HUNDI SYSTEM
1.Context
With its registration under the FCRA (Foreign Contribution Regulation Act) under “suspension” for the past three years, the country’s richest religious Trust, the Tirumala Tirupati Devasthanams (TTD), faces an unprecedented situation: a mounting stockpile of foreign currency in cash anonymously dropped as “hundi” collections which cannot be deposited in its designated bank account.
2. About Hundi
Hundis refer to financial instruments evolved on the Indian sub-continent used in trade and credit transactions.
They were used as the following:
- as remittance instruments (to transfer funds from one place to another),
- as credit instruments (to borrow money [IOUs]),
- for trade transactions (as bills of exchange).
Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Hundis, being a part of the informal system have no legal status and are not covered under the Negotiable Instruments Act, 1881
Though normally regarded as bills of exchange, they were more often used as equivalents of cheques issued by indigenous bankers
Hundis have no legal status and are not covered by the Negotiable Instruments Act of 1881 because they are part of the informal system
3. Difference between 'Hundi and 'Hawala'
- Hundi is an alternative remittance system that operates outside formal banking channels
- The word Hawala has its origin in the Arabic language which means transform or change
- It is defined as a bill of exchange or a promissory note or a travelers check
- Hundis have been in usage in India from ancient times but usages are not uniform and they are different at different places.
- Being a part of the informal system, Hundi is not covered under the Negotiable instrument Acts 1881. Therefore Hundi as a financial instrument is not treated as a negotiable instrument.
- The Hawala or Hewala (meaning transfer or trust in Arabic) word prevalent in the Middle East and North African countries is equivalent to the word Hundi in India. Hawala is used as an informal money transfer system by money brokers in those countries
4. Is Hundi Illegal?
According to an age-old tradition of business transactions in India, Hundi is a negotiable instrument which is available in various vernacular languages in the country
Immigrants mostly use hundi to send their earned money to their country
For the past few centuries, due to less complexity, the hundi business has been quite popular worldwide despite being illegal
Section 2(1)(h) of FCRA, 2010, "foreign. contribution" means the donation, delivery or transfer made by any. foreign source
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For Prelims: FCRA, Hawala, Hundi System, Black Money
For Mains:
1.Whether foreign remittances received from a relative are to be treated as foreign contribution as per FCRA, 2010?
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Previous Year Questions:
1.Which of the following phrases defines the nature of the ‘Hundi’ generally referred to in the sources of the post-Harsha period?
A. An advisory issued by the king to his subordinates
B. A diary to be maintained for daily accounts
C. A bill of exchange
D. An order from the feudal lord to his subordinates
Answer (C)
Hundis refer to financial instruments evolved on the Indian sub-continent used in trade and credit transactions
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Source: rbi
