Stripping/Reconstitution in State Government Securities

## Report on RBI Circular IDMD.RD.S39010.18.060202526: Stripping/Reconstitution in State Government Securities **1. Executive Summary:** This report analyzes Reserve Bank of India (RBI) Circular IDMD.RD.S39010.18.060202526, dated June 12, 2025, which introduces the facility for Separate Trading of Registered Interest and Principal of Securities (STRIPS) in State Government Securities (SGS). This is an extension of the existing STRIPS facility available for Central Government dated securities. The core purpose is to enhance liquidity and provide more granular investment options in the SGS market. The key finding is that this amendment expands the scope of STRIPS, potentially making SGS more attractive to a wider range of investors. **2. Introduction:** This report provides an overview and analysis of RBI Circular IDMD.RD.S39010.18.060202526, focusing on the newly introduced facility for stripping and reconstitution of State Government Securities (SGS). The analysis is based solely on the information provided within the circular. **3. Policy Overview:** * This policy amends existing regulations to include SGS in the STRIPS program. The original policy being amended is the policy already allowing stripping/reconstitution of Central Government dated securities. * **Core Objective:** The core objective, inferred from the text, is to introduce STRIPS in State Government Securities (SGS), thereby facilitating separate trading of interest and principal components of these securities, enhancing liquidity and providing more investment options. **4. Background and Rationale:** The rationale for this amendment, as inferred from the text, is to extend the benefits of STRIPS, previously available only for Central Government securities, to State Government Securities (SGS). This is likely intended to improve the attractiveness and liquidity of SGS, potentially reducing borrowing costs for state governments and deepening the overall government securities market. The text explicitly mentions consultation with State Governments/Union Territories and feedback from market participants as the basis for this decision. **5. Key Provisions / Changes:** This circular introduces the following key changes: * **Expansion of STRIPS to SGS:** The primary change is the extension of the stripping/reconstitution facility to State Government Securities (SGS). This means market participants can now separate the principal and interest components of eligible SGS into individual STRIPS. * **Eligibility Criteria for SGS:** Eligible securities are fixed coupon SGS with a residual maturity of up to 14 years and a minimum outstanding amount of INR 1,000 crore on the day of stripping. These securities must also be eligible for Statutory Liquidity Ratio (SLR) requirements and be transferable. * **Access and Procedure:** Market participants with an SGL account with the RBI can directly place requests for stripping/reconstitution in the RBI's eKuber system. Gilt Account Holders place requests with their custodians who, in turn, will place the request on behalf of their constituents in eKuber. * **Nomenclature and ISIN:** The nomenclature and ISIN structure for STRIPS in SGS will be similar to those used for STRIPS in Central Government dated securities, following a prescribed format as detailed in the Annex. * **Applicability of Existing Regulations:** All other terms and conditions set out in RBI Notifications dated October 16, 2009, and April 10, 2018, and the circular dated March 25, 2010, apply, *mutatis mutandis*, to stripping/reconstitution in SGS. **6. Target Audience and Stakeholders:** Based on the provided text, the primary target audience and stakeholders include: * **Market Participants:** Entities holding SGL accounts with the RBI. * **Gilt Account Holders:** Investors holding gilt accounts with custodians. * **Custodians:** Entities maintaining CSGL accounts with the RBI on behalf of their constituents. * **State Governments/Union Territories:** As issuers of SGS, they are indirectly affected through the potential impact on borrowing costs and market demand. **7. Implementation Aspects (Inferred):** * **Responsible Agency:** The Reserve Bank of India (RBI) is the responsible agency, overseeing the implementation and operation of the STRIPS facility through its eKuber system. The Internal Debt Management Department (IDMD) is involved. * **Procedure:** The process involves market participants or their custodians submitting stripping/reconstitution requests through the eKuber system. * **Timelines:** The stripping/reconstitution facility in SGS is effective from the date of the circular (June 12, 2025). **8. Expected Outcomes / Impact of Changes:** The likely intended outcomes of these changes include: * **Increased Liquidity of SGS:** By allowing separate trading of principal and interest components, the amendment should enhance the liquidity of SGS. * **Wider Investor Base:** The more granular investment options offered by STRIPS could attract a broader range of investors to the SGS market. * **Improved Price Discovery:** The separate trading of principal and interest components may lead to more accurate price discovery for SGS. * **Reduced Borrowing Costs for States:** Increased demand and liquidity in the SGS market could potentially lower borrowing costs for state governments/union territories. **9. Conclusion:** RBI Circular IDMD.RD.S39010.18.060202526 significantly expands the scope of the STRIPS program to include State Government Securities (SGS). This amendment is expected to enhance the liquidity and attractiveness of SGS, providing more granular investment options for market participants. By mirroring the STRIPS framework already in place for Central Government securities, the RBI aims to deepen the overall government securities market and potentially reduce borrowing costs for state governments.

Key Entities Referenced