Demand Promissory Note

Definition

Before fintech apps and digital loan agreements, there was the promissory note, and it's still very much alive. A Demand Promissory Note is exactly what it sounds like: a written, signed, unconditional promise by one party to pay a specific sum to another party whenever demanded. No conditions attached, no future date specified. Just "I promise to pay you Rs X on demand." The Negotiable Instruments Act, 1881, governs these in India, requiring the note to be in writing, signed by the maker, containing an unconditional promise, specifying a definite sum, and naming a specific payee.

Banks love DPNs. When your company takes a working capital loan, overdraft facility, or cash credit line, the bank almost certainly has you sign a demand promissory note alongside the loan agreement and hypothecation deed. Why? Because if you default, the DPN gives the bank a clean, enforceable claim. The limitation period is three years from the date of demand under the Limitation Act, 1963, which is why banks periodically ask borrowers to sign fresh DPNs. They're resetting the clock on enforceability. It's standard practice, even if borrowers don't always understand why.

Here's where people get tripped up: stamp duty. A DPN must be stamped per the applicable state's schedule under the Indian Stamp Act, 1899. Unstamped or inadequately stamped? The note becomes inadmissible as evidence in court. For a lender, that's catastrophic, your primary recovery document is suddenly worthless in litigation. In inter-company lending between group companies (a common structure in Indian business families), DPNs backed by proper board resolutions and transfer pricing documentation keep the arrangement compliant with both the Companies Act, 2013, and the Income Tax Act, 1961.

Key Points

• A DPN is a written, unconditional promise to pay a specified amount on demand, no future date, no conditions.
• Governed by the Negotiable Instruments Act, 1881: must be in writing, signed, and naming a specific payee.
• Banks routinely collect DPNs as security documentation alongside loan agreements and hypothecation deeds.
• The three-year limitation period (from date of demand) is why banks periodically ask you to sign fresh DPNs.
• Inadequate stamp duty makes a DPN inadmissible in court: lenders lose their primary recovery tool.
• Inter-company DPNs need board resolutions and transfer pricing documentation to satisfy Companies Act and Income Tax Act requirements.