(3) no notice of the transfer need to be given to

the party liable in the instrument.
 Negotiable Instrument
Negotiable instrument is a transferable document, where
negotiable means transferable and instrument means document.

To elaborate it further, an instrument, as mentioned here, is a

document used as a means for making some payment and it s
negotiable i.e., its ownership can be easily transferred.

Thus, negotiable instruments are documents meant for making

payments, the ownership of which can be transferred from one
person to another many times before the final payment is
made.

NI are a special class of Contracts

 Negotiable Instrument

According to Section 13(i) a negotiable
instrument means a promissory note, bill of
exchange or cheque payable either on order
or to bearer.

An instrument may be negotiable either by

1. Statute : Promissory Notes , bills of exchange
and cheques are negotiable instruments under
Negotiable Instruments Act 1881 .
2. By Usage : Bank Notes , Bank Drafts , scripts,
treasury Bills etc
Transfer by Negotiation

Negotiation is a transfer of an instrument from
one person to another in such a manner as to
express title & to represent the transferee the
holder thereof.

Passing of possession

With intention to pass title

Must be transferred in such a manner that the
transferee becomes holder thereof.
 Negotiable Instrument

Lets discuss the example given on Page 180
of the Text Book..A sells goods to B..X

Lets look @ Presumptions..Table 6.1 on

Page 180.
 Negotiable Instruments

Relevance of N.Is in
todays Business world?

What are the changes
that you have seen?
Methods of Negotiation
1. Negotiation by delivery
2. Negotiation by endorsement & delivery
3. Property is transferred to the endorsee
4. Endorsee get right to negotiate the instrument, sue on
instrument.
Characteristics

It is freely transferable

Better title

Right to sue

A negotiable instrument can be transferred any number
of times till its maturity

A negotiable instrument is subject to certain
presumptions

Presumptions certain presumptions as to
consideration, reasonable time etc., apply to all
negotiable instruments.
 Presumptions
1. Consideration : Every negotiable instrument is
deemed to have been drawn and accepted ,
endorsed, negotiated, or transferred for
consideration
2. Date : Every negotiable instrument must bear
the date on which it is made or drawn
3. Acceptance : Every Bill of exchange was
accepted within a reasonable time after the date
mentioned therein and before the date of its
maturity
4. Transfer : Every transfer should be made before
the expiry
Meaning of Endorsement

When a maker or holder writes the persons name on
the face or back of the instrument & puts his signatures
thereto for the purpose of negotiation, it is called
endorsement.

Person who signs endorser

To whom it is endorsed endorsee.

A legal term that refers to the signing of a
document which allows for the legal transfer of a
negotiable from one party to another.

When an employer signs a check, they are endorsing
the transfer of money from the business accounts to
the account of the employee.
Essentials of valid endorsement
1. On the back or face of the instrument.
2. Must be made by maker or holder.
3. Must be properly signed by the endorser.
4. It must be for the entire negotiation instrument.
5. No specific form of words are necessary for
endorsement.
Effects of Endorsement

The property in instrument is transferred from
endorser to endorsee.

The endorsee gets right to negotiate the
instrument further.

The endorsee get the right to sue in his own
name to all other parties.
 Promissory Notes

Section 4 defines it as, A promissory note is 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 to the bearer of the instrument.

The person who makes the promissory note is called the
maker.

The person to whom payment is to be made is called the
payee. e.g.

I promise to pay B or order rs. 500

I promise to pay B Rs.500 on D death, provided D leaves me
enough to pay that sum
Promissory Notes..
Promissory Notes..
 Essentials of Promissory Note

It must be in writing

It must contain express promise to pay :- I am liable to pay

The promise to pay must be unconditional

It must be signed by maker

The maker must be certain- It must describe the name &
designation of the maker, sum of money

There are 2 parties involved i.e. maker and the payee

The payee must be certain- It is essential that it must contain a
promise to pay some person ascertained by name or designation.

The sum payable must be certain

The payment must be in legal money

A currency note is not a promissory note
Bill of Exchange
 Bill of Exchange

Section 5, is defined as 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.

Parties to bill of exchange :

Drawer The person who makes/orders to pay bill of exchange.

Drawee The person who is directed to pay on bill. On acceptance
he becomes acceptor.

Payee The person to whom the payment is to be made.

Drawer & Payee can be the same person.

X sells goods worth Rs. 2000 to Y & allow him 3 months time to
pay the price. X then draws a bill on Y Three months after date,
pay to my order the sum of Rs. 2000 for value received. X is
drawer . Y is Drawee.
Essential of Bills of Exchange

It must be in writing

It must contain an order to pay and a promise or
request

The order must be unconditional

There must be 3 parties i.e. : drawer, drawee, and payee

The parties must be certain

It must be signed by the drawer

Number, date and place are not essential
Cheques

 Parts of a Cheque:
 Payee Name
 Date of Issue
 Amount of Currency
 Signature of the Drawer
 Cheque Number
 Signature of the Issuer
Cheques

Section 6, defines it as A cheque is a bill of exchange
drawn on a specified banker & not expressed to be
payable otherwise than on demand.

It is always drawn on a bank

It is payable to bearer on demand

Parties To Cheque:
1. Drawer who makes the cheque
2. Payee to whom payment is to be made
3. Drawee Bank .
Meaning of Crossing of Cheque

Crossing of a cheque is a unique feature associated with
a cheque affecting to a certain level the responsibility of
the paying Banker and also its negotiable Character.

Crossing of a Cheque is a direction to a particular
Banker by the Drawer that Payment should not be
made across the Counter. The payment on the crossed
Cheque can be collected only through a Banker.

Crossing of the Cheque is affected by drawing two
parallel Transverse lines .

The Cheque that is not crossed is an open Cheque.
Types of cheque

There are two types of cheque:
1. Open cheque those which can be en cashed across
the counter of the bank. Liable to great risk if stolen or
lost. Finder can get payment from bank.

2. Crossed cheque which bears two transverse lines

with or without the words & co.
Various kinds of Crossing
1. General Crossing:- which bears across its face the
words & co. or the words not negotiable. For
general crossing two transverse lines on the face of
cheque are essential. The paying banker shall pay only
to a banker.There are two sloping parallel lines, marked
across its face

The cheque bears an short form "& Co. "between the
two parallel lines

The cheque bears the words "A/c. Payee" between
the two parallel lines.

The cheque bears the words "Not Negotiable"
between the two parallel lines.
Specimen of General Crossing
2. Special or Restrictive Crossing :- When a particular
bank's name is written in between the two parallel lines the
cheque is said to be specially crossed. Where a cheque bears
across its face an addition the name of banker either with or
without the words not negotiable. It contains:

The name of the banker across the face of cheque.

With the words not negotiable

In addition to the word bank, the words "A/c. Payee Only",
"Not Negotiable" may also be written. The payment of such
cheque is not made unless the bank named in crossing is
presenting the cheque. The effect of special crossing is that
the bank makes payment only to the banker whose name is
written in the crossing. Specially crossed cheques are more
safe than a generally crossed cheques.
Specimen of Special or
Restrictive Crossing
 Why Crossing of Cheque is being
used

The important usefulness of a crossing cheque is that
it cannot be covered at the counter but can be
collected only by a bank from the drawee bank.

Crossing provides a protection and safeguard to the
owner of the cheque as by securing payment through a
banker it can be easily detected to whose use the money
is received. Where the cheque is crossed the paying
banker shall not pay it except to a banker.

A special crossing makes the cheque more safe than a
general crossing because the payee or holder cannot
receive payment except through the banker named on
the cheque.
What is Bouncing of Cheque?

What are the consequences of

Bouncing of Cheque?
 Promissory Note
1. It contains a promise to pay.
2. It is presented for payment
without any previous
acceptance by the maker.
3. It cannot be made payable to
the maker himself. The maker
and the payee cannot be the
same person.
4. In the case of a promissory
note there are only two
parties, the maker and the
payee.
5. A promissory note can never
be conditional.
6. In case of dishonour no notice
of dishonour is required to be
given by the Holder Also refer to Page. 186 (Table 6.3) of your Text Book
Bill of Exchange
1. It contains an order to pay.
2. It is required to be accepted
either by the drawee or by some
one else on his behalf, before it
can be presented for payment.
3. The drawer and payee or the
drawee and the payee may be the
same person.
4. There are three parties, drawer,
drawee and payee.
5. A bill of exchange cannot be
drawn conditionally, but it can be
accepted conditionally with the
consent of the holder.
6. A notice of dishonour must be
given in case of dishonour of a
Bills of Exchange.
 Cheque
1. Drawee: Cheque can be drawn
only on a banker.
2. Time of payment: A cheque is
payable on demand.
3. Grace period: Cheque is payable
on demand and no grace period is
allowed.
4. Notice of dishonour: Notice of
dishonour is not necessary.
5. Acceptance: A cheque is not
required to be presented for
acceptance. It needs to be
presented only for payment.
6. Crossing: A cheque may be
crossed.
7. Validity period: A cheque is
usually valid for a period of six
months. Also refer to Page. 189 (Table 6.4) of your Text Book
Bill of exchange
1. The drawee may be any person.
2. A bill may be drawn payable on
demand or on expiry of certain
period after date or sight.
3. While calculating maturity three
days grace is allowed.
4. A notice of dishonour is required.
5. Bills require presentment for
acceptance and it is better to
present them for acceptance even
when it is not essential to do so.
6. A bill of exchange cannot be
crossed.
7. A bill may be drawn for any
period.
 SARFESI Act
1. Whats SARFESI?

Securitisation & Reconstruction of
Financial Assets & Enforcement of Security
Interest Act

Applicable for the whole of India

Came into force on 21st June 2002

 SARFESI Act : PURPOSE
1. Whats the Purpose of SARFESI?

Helping the Banks & the Financial
Institutions to auction properties(residential and
commercial) when borrowers fail to repay their
loans.

It enables banks to reduce their non-

performing assets (NPAs) by adopting measures
for recovery or reconstruction.
 SARFESI Act : PURPOSE
1. Whats the Purpose of SARFESI?
The Act has made provisions for registration
and regulation of securitisation companies (SC) or
reconstruction companies (ARC) by the RBI,
facilitate securitisation of financial assets of banks,
empower SCs/ARCs to raise funds by issuing
security receipts to qualified institutional buyers
(QIBs), empowering banks and FIs to take
possession of securities given for financial
assistance and sell or lease the same to take over
management in the event of default.
 SARFESI Act : PURPOSE
1. Whats the Purpose of SARFESI?

To provide effective measures to the Secured

Creditors to recover their long standing dues
from the Non Performing Assets (NPAs)

The act provides 2 alternative methods for
recovery of NPAs:

Securitisation:

Asset Reconstruction
 SARFESI Act
1. What do you understand by Securitisation?

Securitization is the process of taking an illiquid

asset, or group of assets, and through financial
engineering, transforming them into a security.

Securitization is the financial practice of pooling
various types of contractual debt such as
residential mortgages, commercial mortgages, auto
loans or credit card debt obligations (or other
non-debt assets which generate receivables) and
selling their related cash flows to third party
investors as securities, which may be described
as bonds, pass-through securities, or collateralized
debt obligations (CDOs).
 SARFESI Act
1. What do you understand by Securitisation?

Securitisation: It means issue of security by raising of

receipts or funds by SCs/ARCs. A securitisation
company or reconstruction company may raise funds
from the QIBs by forming schemes for acquiring
financial assets.

The SC/ARC shall keep and maintain separate and
distinct accounts in respect of each such scheme for
every financial asset acquired, out of investments made
by a QIB and ensure that realisations of such financial
asset is held and applied towards redemption of
investments and payment of returns assured on such
investments under the relevant scheme.
 SARFESI Act
1. What do you understand by ReConstruction?

Asset reconstruction" means

acquisition by any securitisation
company or reconstruction company of
any right or interest of any bank or
financial institution in any financial
assistance for the purpose of realisation
of such financial assistance;
SARFESI Act
1. What do you understand by ReConstruction?

Asset Reconstruction: The SCs/ARCs for the purpose
of asset reconstruction should provide for any one or
more of the following measures:
the proper management of the business of the borrower,
by change in, or take over of, the management of the
business of the borrower
the sale or lease of a part or whole of the business of the
borrower
rescheduling of payment of debts payable by the
borrower
enforcement of security interest in accordance with the
provisions of this Act
settlement of dues payable by the borrower
taking possession of secured assets in accordance with
the provisions of this Act.
SARFESI Act
1. How was the Bad Debt recovered earlier?

There was a legislation called Recovery of Debts due

to Banks and Financial Institutions Act of 1993 &
this legislations had created:

Debt Recovery Tribunals

Debt Recovery Tribunals
1. Single Most Purpose of DRTs

expeditious disposal of banking cases to

help the banks from Bad Debts i.e.
basically helping the banks & FIs to recover
the debts owed to them.
 Definitions
1. What s?

A qualified institutional buyer (QIB or QUIB) is a

company that manages at least $100 million of securities
on a discretionary basis or is a registered broker-dealer
investing at least $10 million in non-affiliate securities.

DEFINITION of 'Illiquid' The state of a security or

other asset that cannot easily be sold or exchanged for
cash without a substantial loss in value. Illiquid assets
also cannot be sold quickly because of a lack of ready
and willing investors or speculators to purchase the
asset.
 NPA

A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of
Bond finance principal has remained past due for a specified period of time. NPA is used by financial institutions that refer
to loans that are in jeopardy of default. Once the borrower has failed to make interest or principle payments for 90 days
the loan is considered to be a non-performing asset. Non-performing assets are problematic for financial institutions since
they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase
in non-performing loans and often results in massive write-downs.

With a view to moving towards international best practices and to ensure greater transparency, it had been decided to
adopt the 90 days overdue norm for identification of NPA, from the year ending March 31, 2004. Accordingly, with
effect from March 31, 2004, a non-performing asset (NPA)is a loan or an advance where;

Interest and/or installment of principal remain overdue for a period of more than 91 days in respect of a term loan,

The account remains out of order for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half
years in the case of an advance granted for agricultural purposes, and

Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility.

No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 91days

sify non-performing assets further into the following three categories based on the period for which the asset has
remained non-performing and the realisability of the dues:

Sub-standard assets: a sub standard asset is one which has been classified as NPA for a period not exceeding 12 months.

Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12 months.

Loss assets: where loss has been identified by the bank, internal or external auditor or central bank inspectors. But the
amount has not been written off, wholly or partly.

Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All those assets which are considered
as non-performing for period of more than 12 months are called as Doubtful Assets. All those assets which cannot be
recovered are called as Loss Assets.
 Prevention of Money
Laundering Act
1. What is Money Laundering?
Illegal / Legal /
Dirty Conversion white
Money Money

Definition: 'Money Laundering' is the process by which

illegal funds and assets are converted into legitimate
funds and assets.
 Prevention of Money
Laundering Act
1. What is Money Laundering?

Disguise of illegal origin of money

Smuggling, Drug trafficking, Illegal arms sales,
Computer frauds, Embezzlement

Regarded as DIRTY- MONEY

Conversion of the dirty- money

to legitimate money.
 Prevention of Money
Laundering Act

Money Laundering as per section 3 of the Prevention Money
Laundering Act:-

Whosoever directly or indirectly attempts to indulge or knowingly assists

or knowingly is a party or is actually involved in any process or activity
connected with the proceeds of crime and projecting it as untainted
property shall be guilty of offence of money laundering.

Money Laundering is the conversion of profits from illegal activities into

financial assets which appear to have legitimate origins.
Stages of Money Laundering
Stages of Money Laundering
Money Laundering generally refers to washing of the
proceeds or profits generated from:

Kidnapping
Prostitution Extortion

Drug Bribery
Trafficking Criminal & Corruption
Activities

Smuggling Gambling,
(arms, people, Robbery,
goods) Cheating

Counterfeiting
Terrorist Act & Forgery
 Some Popular places from where
Money is Laundered
 Stock Markets

 Agricultural Products (as there is no income tax and mostly the

transactions are on cash basis)

 Property Market

 Creating Bogus Companies

 Showing Loans

 False Export Import Invoices

 PMLA, 2002
 Came into force with effect from 01st July, 2005
 The Act extend to whole of India except J&K

Object:
To prevent money- laundering, seize the
property with authority, involved in money
laundering

Administration:
Directorate of Enforcement of the Department of
Revenue, Ministry of Finance
 Punishment for the Offence

Imprisonment up to seven years.

The same is 10 years in case of Narcotics and

Drugs, and

Fine up to Rs 5 lacs.

In addition, the tainted property is also

confiscated by the Central Government.
 KYC???

Why?

What?

How does this help?

Classic Case in India: ???

Satyam Case.. B. Ramalinga Raju.

 Insurance Act

The Insurance Act of 1938 was the first
legislation governing all forms of insurance to
provide strict state control over insurance
business.

Purpose:- to safe guard the interest of insured,

setting the norms for carrying out the business
of insurance smoothly, Minimizing disputes
 Insurance
 Insurance is the key to good financial planning. On one
hand, it safeguards your money and on the other, ensures
its growth, thus providing you with complete financial well
being.
 Dictionary of business and Finance defines Insurance as
a form of contract agreement under which one party
agrees in return for a consideration to pay an agreed
amount of money to another party to make good a loss,
damage or injury to something of value in which the
insured has a interest as a result of some uncertain event.
It is a device by which loss likely to be caused by an
uncertain event is spread over a number of persons who
are exposed to it and who propose to insure themselves
against such an event.
 Insurance
 Insurance is the key to good financial planning. On one
hand, it safeguards your money and on the other, ensures
its growth, thus providing you with complete financial well
being.
 Dictionary of business and Finance defines Insurance as
a form of contract agreement under which one party
agrees in return for a consideration to pay an agreed
amount of money to another party to make good a loss,
damage or injury to something of value in which the
insured has a interest as a result of some uncertain event.
It is a device by which loss likely to be caused by an
uncertain event is spread over a number of persons who
are exposed to it and who propose to insure themselves
against such an event.
Types of Insurance
Elements of General Contract

Offer & Acceptance

Consideration

Legal capacity to Contract

Consensus

Legality
Elements of Insurance
Contract

CW: Page # 530 & 531

Next Class : Property Laws

Classification of Property Moveable and
Immovable Property / Tangible and
Intangible Assets- Definition and
Essentials of sale

Sale and Agreement to Sell Rights and
Duties of Seller and Buyer Rights of an
unpaid seller, Conditions and warranties
(including types of warranties), Sale of
Goods Act
Next Class : Property Laws

Rights and Liabilities of Parties - Mortgage
of Immovable Property - Hire Purchase /
Lease of Property, Exchange / Gift /
Assignment of Property

IPRs-Introduction, Trade Related
Intellectual Property Rights (TRIPS),
Definition of patents, Register of patents
and its procedure, Revocation of patents

Definition of copy right, Copy rights and it
ownership, Infringement of copy right
Next Class : Property Laws

Definition of a trade mark, Functions of a
trade mark, Procedure and duration of a
trade mark, Assignment and transmission
of trade mark
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