Category Commerce

         Negotiable instruments are those that can be converted into liquid cash under certain conditions like that of a cheque.

         The transactions of these instruments in our country are regulated by a law titled the Negotiable Instruments Act, framed in the year 1881. According to this, the three negotiable instruments that can be used are – a promissory note, a cheque, or a bill of exchange.

         The Act is quite important to our banking sector as it gives statutory definitions for these three instruments as well as the conditions under which they can be used. Besides, a certain section of the Act – Section 138 – is a step towards justice.

         As per this section, if a cheque issued by someone is bounces due to an insufficient amount in his account, it is an offence. This section inserted later in 1988 was a major change in banking, because till then, there were no provisions to restrain a person from issuing a cheque without sufficient money in his account. 

          This concept surely seems familiar to all of us, as it is now filling newspapers and newsrooms across the country.

          Demonetization is the legal act of making a currency invalid, and replacing it with a new one. In other words, it could be the removal of a particular currency, say Rs 500, from circulation, and issuing a new one of equivalent value or denomination. Demonetization also happens when the currency of a nation changes.

          Many instances of demonetization have taken place in the world. One classic example would be the withdrawal of currencies in countries under the European Union to replace them with the euro. However, it was not a sudden and unexpected move. People in those countries were given enough time to convert the older currencies to the euro in order to ensure a smooth transition.

           Such a move could definitely affect people, but as a process, demonetization has proved effective in controlling counterfeiting and black money in any country. 

        Many countries in the world have faced the process of demonetization at different periods. Some succeeded and others ended up in failure. One such failed attempt happened in the erstwhile Soviet Union in 1991.

        Under the leadership of Mikhail Gorbachev, a sudden monetary reform was initiated on January 22nd. At around 9 pm, televisions announced the President’s withdrawal of the 50 and 100 ruble banknotes from circulation. The move was to control black money and counterfeit. However, it created a stir in the public. Some were able to make exchanges for the currencies with them but most of the people couldn’t, because the exchange had many limitations. There were only three days given for exchange, and only 1000 rubles were to be given to a person.

        Although the bid to control malpractices succeeded to an extent, demonetization had a huge negative effect. Within months, consumer prices increased, and people started losing jobs. Within eight months, Gorbachev faced a coup.

        The monetary reform of 1991, as it is popularly called, later led to a redenomination of the ruble in 1998.

Australia is a country that once successfully demonetized its currency. In 1996, the country replaced its banknotes with their plastic or polymer equivalents. The move was intended to fight financial malpractices that were growing rampant.

            Like all other countries, Australia too, was facing severe problems caused by counterfeit currencies and black money. It was then that the Reserve Bank of Australia developed polymer notes with better security features.

            The initial steps of the process began in 1988, when the bank issued a commemorative 10 – dollar polymer bank note. Later in 1996, all the existing currency notes were made invalid and the new ones entered circulation. They came in all denominations from 5 to 100 dollars.

            As the withdrawal and replacement happened in various steps, it was not too difficult for the country to switch to a new system.

            In spite of the initial costs incurred to manufacture the new notes, the move was successful and it also helped in making the country business friendly.

            The concept of demonetization is not something new in modern India as it had gone through the same twice before – in 1946, and 1978.

            Did you know that we once had the banknotes of Rs 10,000? Those notes were the largest currency denomination printed by our central bank, the Reserve Bank of India. It happened in 1938 and in 1954.

            The year before the country gained independence, banknotes in denomination of 1000 and 10,000 were taken out of circulation. This move that came in January 1946 was as part of the country’s effort to prevent black money. It is said that the invalid notes were sold or exchanged at 60 to 70 per cent of their price. The sudden withdrawal of the currencies had become a ‘death blow’ to tax evaders.

            However, those banknotes along with that of Rs 5000 were later reintroduced in 1954. The second instance of demonetization in modern India happened in January 1978. The government headed by Morarji Desai, withdrew from circulation notes of Rs 1000, Rs 5000 and Rs 10,000. The reason behind this was to stop the circulation of counterfeit currencies.

            The currencies of Rs 500 and Rs 1000, however, returned to circulation later. In 1987, the Rs 500 note was reintroduced and the latter, in 2000.

You might have heard of the recent withdrawal of higher denomination currencies in the country. This happens to be the third instance of demonetization in modern India. With this, old banknotes of Rs 500 and Rs 1000 have become invalid and the government, with the help of the Reserve Bank of India has started issuing new currency notes in the denomination of Rs 500 and Rs 2000.

       As a result of this major move, banknotes belonging to the Mahatma Gandhi series that we now use will be replaced by the Mahatma Gandhi new series. However, the notes of Rs 100, Rs 50, Rs 20, Rs 10 and Rs 5 will remain unchanged.

       The announcement of demonetization made by the Prime Minister Narendra Modi on the night of October 8 over television has been considered historic by many people.

       In what is regarded as the most important cleanliness drive in the country, the sudden step is expected to curb counterfeit notes used for various criminal activities like terrorism, and corruption. The move is also expected to make the country more digital.