Reliance Power Ltd’s poor showing on its first day of trading has taken even the sceptics by surprise. Few had expected it to end the day at a steep discount to its issue price.
There are broader lessons here. Investors often believe that powerful institutions will maintain a floor on stock prices, not allowing them to fall beyond a point. It’s like a put option that allows them to bail out with few losses when their bets backfire.
As far as Reliance Power goes, investors believed in an Ambani put. And they assumed that the company would call upon large pools of friendly money to support the stock.
It’s time investors also realized that central banks too can be ineffective in maintaining safety nets to hold up equity prices when economies tank. Too many people have come to believe that the US Fed has a magic wand to help us defy gravity. In short, the Bernanke put can be as illusory as the Ambani put.