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Bills of Exchange

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  • Last Updated : 28 Feb, 2023
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A bill of exchange is a sort of written order or notification used in trading that obligates one party to make a certain payment to another party either immediately on demand or at a predetermined duration of time. A bill of exchange is used also in international trading to facilitate transactions between importers and exporters. 

What is a Bill of Exchange?

A bill of exchange is a written order which is primarily used to bind a party to pay a fixed amount of money to another party on demand or at a predetermined date. They are similar to checks and promissory notes; which are drawn by individuals or banks and are usually transferable by endorsements.

A bill of exchange is not a contract, the parties involved can use it to establish the terms and circumstances of a transaction, such as the terms of credit and the rate of interest that will accrue.

The primary aim and objectives of the bill of exchange are to allow the financier to have legal authority over both buyer and seller, provide the seller with finance by transferring their debts to a bank, and grant the credit for trade lawfully by making payments on prospective agreed dates. Typically employed in international trade, a bill of exchange commits one party to pay a specific sum of money to another party at a specified future time. According to Investopedia, bills of exchange are similar to checks and promissory notes.

Features of Bills of Exchange

  • Bill should be in written form.
  • Bill should be stamped and dated.
  • Bill should have the signature of the maker or drawer.
  • The drawer’s name needs to be mentioned.
  • There should be a fixed date on which the drawee has to pay its amount.
  • The amount should be definite on a bill of exchange.
  • It must include a request for payment in cash, not in kind.
  • The mentioned amount on a bill of exchange should be paid on-demand or for a fixed duration of time.
  • Bills of Exchange must have adequate stamp duty at a subscribed rate.

Parties of a Bills of Exchange

A Bills of Exchange involves three parties: 

  1. Drawee: This type of party pays the specific amount that is mentioned on the bill of exchange to the payee. 
  2. Drawer: This party is kind of a mediator between the drawee and the payee. This type of party collects the mentioned amount directly from the drawee, or this party can directly demand payment from the drawee. 
  3. Payee: This type of party collects the mentioned specific amount on the bill of exchange from the drawee.
  4. Acceptor: The drawee signs the Bill of Exchange as a mark of acceptance of terms and conditions, and becomes the acceptor of the Bill.
  5. Drawee in Case of Need: Another person’s name is mentioned in the Bill of Exchange, who would accept the Bill in case the original drawee does not accept the Bill and is known as Drawee in case of need.
  6. Endorser: If the holder of the bill endorses it to another person, he is called an endorser.
  7. Endorsee: This refers to the person to whom the Bill of Exchange is endorsed.

Advantages of Bills of Exchange

  • A Bill of Exchange is a legal document, and if the drawee somehow fails to make a payment, it will be easier for the drawer to recover the amount legally.
  • The bills of exchange give the debtors a full period of credit. Debtors cannot be compelled to make a payment before the deadline.
  • Credit sales and credit purchases are made possible by the bills of exchange.
  • The bill of exchange specifies the payment date, giving the creditor advance notice of when to anticipate payment (cash). Additionally, the debtor is aware of the deadline for making the payment or settlement.
  • The bill of exchange provides a simple method for transferring money from one location to another.
  • The bills of exchange are negotiable documents, number 5. Therefore, a bill of exchange may be transferred from one party to another in a debt settlement.

Types of Bills of Exchange

There are 9 types of bills of exchange that are mentioned below with their details:

Documentary Bill

The pertinent documents that attest to the legitimacy of the sale or other transactions between the seller and the buyer are annexed to this kind of bill of exchange. They are categorized into 2 types:

  1. Documents against payments: The payment is to be made to the bank when the buyer is presented with the draft and before any kind of shipping document is released.
  2. Documents against acceptance: The importer has to pay on a specified date and once the buyer has accepted the time draft, the bank releases the documents to the buyer.

Demand Bill

This invoice must be paid in full right away. The bill must be paid whenever it is presented because there is no set due date for it. This payment can be made as and when the bill is presented.

Usance Bill

These bills are time bound in which the payments must be paid within the given duration of time. It is also known as a time-bound bill.

Inland bill

They can only be paid in the country in which it is issued; they cannot be paid abroad. The foreign bill is the opposite of this one. For example, the bill of exchange drawn in India should be paid in India only.

Clean Bill

Because this bill lacks any supporting documentation, its interest rate is higher than that of the other bills. These bills levy a higher interest rate than other documented bills since no form of the document is involved in issuing them.

Foreign Bill

A bill that is paid outside of India. Different types of rules and regulations are implied on these bills as compared to other bills. Two types of foreign bills are:

  1. Export Bill- It is a bill of exchange that is drawn by an exporter for a party that resides outside Indian waters.
  2. Import Bill- A bill of exchange that is drawn by exporters outside India for Indian importers.

Accommodation bill

It refers to a situation where no trade transactions of the goods or the services take place but is used as an agreement between the two parties to give each other some financial assistance known as an accommodation bill.

Trade Bill

A bill of exchange is drawn with the intention of setting some credit trade transaction and is then accepted as a trade bill. It is mostly between buyer and seller, who allow the buyer to make a credit kind of purchase.

Supply Bill

This bill is taken by contractors and suppliers from government agencies. The goods are supplied by the government bodies by a contractor or supplier and the bill is drawn.

Bills of Exchange in India

Indian negotiable instruments act of 1881 governs the Bill of exchange in India. In Section 5 it appears as a negotiable instrument act. According to this, the order to pay is not “Conditional” and the payable amount is “certain”. Features like future interest and also rate of exchange are present, in case of default of the payment. The Reserve Bank of India and the Government of India are the entities that can draw a bill payable on demand to the person who is also the bearer of the bill.

Format of Bills of Exchange

Format of Bill of Exchange


The format of the Bill of Exchange includes the detail mentioned below:

  1. Name of the person who writes the bill and also authorizes the recipient to make the payment.
  2. The date on which the payment is to be made.
  3. Details of the recipient.
  4. Details of the payee.
  5. An identification number.
  6. Signature of the Drawer.

Importance of Bills of Exchange

  1. The constant change in the rate of exchange can negatively affect long-term trading associations. In such a situation a fixed term of payment laid by Bills of Exchange can give assurance.
  2. Legal Action serves as an important base for taking legal action in case a buyer fails to make payment on the due date.
  3. A Bill of Exchange can only be signed if the terms and conditions are read and accepted.
  4. Bill of Exchange is easily transferable including the endorsement and liabilities related to it.

What is a Promissory Note?

A written document (not a banknote or currency note) that carries a maker’s unequivocal promise to pay a certain sum of money only to, or at the direction of, a particular person, or to the document’s bearer, is referred to as a promissory note.

A promissory note, described as “an instrument in writing (not being a banknote or a currency note), signed by the maker,” contains an unqualified promise to pay a certain sum of money only to or at the direction of a particular person, or the instrument’s bearer. The Reserve Bank of India Act forbids the issuance of promissory notes payable to the bearer. As a result, the bearer of a promissory note cannot be its beneficiary.

Importance of Promissory Note

Negotiable Instruments Act of 1881, the meaning of promissory note is “an instrument in writing, containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person or bearer of the instrument. However, Reserve Bank of India Act, a promissory note payable to the bearer is illegal. Therefore, a promissory note cannot be made payable to the bearer”.

Components of Promissory Note

There are two parties to the Promissory Note:

  • Maker: The maker or also referred to as the drawer is an individual who makes or draws the promissory note with a promise to pay a certain amount specified in the promissory note.
  • Payee: The payee is the person in favor of the promissory note drawn to.

Example of Bills of Exchange

Mr. Shah Rukh Khan draws a bill on Mr. Salman Khan for 6 months for Rs. 1 Lakh rupees, payable to Mr. Amir Khan or his order on 22nd April 2017.

Mr. Shah Rukh Khan has ordered Mr. Salman Khan to pay Rs. 1 Lakh rupees. When the drawee accepts the bill, it becomes a bill of exchange. In the above example, Mr. Shah Rukh Khan is the drawer of the bill, Mr. Salman Khan is the acceptor, and Mr. Amir Khan is the payee.

FAQs on Bills of Exchange

Question 1: What is the importance of bills of exchange?


Bill of exchange has been used in case of international trade to both the importers as well as exporters to fulfill the transactions.

Question 2: What is the difference between a Bill of exchange and a cheque?


A cheque always involves a bank whereas a bill of exchange can involve anyone, including that of a bank.

Question 3: Why is the Bill of Exchange unconditional?


It is a unconditional order which is signed by the maker, directing the debtor to pay a certain amount of money on certaindate or on demand by the maker.

Question 4: Is the Bill of exchange secure?


Bill of exchange is a secure source of document since they are a legal type of document.

Question 5: When Interest is included in a bill of exchange?


Interest is added if the bill of exchange is not paid by a certain date, the rate of which should be specified on the instrument.

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