Instruments Negotiable by Custom: Hundis and Similar Instruments

Long before the Negotiable Instruments Act, Indian traders and bankers moved money across the subcontinent using hundis: written orders or promises in Indian languages, honoured by networks of merchants on the strength of reputation and custom. The Act did not abolish this system. Section 1 expressly saves local usages relating to instruments in an oriental language. This note explains what hundis are, their main kinds, how the law treats them, and the limits that modern law places on them.

1. What Is a Hundi?

A hundi is a negotiable instrument written in an Indian language, used for remittance, trade credit and short-term lending. Most hundis function as bills of exchange: a trader in one town directs a correspondent in another to pay a sum to a named person or the holder. Some function as promissory notes. Their force came from custom and mercantile reputation, and they were transferred by endorsement and delivery like their English counterparts.

2. The Statutory Saving (Section 1)

Section 1 provides that nothing in the Act affects any local usage relating to any instrument in an oriental language, but adds a proviso: such usages may be excluded by words in the body of the instrument indicating that the parties intended their legal relations to be governed by the Act. The consequences:

Custom first: a hundi is governed by the proved usage of the relevant trade or place, even where it departs from the Act.
Opting in: the parties can bring a hundi under the Act by appropriate words in the instrument.
Gaps filled by the Act: where no usage is proved on a point, courts have generally applied the provisions of the Act, as rules of justice, equity and good conscience.
Proof of custom: the party relying on a usage must prove it as a fact: that it is ancient, certain, reasonable and generally observed in the relevant trade.

3. The Main Kinds of Hundi

Darshani hundi: payable at sight on presentation, like a demand bill.
Muddati (miadi) hundi: payable after a fixed period, like a usance bill.
Shahjog hundi: payable only to a shah, a respectable and responsible person known in the market, who vouches for the holder; a check against fraud.
Namjog hundi: payable to a named person or his order.
Dhanijog hundi: payable to the owner (dhani), that is, to whoever holds it, much like a bearer instrument.
Firmanjog hundi: payable to order.
Dekhanhar hundi: payable to the presenter or bearer.
Jokhmi hundi: payable only if goods shipped arrive safely; the drawer bears the risk, giving it a character similar to insurance.

⚠ Note

Names and incidents of hundis varied between regions and trading communities. The table above describes the commonly recognised kinds, but in any dispute the particular usage must be proved.

4. Limits Imposed by Modern Law

The RBI Act restriction

Section 1 also saves the law on currency, now Section 31 of the Reserve Bank of India Act, 1934. That section prohibits any person other than the Reserve Bank (and the Central Government for its own notes and coins) from drawing, accepting, making or issuing any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand, or borrowing on such instruments. Cheques and drafts drawn on an account are permitted, and Section 31(2) separately bars any private promissory note payable to bearer. The rule protects the Reserve Bank's monopoly of currency issue: a hundi payable to bearer on demand would circulate like a currency note (Topic 55).

Other constraints

Stamp duty: hundis are bills of exchange or promissory notes for stamp purposes and must be duly stamped (Topic 55).
Foreign exchange and anti-money-laundering law: the informal transfer of money through hawala networks, sometimes loosely associated with hundis, is regulated or prohibited by the Foreign Exchange Management Act, 1999 and the PMLA.
Banking regulation: persons accepting deposits or carrying on banking business must comply with banking and RBI regulation.

5. Hundis Today

Formal banking, cheques, drafts and electronic transfers have largely replaced hundis in mainstream commerce. Hundis survive in some traditional trading communities and in internal trade credit. For students, they illustrate two important points: that negotiability can arise from custom, not only from statute; and that the Act was drafted to coexist with indigenous commercial practice rather than displace it entirely.

⚠ Key point

A hundi is an instrument in an Indian language, usually functioning as a bill of exchange, governed by local usage, which Section 1 saves unless the instrument shows an intention to be governed by the Act. Usage must be proved; where none is proved, courts apply the Act's principles. Common kinds include darshani (sight), muddati (time), shahjog (payable to a respectable person), namjog (named payee), dhanijog (holder), firmanjog (order), dekhanhar (presenter) and jokhmi (conditional on safe arrival of goods). Section 31 of the RBI Act bars hundis and notes payable to bearer on demand, except by the Reserve Bank; Section 31(2) further bars any private promissory note payable to bearer.

6. Related Topics and Provisions

Object, scope and scheme (Topic 1): Section 1
History of negotiable instruments law (Topic 2)
Meaning and kinds of negotiable instrument (Topic 3)
Stamp duty and the RBI Act restriction (Topic 55)