The Reserve Bank of India on Thursday said it proposes to remove the restrictions on the securities eligible for stripping/reconstitution, as well as the requirement of authorisation of all requests in this regard by Primary Dealers (PDs).
This move, according to the central bank, is aimed at meeting the diverse needs of investors and making Separate Trading of Registered Interest and Principal of Securities (STRIPS) more aligned with market requirements
What is stripping?
Stripping is a process of converting periodic coupon payments of an existing government security into tradeable 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
Reconstitution is the reverse of stripping, where the coupon strips and principal strips are reassembled into the original government security.