The passage of the Negotiable Instruments Amendment Act
2002 (NIAA 2002) in the Parliament has also brought in a significant change to
the Information Technology Act 2000 (ITA-2000) bringing Cheques within its
The amendment has brought in two concepts of digital
cheques. One is a "mirror image" of a cheque digitally signed. Second is the
concept of "truncated cheque" where the physical cheque carrying a physical
signature of the drawer is killed and replaced with an image of the signed
cheque. Power to create a truncated cheque lies with the clearing house or by
the paying or collecting banks.
The NIAA 2002, replaces the original section 6 of the
parent Act (NIA) to read as follows.
A "Cheque" is a Bill of Exchange drawn on a specified
banker and not expressed 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 purpose of this section, the
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
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 purpose of this section, the
expression "clearing house" means the clearing house managed by the reserve
bank of India or a clearing house recognized as such by the Reserve Bank of
Readers of naavi.org recall the earlier article
Negotiable Instruments…A Fantasy? written on 22nd November 2001
highlighting the problems that creation of a virtual negotiable instrument
would create. Some of these problems relating to the protection available to
the paying and collecting bankers have been addressed by further amendments to
Accordingly, when a cheque is truncated, the paying banker
is entitled to demand further information in case of a reasonable suspicion
(section 64 of NIA), the Collecting Banker can retain the truncated cheque
even after receiving the payment (Section 81 of NIA), the difference if any
between the image and the truncated cheque will be considered a
"Material Alteration" (Section 89 of NIA), and the Collecting Banker is
responsible to verify that the truncated cheque is prima-facie genuine (Sec
131 of NIA).
While the operational aspects involving the Bankers arising
out of the introduction of the "Electronic Cheque" has thus been
addressed, there may still be certain legal issues where the electronic
cheques may still be found inferior. One such aspect is in creating a "Holder
in Due Course".
Further the insistence of a "Mirror Image" of a cheque to
constitute a valid electronic cheque means that a special application is
required to be used by a customer if he wants to issue an "electronic cheque"
on his Banker. Just as a Banker issues a physical cheque book, he may have to
issue an "Electronic Cheque book" which produces blank electronic images
of cheques which can be completed by the customer and digitally signed.
Hopefully this would be addressed at the individual Bank level.
With the changes made to the NIA, the NIAA-2002 has also
made consequential amendments to the ITA-2002.
Accordingly, Section 1 and Section 81 of the ITA-2000
has been amended as follows.
Amendment 1: Section 1 (4) (a) will now read
(Nothing in this Act will apply to...)
" a negotiable instrument (Other than a cheque) as defined
in section 13 of the Negotiable Instruments Act,1881 (26 of 1881)
After Section 81, the following has been inserted:
81-A, Application of the Act to electronic cheque and
(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
subsection (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 the notification.
Explanation: For the purpose of this Act, the
expression "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).
(P.S. Copy of the ITA-2000 available on this site will be
modified shortly after the Presidential Assent is given to the NIAA-2002).
December 6 , 2002
Negotiable Instruments Act-2/11/00
Negotiable Instruments…A Fantasy?-22/2/2001