Gilt stripping would promote greater activity and give depth to the government securities market for zero-coupon bonds with a view to accessing long term savings of different investor segments, according to the report of the internal group of the Reserve Bank of India (RBI) on stripping of gilts.
However, the introduction of this concept will be delayed as it requires intensive computerisation of Public Debt Offices (PDO) in a high-tech environment with operational transparency.
According to the working group, the market needs introduction of Separately Traded Registered Interest and Principal of Securities (STRIPS) in order to hasten the process of diversification of investor base.
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"STRIPS are expected to access long term savings of individuals and investments from pension funds and insurance companies", says the report.
STRIPS would also act as an interest rate instrument to enable better asset-liability management.
Government-dated securities would only be eligible for stripping. Stripping of government securities would initially be assigned exclusively to primary dealers which would enable them to widen their clientele base. Gilt stripping would also give a boost to secondary market activity in government securities, according to the report.
STRIPS would only be made available in dematerialised form and all settlements would be made at PDO, Mumbai. Investors would be able to buy STRIPS directly from primary dealers or through stock exchanges in the secondary market. All investors who are currently eligible to invest in government stock would be eligible for holding STRIPS, says the report.
Requests for stripping and exchange would be received for specified acceptable amounts whereas stocks eligible for the same would be subject to certain quantitative restrictions and validation tests. However, no limits would be fixed on the amount or proportion of any gilt issue which could be stripped, says the report.
According to RBI, the zero-coupon and forward yield curve that would emerge due to the introduction of STRIPS would lend itself to the development of a swap and derivative market.