An interesting development has taken place in bond market in India. The RBI has allowed ‘stripping’ of bonds from April 1, 2010. For the uninitiated, STRIPS, or Separate Trading of Registered Interest and Principal of Securities (STRIPS) refers to a process of separating principal and coupon payments on bonds and turning them into zero-coupon securities.
The advantages that accrue from STRIPS is multiple – One, it allows corporate to plan their payments and receivables for required amount per the STRIP that they buy/ sell. Two, it allows for a more accurate price determination in the market as the strips provide liquidity. Three, there is no reinvestment risk arising from coupons.
To start with, here is what RBI has allowed-
1. 1. Stripping for bonds with coupon or maturity dates of Jan. 2 and July 2, irrespective of the year of maturity.
2. Minimum amount to be submitted for stripping will be INR10 million and subsequently multiples thereof
3. Reconstitution, which is the reverse of stripping, allowed. That means the coupon and the principal are reassembled into the original government security.
4. The stripped financial instruments will be reckoned as eligible government securities for statutory liquidity ratio (SLR) purposes.
5. RBI will not charge any fees for stripping/reconstitution of Government Securities.
2. Minimum amount to be submitted for stripping will be INR10 million and subsequently multiples thereof
3. Reconstitution, which is the reverse of stripping, allowed. That means the coupon and the principal are reassembled into the original government security.
4. The stripped financial instruments will be reckoned as eligible government securities for statutory liquidity ratio (SLR) purposes.
5. RBI will not charge any fees for stripping/reconstitution of Government Securities.
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