The Reserve Bank of India yesterday unveiled draft guidelines on stripping/reconstitution of government securities.

In its Annual Policy Statement for the year 2008-09, the central bank had indicated that it has been decided to introduce STRIPS (separate trading of registered interest and principal of securities) in government securities.

The move is aimed at improving the debt market for retail investors as well as institutions like insurance firms, and bond houses.

Stripping is a process of converting periodic coupon payments of an existing government security into tradable zero-coupon securities, which will usually trade in the market at a discount and are redeemed at face value.

Thus, stripping a five-year security would yield 10 coupon securities (representing the coupons), maturing on the respective coupon dates and one principal security representing the principal amount, maturing on the redemption date of the five-year security.

Reconstitution is the reverse of stripping, where, the coupon STRIPS and principal STRIPS are reassembled into the original government security.

As per the draft, any entity, including individuals, holding balances of government securities can strip or reconstitute these securities. However, a participant desirous of stripping/reconstituting his balance of eligible government securities should approach a primary dealer (PD) with a request for stripping/ reconstitution. It also notified that the party should have a demat account for this purpose.

 To begin with, all outstanding securities issued by the government of India with coupon dates as 2nd of January and July will be eligible for stripping/reconstitution, and will be tradable only in the OTC market.

Also, the RBI has fixed the minimum amount of securities that needs to be submitted for stripping/reconstitution at Rs.1 crore (face value) and its multiples.

STRIPS will be reckoned as eligible government securities for SLR purposes and retain all the characteristics of a government security, the RBI pointed out in the draft.

They will be eligible securities for market repo as well as repo under LAF of RBI but with appropriate haircut.

RBI will finalise and issue the guidelines after examining the feedback received, the bank said in a press release yesterday.