Cheque In Electronic Form, redefined, Implications on E Banking

Section 6 of the Negotiable Instruments Act 1881 defined the term “Cheque” as follows:

A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

This section was amended and expanded  by the Negotiable Instruments (Amendment and Miscellaneous Provision) Act 2002 with effect from 6th February 2003 to include “Cheques in Electronic Form”.

The amended section then read:

6. “Cheque”.– A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Explanation 1.–For the purposes of this section, the expressions–

(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 crypto system;
(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 purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.

The above amendment had a relation to ITA 2000 since “Cheque in Electronic Form” was one of the electronic documents to which the ITA 2000 applied.

Now the NI Act has been further amended with “The Negotiable Instruments (Amendment) Act 2015” passed on 29th December 2015 with effect from 15th June 2015.

This amendment inter-alia re-defines the  term “Cheque in Electronic Form” by replacing the explanations which now now read as follows:

Explanation 1.–For the purposes of this section, the expressions–

(a) “a cheque in the electronic form” means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or with electronic signature, as the case may be;
(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 purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.

Explanation III.—For the purposes of this section, the expressions “asymmetric crypto system”, “computer resource”, “digital signature”, “electronic form” and “electronic signature” shall have the same meanings respectively assigned to them in the Information Technology Act, 2000.’.

The amendment is meaningful and confirms what was already understood with the passage of ITA 2000 (effective from 17th October 2000) which recognized the electronic document and digital signature as equivalent to paper and written signature.

In the earlier system, there was a need to scan  a cheque to transform into an electronic form and cancel the physical cheque simultaneously. It was not practically convenient and it is good that RBI realized its mistake and corrected the system.

Now any document which is an unconditional order to a banker affixed with digital signature can be called a Cheque in Electronic form.

However, it will be necessary for Banks to make an addition to their Account operational instructions to include instructions on how a  non standard format satisfying the definition given in Section 6 (2015 version) received by the Bank would be handled.

It may however be necessary to take note that the amendment does not make any changes in the “Presentment” of  or “Payment in Due Course” or “Collecting Banker/Paying Banker responsibilities” of an electronic cheque.

Now that the definition of the cheque in electronic form has been  added to the NI Act without further changes to other aspects of NI Act, Banks should be prepared to receive an e-mail from a customer attaching a digitally signed cheque in electronic from issued by another customer of the same Bank or another Bank and take a decision on what to do.

Presently the clearing system operates on truncated cheque system and there is no defined system for clearing the new Cheques in Electronic form. RBI needs to take action on introducing a system of clearance of such cheques.

Since the NI Act has not been further amended to re-define the concepts of endorsement in electronic form, holder in due course of an Cheque in electronic form, etc, there are several aspects of NI Act which needs to be interpreted for Cheques in Electronic form.

An interesting phase of development in electronic banking is now before us. There will be certain adverse implications of the amendment not being comprehensive enough. Probably, there will be a need for a quick further amendment to reduce the uncertainties created by the amendment-2015

Naavi

Copy of the Amendment Act

(More on the implications of the new NI Act will be discussed in these columns in the coming days. I invite comments and views from readers in this regard)