Q-7: Write a note on the negotiable and non-negotiable securities? OR Discuss the various forms of negotiable securities?
Ans: NEGOTIABLE SECURITIES
Those securities, which are transferable by delivery or negotiable by endorsement are called negotiable instrument. The new owner has a clear title to the securities, provided the takes those in good faith or for value. Negotiable instruments like note, cheque or bill of exchange when transferred to its transferee. The transferor is free from the equities. The bank can safely advance the loans against fully negotiable securities.
KINDS OF NEGOTIABILITY
There are three kinds of it.
1. NEGOTIABILITY BY STATUTE
Certain instruments like cheque, bill of exchange or promissory note are those instruments, which are given negotiability by statute law. It is an important kind of negotiability.
2. NEGOTIABILITY BY CUSTOM
Treasury bills, Bearer Bonds, script to bearer, share warrants payable to bearer are negotiable by mercantile customs and recognized by the law.
3. NEGOTIABILITY BY ESTOPPEL LAW
In certain cases instruments become transferable by the law of estoppels warding to the principle are estoppels from denying its negotiability against a transferee. Who has taken it in good faith and for value?
In this case the banker gets the equitable title only, which too is fraught with many risks. There are two kinds of non-negotiable securities. Registered Share and Inscribed Stocks.
1. REGISTERED SHARES
Those shares, which are issued by the joint stock companies under their seals, are called registered shares.
2. INSCRIBED STOCKS
The stocks, which are recorded in the books kept with the Government or with the bank or agent, are called inscribed stocks. The holders of these stocks are issued receipt of acknowledgment. These receipts can be used as evidence, before advancing such loans against such stocks must transfer to his name.
METHODS OF MORTGAGING SHAKES
There are two methods:
1. LEGAL MORTGAGE
When fully paid shares are formally transferred to the name of bank or his nominee is called legal mortgage. Generally, borrower hesitates to offer the shares against the loan because he has to bear the expenses and to face the many problems.
2. EQUITABLE MORTGAGE
Bank gets the shares as a security from the borrower with or without the deposit of memorandum. Following are the main defects in it.
- The Stock exchange may have a lien over the shares-
- These can be defeated by prior equitable title.
- The bank remains ignorant about the fluctuations of prices of shares.
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