Negotiable Instruments Act and Information Technology Act, 2000 Explained

Posted on Jan 20, 2026 in Law & Jurisprudence

Negotiable Instruments Act, 1881

The Negotiable Instruments Act, 1881 is the foundational law in India that defines and amends the law relating to promissory notes, bills of exchange, and cheques.

Scope and Features of Negotiable Instruments

Scope

The Act deals primarily with three specific types of instruments (Section 13):

Promissory Note (Sec. 4)
Bill of Exchange (Sec. 5)
Cheque (Sec. 6)

The Act also covers concepts such as maturity, negotiation, endorsement, crossing, presentment, notice of dishonour, and the rights and liabilities of the parties involved.

Essential Features

A negotiable instrument must possess the following two fundamental features:

Free Transferability (Negotiability)
- It is easily transferable from one person to another either by mere delivery (if it is payable to the bearer) or by endorsement and delivery (if it is payable to order).
- No complex formalities, registration, or separate notice to the debtor is required for transfer.
- The transferee can sue upon the instrument in their own name.
Holder in Due Course (Good Title)
- The most crucial feature: a person who takes the instrument in good faith, for value, and before maturity, without notice of any defect in the title of the transferor, obtains a perfect title.
- This person is known as the Holder in Due Course (HDC). The HDC is protected from defects in the previous holder’s title.

Types of Negotiable Instruments

The three primary types of instruments defined by the Act are shown below.

Instrument	Parties	Nature of Payment	Section
Promissory Note	Two Parties: Maker (Debtor) and Payee (Creditor)	An unconditional promise to pay a specified sum of money	Sec. 4
Bill of Exchange	Three Parties: Drawer (Creditor), Drawee (Debtor), and Payee	An unconditional order to a specific person (drawee) to pay a specified sum of money	Sec. 5
Cheque	Three Parties: Drawer (Account Holder), Drawee (Banker), and Payee	An unconditional order addressed to a specified banker, always payable on demand	Sec. 6

Negotiation (Sections 14-16)

Negotiation means the transfer of an instrument from one person to another in such a manner as to constitute the transferee the holder of the instrument.

Modes of Negotiation

By Delivery (Section 47): Applicable when the instrument is payable to the bearer. Ownership transfers by mere physical handing over.
By Endorsement and Delivery (Section 48): Applicable when the instrument is payable to order. The transfer requires the signature of the holder (endorser) on the back or face of the instrument and then its physical handing over (delivery) to the transferee (endoree).

Types of Endorsement (Section 15)

Blank or General Endorsement: The endorser signs the instrument without naming any endorsee. The instrument becomes payable to the bearer.
Special or Full Endorsement: The endorser signs and specifies the person to whom the instrument is payable (for example, Pay X or order, Signed A).
Restrictive Endorsement: Restricts the further negotiation of the instrument (for example, Pay X only).
Conditional Endorsement: Makes the transfer subject to the happening of some event.

Crossing of Cheques (Sections 123-131)

Crossing is a direction given to the drawee banker that the cheque should not be paid across the counter but must be paid only through a banker. Crossing enhances the security of the payment.

Types of Crossing

General Crossing (Sec. 123): Two parallel transverse lines across the face of the cheque.
- Effect: The paying bank must pay the money only to a bank and not directly to the person presenting it.
Special Crossing (Sec. 124): The name of a banker is written across the face of the cheque, with or without the words not negotiable.
- Effect: The paying bank must pay the amount only to the bank whose name is specified.
Account Payee Crossing: Although not explicitly defined in the Act, this is a common banking practice where the words Account Payee are added between the lines.
- Effect: It is a direction to the collecting bank that the proceeds should be credited only to the account of the payee named on the cheque. It is the safest form and restricts the protection of the HDC.
Not Negotiable Crossing (Sec. 130): The words Not Negotiable are inserted between the transverse lines.
- Effect: The transferee does not get the HDC protection; they cannot acquire a better title than that of the transferor.

Dishonour and Discharge of Negotiable Instruments

Dishonour of Instrument

Dishonour occurs when the person liable to pay fails to honour the instrument upon its proper presentment.

Dishonour by Non-Acceptance (Section 91): Applies only to a bill of exchange (since promissory notes and cheques do not require prior acceptance). The bill is dishonoured if the drawee:
- Refuses to accept the bill within 48 hours.
- Is incompetent to contract.
- Cannot be found after a reasonable search.
Dishonour by Non-Payment (Section 92): Applies to all three instruments (promissory note, bill of exchange, or cheque). The instrument is dishonoured when the maker (note), acceptor (bill), or drawee (cheque) makes default in payment upon being duly required to pay.
- Consequence (Sec. 93): Upon dishonour, the holder must give notice of dishonour to all prior parties (drawer, endorsers) whom they seek to hold liable. Failing to give notice discharges the previous endorsers from their liability.

Criminal Liability (Sec. 138): Dishonour of a cheque specifically due to insufficient funds, or the account being closed, is a criminal offence punishable with imprisonment or fine.

Discharge of Instrument

An instrument is said to be discharged when all rights and liabilities under it are extinguished, and it ceases to be negotiable.

By Payment (Section 82): The most common mode. When the party primarily liable (maker or acceptor) makes payment in due course.
By Cancellation (Section 82(a)): When the holder intentionally cancels the name of any party liable to them on the instrument.
By Release (Section 82(b)): When the holder renounces their rights against the parties liable on the instrument.
By Operation of Law: Through insolvency of the debtor or when the legal remedy becomes time-barred (Limitation Act).
By Material Alteration (Section 87): Any material alteration (for example, changing the date or sum payable) without the consent of the parties discharges all parties who did not consent to the alteration.
By Qualified Acceptance (Bill of Exchange): If the holder of a bill of exchange allows the drawee to give a qualified acceptance, prior parties who did not consent are discharged.

Information Technology Act, 2000

The Information Technology Act, 2000 (IT Act) is the primary law in India dealing with cybercrime and electronic commerce.

Purpose of the Information Technology Act, 2000

The main purpose of the IT Act is to provide legal recognition for transactions carried out by means of electronic data interchange and other electronic communication methods, commonly referred to as e-commerce.

Key objectives include:

Legal Recognition: Giving legal sanctity to electronic records, digital signatures, and electronic contracts.
E-Governance: Facilitating electronic filing of documents with the government and promoting efficient public service delivery through electronic means.
Cyber Security: Providing a legal framework for the prevention and prosecution of cyber crimes.
Digital Signature: Establishing a framework for the creation and use of digital signatures to authenticate electronic documents.
Certifying Authorities (CAs): Providing a regulatory framework for the issue and management of Digital Signature Certificates by CAs.

Benefits and Limitations of the IT Act, 2000

Benefits

The Act provides several benefits, including the following.

Benefit	Description
Promotion of E-Commerce	Removes legal hurdles for conducting business online, covering e-contracts and electronic payments.
E-Governance Push	Enables government departments to accept electronic records, making public services faster and paperless.
Legal Validity	Ensures that electronic documents and communications (like email) have the same legal standing as their paper-based equivalents.
Cybercrime Deterrence	Introduced specific sections and penalties for crimes like hacking, denial of service attacks, identity theft, and data theft.
HDC Concept	Protects the good faith acquisition of digital signature certificates.

Limitations (Common Criticisms)

Limitation	Description
Broad Terminology	Some terms, such as reasonable security practices, lack clear definition, leading to ambiguity in implementation.
Jurisdictional Issues	While global in scope, enforcing the Act across international boundaries for cybercrime remains complex.
Scope of Censorship	Critics argue that certain sections, like the blocking and interception provisions, can be misused to curtail freedom of speech.
Technological Obsolescence	The Act was drafted primarily around digital signatures based on PKI, and it took time to legally recognize other modern electronic authentication methods.

Digital Signature (Sections 2 and 3)

A digital signature is a mechanism used to authenticate an electronic record.

Mechanism (Sec. 3): It involves a mathematical function applied to an electronic record using a private key to create a digitally signed record. The process uses asymmetric cryptography (Public Key Infrastructure or PKI).

Authentication: When the recipient receives the signed record, they use the sender’s publicly available public key to verify the signature.
Purpose:
- Authenticity: Confirms the electronic record originated from the claimed sender.
- Integrity: Confirms the electronic record has not been tampered with since it was signed.
- Non-repudiation: Prevents the sender from denying they signed the document.

E-Governance (Sections 4-10A)

E-Governance aims to bring efficiency, transparency, and simplicity to government services by using electronic means.

Legal Recognition of Electronic Records (Sec. 4): Where any law requires information to be in writing or in paper form, that requirement shall be deemed to be satisfied if the information is rendered or made available in an electronic form.
Legal Recognition of Digital Signatures (Sec. 5): Where any law requires a signature, that requirement is satisfied by the use of an authenticated digital signature.
Electronic Filing (Sec. 6): Government entities (central, state, local) can now accept documents in electronic form, issue licenses, sanctions, or permits in electronic form, and accept payments electronically.

Attribution of Electronic Records and Duties of Subscribers

Attribution of Electronic Records (Section 11)

An electronic record shall be attributed to the originator if it was sent by:

The originator themselves.
A person who had the authority to act on behalf of the originator in respect of that electronic record.