It's used to create mutually related types. Usually in F#, you need to forward declare each type before you use it - but this isn't always possible, for example when you need to introduce a cyclic dependency on two or more types.
In your example, if you defined Definition with type rather than and, you wouldn't be able to compile the definition of Grammar, unless you switched the order in which they're defined.
The code example you've posted isn't exactly a good one, because the mutual relation isn't necessary in it - you can change the order. (Unless there were some more types defined further down which depended on the above).