BCom Notes Part II Banking and Finance Bill of Exchange
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Bill of Exchange
Discuss the different types of bill. Definition and Salient Features
According to Negotiable Instrument Act a Bill of Exchange is “An instrument in writing containing an unconditional order, signed by the maker directing a certain person to pay on demand or at a fixed or determinable future time, a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.
Thus we find the following important features of a bill of exchange:
1. The order to pay a bill must be unconditional one.
2. The order to pay must be made in writing on the bill.
3. The bill must be signed by the drawer of the bill. Without signature of the drawer the bill will not be genuine one.
4. The order to pay under a bill must be addressed to a certain person which, of course, includes individuals, firm, company, corporation etc.
5. The amount to be paid under a bill must be certain one.
6. The money under a bill must be paid in legal tender currency.
7. The amount should be payable to or to the order of a specified person or to the bearer of the instrument.
8. The amount should be payable either on demand or at a fixed determinable future time.
9. The bill must be duly stamped.
10. The other formalities like dating, stating the names of the parties concerned etc. must be observed.
Parties to a Bill of Exchange
Following are the various parties related to a bill transaction
a. The Drawer
The person who draws the bill and puts his signature on it is known as the drawer of the bill. He is also called the “maker” of the bill.
b. The Drawee
The person on whom the bill is drawn is called as the drawee of the bill.
c. The Acceptor
The person who accepts the bill is known as the acceptor of the bill. Usually, the drawee accepts the bill. But sometimes, a third party may also accept a bill on behalf of the drawee. The acceptor puts down his signature across the bill showing his acceptance.
d. The Payee
The person to whom the amount of bill is to be paid is known as payee of the bill. The drawer may make the bill payable to himself or to any other person he likes.
e. The Endorsee
The holder of the bill may endorse the bill in favor of someone else known as endorsee. The person who endorses the bill is called endorser.
f. The Holder
The person who holds the bill and is entitled to realize the amount of the bill from the drawee is known as holder of the bill.
Types of Bills
Bills may be of the following types:
a. Inland Bills
Inland bill means the bill which is drawn and payable within the same country. Thus, the bill which is drawn in Pakistan and will also be paid in Pakistan is termed as an inland bill.
b. Foreign Bill
The bill which is drawn in one country and accepted and payable in another country is known as a foreign bill.
c. Accommodation Bill
The bill which is drawn and accepted by the parties concerned for their mutual accommodation with a view to raise money by negotiating it, is known as an accommodation bill. The parties concerned bind themselves as the drawer and the acceptor without any valuable consideration.
d. Demand Bill
The bill which is payable “on demand” or “on presentation” or “at sight” is known as demand bill.
e. Time Bill
The bill which is payable at a fixed or a determinable future time is known as time bill. The time bill may further be classified as following:
After Date Bill
The bill whose tenure is counted from the date of drawing it is known as after date bill.
Sight Bill
The bill whose date of payment is counted from the date of acceptance is known as after sight bill.
f. Documentary Bill
When a bill is accompanied by shipping documents like, Bill of Lading, Invoice, Insurance Policy relating to goods against which the bill is drawn, is then known as a documentary bill.
g. Sent Bill Or Bills for Collection
When bills are handed over to a bander by his customer in order that they may be collected when due and the proceeds credited to the customer’s account. They are called as Bills for Collection.
h. Bills Negotiated
The bills for which the banker has given the value at once, without waiting for the proceeds after collection.
i. Bills in Set
When bills of exchange are drawn in two or more parts, they are called “bills in set”. The foreign bills are generally drawn in sets of two or three. The each of the set is on a seperate piece of paper, but all parts are worded exactly in the same language except that the parts are numbered as “The 1st of exchange”, “2nd of exchange” etc.
j. Bills Retired
When a bill is withdrawn from circulation or taken back before it is due, it is known as “retired bill”.
Discounting of Bills
A time bill is payable on future date and the holder of the bill is to wait for a specific period of time to receive the amount of the bill. But the modern commercial banks are providing the facilitates of discounting of bill to the holder to have money earlier. For discounting of bill, the bank purchases the bill from the holder at a reduced rate before maturing of the bill and receives the amount of the bill from the acceptor on due date. The reduction in the value of bill at the time of purchase by bank is known as “discount” and it is charged on the basis of interest rate. Thus, discounting of bill is a sort of short term credit given to the holder of the bill by a banker and the discount forms the profit to him.
Discounting of bill very useful from the point of view of traders and bankers. It benefits the importer, exporter and bankers equally. The exporter or seller can get immediate cash as soon as he handed over the goods to the transporters. The importer or buyer gets enough time to sell the goods after having received it. The bankers earn a lot by effecting these transactions.
Precautions in Discounting a Bill of Exchange
Like advancing other loans and credit, discounting of bills also is a very risky job on the part of the banker. He must be careful and cautious with discounting the bill of exchange and must take the following precautions are measures in discounting of bills:
1. He should examine financial standing of the holder and acceptor of the bill. If the parties concerned have bank accounts with him, the banker can easily learn their financial stability. If there is no such account with him, the banker should refer to the bank where they have got account to know their financial position.
2. The banker is also to examine the financial status of other parties engaged in the bill.
3. The banker should see whether the acceptor dishonored any other bill in past time.
4. The banker should satisfy himself whether the bill is a bona-fide trade bill which is accepted for value received in course of business. The banker should, as for as possible, avoid the accommodation bills.
5. The banker should examine the bill whether all the formalities as of date, stamp, signature etc, have been compiled with.
6. He must see whether the bill is capable of being endorsed. If so, the banker should see whether the bill is duly endorsed by the payee.
Presentation of Bills
Bill has to be presented first of all before the drawee for acceptance and again in due date it is to be presented before the acceptor for the payment. Thus, presentation of bill may be of two types viz,
1. Presentation for Acceptance
2. Presentation for Payment
1. Presentation for Acceptance
Presentation for acceptance is made not only for the acceptance of the bill but also to fix-up the time, place etc., for the payment. In case of time bill, where the tenure of the bill is clearly stated, the bill is presented for acceptance of the drawee to confirm the stipulated time for payment.
A bill should be presented for acceptance within a reasonable tenure after the drawing or negotiation of the bill.
2. Presentation for Payment
If refers to presentation of a bill before the draw or acceptor or before the agent of the drawee or acceptor for the payment of the bill on due date. The presentation for payment is subject to the following rules:
In case of “demand bill”, the bill must be presented within a seasonable time after its drawing or endorsement as the case may be,
In case of time bill, the bill should be presented for payment on the due date.
The bill should be presented for payment during the business hours of working days.
The bill should be presented for payment at the proper place. The term proper place may refer to any one of the following
- The place mentioned in the bill for payment.
- Where no specific place is mentioned in the bill, the address of the drawee or acceptor.
- Where no address is given, of any place where the drawee or acceptor can be found including his residence.
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