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 he takes them in good faith or for value. Negotiable instruments like note, cheque or bill of exchange when transferred to its transferee. The transferee 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 Estoppels’ Law:-
In certain cases instruments become transferable by the law of stopped warding to the principle is stopped from denying its negotiability against a transferee. Who has taken it in good faith and for value.
In this case the banker gets an equitable title only which too is fraught with many risks. There are two kind of nonnegotiable securities, registered share and inscribe 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 holder of these stocks are issued receipt of acknowledgement. These receipts can be used as evidence. Before advancing the loans against such stocks must transfer to his own name.
METHODS OF MORTGAGING SHARES:-
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 :
1. The stock exchange may have a lien over the shares.
2. These can be defeated by prior equitable title.
3. The bank remains ignorant about the fluctuations.
4. If the shares are not registered in time.