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G Gopalakrishna Working Group (GGWG) on Electronic Banking

Additional Comments-on Legal Issues

Chapter IX of the GGWG deals with Legal Issues. There are 18 key recommendations that the group has made  and Naavi.org has already submitted its point by point comments in the Previous Article. This article provides further comments from the body of the Chapter IX other than the Key Recommendations included in the end.

The working group has discussed three specific Indian Laws namely the NI Act, PMLA and ITA 2008 in its deliberations besides some international laws on data protection.

Regarding Cheques in Electronic Form:

Commenting on the NI Act and the amendments of 2002 regarding "Cheques in Electronic Form", the GGWG states

"A cheque in the electronic form has been defined as "a mirror image" of a paper cheque. The expression 'mirror image' is not appropriate. It is perhaps not even the intention that a cheque in the electronic form should look like a paper cheque as seen in the mirror. Further, requiring a paper cheque being written first and then its mirror image or electronic image being generated does not appear to have been contemplated as the definition requires generation, writing and signature in a secure system etc. The expression, "mirror image of" may be substituted by the expression, "electronic graphic which looks like" or any other expression that captures the intention adequately.

The definition of a cheque in electronic form contemplates digital signature with or without biometric signature and asymmetric crypto system. Since the definition was inserted in the year 2002, it is understandable that it has captured only digital signature and asymmetric crypto system dealt with under Section 3 of IT Act, 2000. Since IT Act,2000 has been amended in the year 2008 to make provision for electronic signature also, suitable amendment in this regard may be required in NI Act so that electronic signature may be used on cheques in electronic form"


It is noted that the GGWG is averse to  the concept of "Mirror Image" and the use of "Digital Signature" as part of the definition of "Cheques in Electronic Form".

It is essential to appreciate that Negotiable Instruments have a special status in law by virtue of Section 9 of NI Act according to which in certain circumstances, a holder of a cheque on which he himself has a defective title can pass on a title free from defects to the transferee who is a "holder in due course". This status is available only for three kinds of instruments namely "Promissory Notes", "Bill of Exchange" and "Cheques" as defined in sections 4, 5 and 6 of NI Act. While amending the NI act in 2002 and trying to introduce the concept of "Cheques in Electronic Form", there was an option available to either make "Cheques in Electronic Form" as a part of the definition of "Cheque" under Section 6 of NI Act or describe it as a new instrument other than the three negotiable instruments already covered under the Act.

It must be recognized that the amendments to NI act was handled almost entirely by RBI in consultation with IBA and without involving any Cyber Law experts. As a result the committee which worked on the amendments came up with some suggestions which in its wisdom at that point of time was a best solution.

The solution adopted was to use "Electronic Form" as only a part of  "Constructive Delivery" and leave the existing provisions of NI Act untouched. Hence both the definitions of "Cheque in Electronic Form" and "Truncated Cheque"  presumed the existence of a "Cheque" as defined under section 6 and tinkered with only the legal aspects of how the title in the cheque could be transferred to the next person. Even here, the form of "Endorsement" was not tampered with and only the "Delivery" was addressed. For a valid transfer of a title in a cheque, the cheque needs to be "Endorsed" (except for  for "bearer" or previously "blank endorsed" cheque) and delivered.

The definition of "Cheque in Electronic Form" and "Truncated Cheque" implies that the delivery of the cheque happens through "Constructive Delivery" and such constructive delivery happens through a transfer of a "Mirror Image" of the cheque.  A "Mirror Image" cannot be created without the existence of the original cheque and hence the existence of a negotiable instrument in the form of the original cheque was a pre-requisite. If there is no original cheque, there is no "mirror image". The need for the use of the term "Mirror Image" is therefore well recognized.

From the GGWG report, it appears that the group did not fully understand the requirements of NI act before suggesting that "The expression, "mirror image of" may be substituted by the expression, "electronic graphic which looks like" or any other expression that captures the intention adequately. "

If this recommendation is adopted then "Cheque in Electronic Form" will cease to be a "Cheque" as per Section 6 of NI Act and cannot create a "Holder in Due Course". It will be an instrument which has no place in the NI Act or it will be a "Not a Negotiable Instrument but covered under NI Act". I.O.W. a "Cheque in Electronic Form" will be like a "Cheque" carrying "Not Negotiable" crossing.

RBI has so far introduced the "Truncated Cheque" system at least on trial basis but has not figured out how the system of "Cheques in Electronic Form" can be introduced.

The undersigned would be happy to provide a suitable solution for this purpose as he has already discussed in some Banker's forums long time back. This would be a hardware-software solution and meet the requirements of the amended NI act and also the practical requirement of the users.

The inability of RBI to find a solution to the suggested instrument since 2003 is indicative that RBI lacked the resources to scout for an appropriate Techno Legal solution which also met the requirements of a practical Banker.

It is therefore not necessary at this point of time to tinker with the concept of "Mirror Image".

(... To Be continued)


February 4, 2011

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