CONSTRUCTION SECTOR IN INDIA Chander Agarwal Chander Agarwal Roll#22A Roll#22A

Indian Economy Indian economy is the fourth largest economy in terms of purchasing power parity. Indian economy is the fourth largest economy in terms of purchasing power parity. GDP growth rate accelerated from 7.5% in to 9.2% in GDP growth rate accelerated from 7.5% in to 9.2% in GDP growth rate estimated at 7.8% in GDP growth rate estimated at 7.8% in

Contents Indian Economy : Current Status of Foreign Direct Investment in Real Estate Sector in India, its Growth and Key Drivers 2 Demand of Residential, Commercial,Retail and Hotel Spaces with Major Players In the Market 1 3 Tax environment – Law Models,Guidelines for Investment for Developers & Investors 4 Challenges facing Real Estate sector & future trends

Current Status of FDI India continues to be a favorite foreign direct investment (FDI) destination as FDI trebled to US$ 11.4 billion in the first half of 2007, from US$ 3.6 billion in India continues to be a favorite foreign direct investment (FDI) destination as FDI trebled to US$ 11.4 billion in the first half of 2007, from US$ 3.6 billion in India has ranked second in capital market inflows and fourth in mergers and acquisitions in Asia Pacific, with transactions worth US$ billion reported in the first eight months of calendar 2007, according to Thomson Financial.. India has ranked second in capital market inflows and fourth in mergers and acquisitions in Asia Pacific, with transactions worth US$ billion reported in the first eight months of calendar 2007, according to Thomson Financial.. With an estimated intangible assets component of 74 per cent (as proportion of total enterprise value), India is just behind US (75 per cent) and Switzerland (74 per cent), according to Global Intangible Tracker 2007, the most extensive global study ever on intangibles assets by the London-based Brand Finance Institute. With an estimated intangible assets component of 74 per cent (as proportion of total enterprise value), India is just behind US (75 per cent) and Switzerland (74 per cent), according to Global Intangible Tracker 2007, the most extensive global study ever on intangibles assets by the London-based Brand Finance Institute. Indian firms listed in the US have a reason to smile - their total market value has grown by close to US$ 20 billion since the beginning of Indian firms listed in the US have a reason to smile - their total market value has grown by close to US$ 20 billion since the beginning of 2007.

Growth in Real Estate 1.1% of the GDP constitutes FDI in Real Estate Sector. 1.1% of the GDP constitutes FDI in Real Estate Sector. Return in India range from 12-15% compared to 3-4% in advance countries Return in India range from 12-15% compared to 3-4% in advance countries Merrill Lynch forecasts that Indian Real Estate Sector shall grow from US 12Billion in 2005 to US $ 90 Billion by 2015 Merrill Lynch forecasts that Indian Real Estate Sector shall grow from US 12Billion in 2005 to US $ 90 Billion by 2015

Growth in Real Estate US $ 320 Billion investment is required in next 5 years in infrastructures US $ 320 Billion investment is required in next 5 years in infrastructures Real Estate Sector is registering an annual growth rate of 30% Investment of US $ 16 billion expected over the next 5 to 6 years. Real Estate Sector is registering an annual growth rate of 30% Investment of US $ 16 billion expected over the next 5 to 6 years. Credit to the Housing Sector has continued to be strong and benefited from low interest rates and incentives. Credit to the Housing Sector has continued to be strong and benefited from low interest rates and incentives.

Demographics and Development 1. Global urban population is expected to grow from 2.86 billion in 2000 to 4.98 billion in 2030, of which high-income nations will account for only 28 million out of the expected increase of 2.12 billion (Source: UN-Habitat 2004) 2. In India, 19.9% (in 2001 that translated to ~200 million) of total population lived in our urban areas, and contributed 38.9% of GDP.  A simplistic but linked projection based on the two statements above seems to indicate at least 500 million of India’s 2030 population could be urban, but only by assuming that the rural-to- urban population shift remains static, and zero percent population growth!

State of the Real Estate Market The sector remains largely urban & semi-urban, and again, largely unorganized The sector remains largely urban & semi-urban, and again, largely unorganized There are less than a dozen developers in the country who are able to deliver relative quality, and operate in niche territories, although a few amongst them are seeking to expand their geographical footprint. There are less than a dozen developers in the country who are able to deliver relative quality, and operate in niche territories, although a few amongst them are seeking to expand their geographical footprint. The sector has recently shown explosive growth, and this growth was not caused by increased FDI The sector has recently shown explosive growth, and this growth was not caused by increased FDI Nevertheless, many (incl. FIIs’) feel that prices are overly rich and unsustainably high Nevertheless, many (incl. FIIs’) feel that prices are overly rich and unsustainably high

State of Real Estate Market-2 A key question: Is relative pricing predominantly set by investors or end users? Industry sources say that end user buying has gradually increased over the last ten years (to 60+% from 35%) A key question: Is relative pricing predominantly set by investors or end users? Industry sources say that end user buying has gradually increased over the last ten years (to 60+% from 35%) India could do with a clutch of quality foreign developers to offer much needed competition and improve the quality of our (perhaps already improving) residential and office offerings that mostly come to us from less than a handful of Indian developers India could do with a clutch of quality foreign developers to offer much needed competition and improve the quality of our (perhaps already improving) residential and office offerings that mostly come to us from less than a handful of Indian developers Many of us are probably just as surprised as others elsewhere how tenets of basic urban planning especially related to primary infrastructure are so casually ignored. This is true in both tier-1 and tier 2/3 cities Many of us are probably just as surprised as others elsewhere how tenets of basic urban planning especially related to primary infrastructure are so casually ignored. This is true in both tier-1 and tier 2/3 cities

Growth Drivers for Real Estate The robust growth in IT sector has pumped up the growth in Real Estate Sector. An estimated 70% of new construction is to cater IT Sector. The robust growth in IT sector has pumped up the growth in Real Estate Sector. An estimated 70% of new construction is to cater IT Sector. Retail Sector is also growing at a fast pace. India is ranked 5 th in the list of 30 emerging retail markets and 20% growth rate is predicted for the Organized Retail segment by Retail Sector is also growing at a fast pace. India is ranked 5 th in the list of 30 emerging retail markets and 20% growth rate is predicted for the Organized Retail segment by Spiraling demand for hotel rooms has brought boom in Hotel Industry The demand supply imbalance will continue to be over 50% beyond 2010, generating substantial business for real estate. Spiraling demand for hotel rooms has brought boom in Hotel Industry The demand supply imbalance will continue to be over 50% beyond 2010, generating substantial business for real estate.

Growth Drivers for Real Estate Rapid Urbanization Urban Population expected to touch 590 million by 2030 Decreasing Household size: Average H/h size fell from 5.4 in 1981 to 5.1 in 2000 Increasing working age population (Almost 64% in age group) Market Structure Highly fragmented and unorganized Regional players are expanding to achieve a Pan-India presence

FDI in Real Estate Till recently, FDI in real estate was restricted to development of industrial parks, hotels, integrated townships and SEZ’s. On March 3, 2005, Government of India replaced the integrated township policy to permit FDI upto 100% in townships, housing, built-up infrastructure & construction - development projects, under automatic route (Press Note 2 (2005 series))  townships  housing  commercial premises  hotels  resorts  hospitals FDI is now permitted in:  industrial parks  resorts  educational institutions  recreational facilities  SEZ’s, etc

Growth Potential & Expected Trends Increase in urbanization & working population High disposable incomes & aspiration levels Easier access to finance Fiscal incentives on house loans India accepted as most attractive destination for IT & BPO services Residential Office Space Key demand drivers Retail Entry of global brands Organised retailing only 2% of total retail industry India ranked as second most attractive retail destination by AT Kearney Hotels Increased business travel – both domestic & foreign due to buoyant economic growth & growing FDI 2004 saw record tourist arrivals of 3 mn. By 2020, India is expected to be a leading tourist destination in South Asia with more than 8 mn tourist arrivals  Recent opening up of sector to foreign investment  Foreign developers and investors will be making their presence felt, largely through joint venture arrangements  Improved environment for debt funding  Increasing institutionalization of real estate investment market

Demand of Spaces Integrated Town-ships Integrated Town-ships Residential Spaces Residential Spaces Commercial Spaces: Offices Commercial Spaces: Offices Retail Spaces: Malls & Shops Retail Spaces: Malls & Shops Hospitality Spaces: Hotel Rooms Hospitality Spaces: Hotel Rooms

Integrated Town Ships Central Government has sanctioned setting of such Integrated townships at Central Government has sanctioned setting of such Integrated townships at Gurgaon-Haryana Gurgaon-Haryana Hyderabad-AP Hyderabad-AP Mohali-Punjab Mohali-Punjab Chennai-Tamilnadu Chennai-Tamilnadu Banglore-Karnataka Banglore-Karnataka Kolkata-West Bengal Kolkata-West Bengal More Town ships are under cosideration More Town ships are under cosideration

Residential Space Increasing income levels: Average salary levels increased by 13.5% in 2005 Easier access to mortgage, long tenure loans and tax incentives Source : National Institute of Urban Affairs

Residential Space Contd…. Segmentation Broad categories include Low cost/Mid market/ Premium housing Luxury segment growing annually at 25-30% Outlook Current shortage close to 25 million units, predominantly in middle and low income group Expected to grow at CAGR of 18-19% up to by 2010 Mortgage finance will be increasing penetration into the urban housing finance sector Annual Home Loan Disbursal from Formal Sector and Commercial Banks, HFCs & Coop Institutions Source: The Working Committee of the 11th Plan ( )

Commercial Space Growth Drivers Rapid Urbanization: Urban Population expected to touch 590 million by 2030 Decreasing Household size: Average H/h size fell from 5.4 in 1981 to 5.1 in 2000 Increasing working age population (Almost 64% in age group) Segmentation Commercial Space can be classified broadly into Grade A and B Business activity shifting from CBD to SBD and from Tier I to Tier II & III cities

Retail Space Segmentation Organized retail contribution to the retail industry grew from 2% in 2003 to 4.4% in 2006 International retailers are present through franchisee route Outlook FDI norms are likely to be relaxed in next 2-3 years Organized retail expected to grow at around 30% Share of organized retail, by sales expected to reach 10% by 2010

Hospitality Space Growth Drivers More than 4.4 million international visitors and 430 million domestic tourist visits in 2006 Low cost airlines India requiring recognition as a medical tourism destination International events such as Commonwealth Games Emergence of India as a MICE destination Market Structure Entry of several corporate houses such as Reliance Existing hotel operators are scaling up their operations

Hospitality Space Developers are tying up with major international chains Developers have set up RE funds to finance their Ventures Segmentation Classification on the basis of Star Rating of 1 to 5 star deluxe 100,000 hotel rooms in India in various categories, Five Star and Five Star Deluxe contributing close to 30,000 rooms

Budget Hotels Indian Railways plans to build over 100 budget hotels on its vacant land near railway stations across the country. It wants to cater to people who travel by trains extensively and provide them facilities for a comfortable stay. This is keeping in view the fact that the railway traffic is growing over 17 to 18 per cent. Construction of budget hotels on Railways’ landwould be undertaken by IRCTC under the Public-Private Partnership scheme.

Major Players Real Estate Developers Real Estate Developers Indian:DLF,Unitech,Universal,Parsvanath, Omaxe Indian:DLF,Unitech,Universal,Parsvanath, Omaxe Foreign: Ascendas, Emmar Group, Salem Group,CESMA International,LJ Hooker Foreign: Ascendas, Emmar Group, Salem Group,CESMA International,LJ Hooker REVFs/REMfs REVFs/REMfs Indian: IDFC,Kotak Mahindra,Dewan Housing,HDFC Indian: IDFC,Kotak Mahindra,Dewan Housing,HDFC Foreign : Black Stones, Dawnay Day, Savvils,Macquaries Bank etc. Foreign : Black Stones, Dawnay Day, Savvils,Macquaries Bank etc.

FDI in Real Estate :Law 100% FDI is allowed under automatic route in townships, housing, built-up infrastructure and construction development projects (including but not restricted to housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities and regional level infrastructure. 100% FDI is allowed under automatic route in townships, housing, built-up infrastructure and construction development projects (including but not restricted to housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities and regional level infrastructure. FDI upto 51% is allowed through FIPB route in single brand retail shops. FDI upto 51% is allowed through FIPB route in single brand retail shops.

FDI in Construction & Development : Guidelines Developmen t criteria  Minimum 10 hectares/ 25 acres area to be developed for serviced housing plots  For construction-development projects, minimum built-up area of 50,000 sq mts prescribed  In case of a combination project, any one of above two conditions would suffice Investment conditions  Minimum capitalization of US$ 10 million for wholly owned subsidiaries & US$ 5 million for joint ventures with Indian partners  Funds to be brought in within 6 months of commencement of business  Original investment cannot be repatriated before a period of 3 years from completion of minimum capitalization. Investor may be permitted to exit earlier with prior Government approval FDI backed projects would be accorded national treatment at par with local developers - State Government’s/ Municipal bodies will now approve projects for construction- development involving foreign investment. * As per Press Note 2 (2005 series) dated March 3, 2005 Other conditions  At least 50% of project must be developed within of 5 years from date of obtaining all statutory clearances  Investor not permitted to sell undeveloped plots**  Project to conform to norms & standards laid down by respective State authorities  Investor responsible for obtaining all necessary approvals as prescribed under applicable rules/bye-Iaws/regulations of the State  Concerned Authority to monitor compliance of prescribed conditions by developer ** “Undeveloped” plot means where roads, water supply, street lighting, drainage, sewerage & other conveniences have not been made available. It will be necessary that investor provides this infrastructure & obtains a completion certificate prior to sale of serviced housing plot

FDI in Industrial Parks & Hotels  FDI upto 100% permitted under automatic route in Industrial Parks (ie Technology Parks, Biotech Parks), approved by State Government  Approval from Department of Industrial Policy & Promotion under Industrial Park Scheme, 2002 is only for availing 100% tax holiday Industrial Parks Hotels & Tourism  100% FDI permitted in Hotels & Tourism under automatic route  FDI in Hotels should not be governed by Press Note 2 (2005 series) – clarification required

Special Economic Zones :SEZ SEZ is a specifically delineated duty free enclave and is deemed to be foreign territory for the purpose of trade operations and duty/tariffs. To augment infrastructure facilities for export production it has been decided to permit the setting up of SEZ in public, private, and joint sector or by State Governments of India. SEZ is a specifically delineated duty free enclave and is deemed to be foreign territory for the purpose of trade operations and duty/tariffs. To augment infrastructure facilities for export production it has been decided to permit the setting up of SEZ in public, private, and joint sector or by State Governments of India. SEZ Act 2005 and SEZ rules 2006 have come into effect which enable India to leverages SEZ, like many East Asian economies. And to push growth and investment to higher levels. SEZ Act 2005 and SEZ rules 2006 have come into effect which enable India to leverages SEZ, like many East Asian economies. And to push growth and investment to higher levels. Details can be had from Details can be had from

SEZ – The Next Frontier SEZ – The Next Frontier 100% FDI permitted under automatic route for setting up of SEZs Envisaged “Pillars” of the SEZ concept: A bundle of fiscal incentives to zone investors, zone occupants and zone suppliers An overall zone governance that provides for efficient unhindered business activities particularly for export oriented enterprises Superior infrastructure of global standards Special Economic Zones Fiscal IncentivesRegulatory Freedom and Hassle-free Business Environment World Class Infrastructure  SEZ Act and rules implemented  Provides single window approval mechanism for developers & units in SEZs  Provides fiscal concessions for SEZ units/ developers - exemption from customs duty, excise, Cess, service tax, income tax, stamp duty (under Indian Stamp Act, 1899), etc  Expected to trigger significant inflow of funds in infrastructure, increase production capacity and creation of new employment opportunities The Concept Recent Developments

Incentives & Facilities for SEZs. The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment include:- The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment include:- Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.

Incentives & facilities : SEZs Exemption from State sales tax and other levies as extended by the respective State Governments. Exemption from State sales tax and other levies as extended by the respective State Governments. The major incentives and facilities available to SEZ developers include:- The major incentives and facilities available to SEZ developers include:- Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA. Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA. Income Tax exemption on export income for a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. Income Tax exemption on export income for a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.

Incentives & facilities Contd. Exemption from minimum alternate tax under section 115JB of the Income Tax Act. Exemption from minimum alternate tax under section 115JB of the Income Tax Act. External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels. External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels. Exemption from Central Sales Tax Exemption from Central Sales Tax Exemption from Service Tax. Exemption from Service Tax. Single window clearance for Central and State level approvals. Single window clearance for Central and State level approvals.

SEZ Approval Status Total Investment in SEZs is expected to be over US $ 10 Billion in next 5 years. Total Investment in SEZs is expected to be over US $ 10 Billion in next 5 years. Consequent upon the SEZ Rules coming into effect w.e.f. 10th February, 2006, Twenty-one meetings of the Board of Approvals have since been held. During these meetings, formal approval has been granted to 439 SEZ proposals. There are 138 valid in-principle approvals. Out of the 439 formal approvals, 195 SEZs have been notified. 237 SEZ have been approved. So far SEZ are operational & functional Consequent upon the SEZ Rules coming into effect w.e.f. 10th February, 2006, Twenty-one meetings of the Board of Approvals have since been held. During these meetings, formal approval has been granted to 439 SEZ proposals. There are 138 valid in-principle approvals. Out of the 439 formal approvals, 195 SEZs have been notified. 237 SEZ have been approved. So far SEZ are operational & functional

 All corporate borrowers are eligible to raise ECBs up to a maximum of US$ 500 million under automatic route  ECB can be raised only for investment in real sector - industrial sector including small and medium enterprises and infrastructure sector in India, including industrial/ technology parks and for working capital requirement  ECB not permitted for real estate activities other than development of integrated townships as defined by Press Note 3 (2002 series) (ie the 100 area criteria) External Commercial Borrowings By implication, if ECB is not permitted for projects qualifying under Press Note series, corresponding changes have been incorporated in the new ECB policy.

Foreign Collaboration: Business Models PRIVATE EQUITY CAPITAL - Pure financial investment to provide base capital required to undertake larger projects and reduce exposure to debt financing JOINT VENTURE COMPANY – Foreign investor to contribute capital and engineering capabilities. Indian developer to contribute land and local resources. Both partners have joint ownership of project specific SPV. JOINT DEVELOPMENT AGREEMENT – Foreign investor sets up Indian presence and undertakes development activity. Indian partner contributes land and receives deferred consideration in terms of share of development or share of revenues.

Venture Capital Funds (VCF) In 2004, SEBI allowed venture capital funds to invest in local real estate. In 2004, SEBI allowed venture capital funds to invest in local real estate. So far over 30 Foreign funds have applied to start operations in India. So far over 30 Foreign funds have applied to start operations in India. VCFs invest in new properties with a lock in period averaging about 7 years. VCFs and Foreign Venture Capital Finds Investors are exempted from the lock in period requirements, if the shares were held by them for at least one year at the time of filing of the draft prospectus with SEBI. VCFs invest in new properties with a lock in period averaging about 7 years. VCFs and Foreign Venture Capital Finds Investors are exempted from the lock in period requirements, if the shares were held by them for at least one year at the time of filing of the draft prospectus with SEBI. US $ seven to eight billion is estimated to flow into real estate in next 3 years US $ seven to eight billion is estimated to flow into real estate in next 3 years

Real Estate Mutual Funds (REMFs) Recently SEBI has approved the scheme of REMF. Recently SEBI has approved the scheme of REMF. This scheme has objective of direct or indirect investment in Real Estate Property. This scheme has objective of direct or indirect investment in Real Estate Property. The units of REMFs will be compulsorily listed in Stock Exchanges and NET ASSET VALUE (NAV) of the scheme shall be declared daily. The units of REMFs will be compulsorily listed in Stock Exchanges and NET ASSET VALUE (NAV) of the scheme shall be declared daily.

REMFs REMFs can invest directly in Real Estate properties within India, mortgage, housing lease, backed securities, equity shares,bonds,debentures of listed and unlisted Companies.which deals in real estate properties and also undertake property development and other other securities. REMFs can invest directly in Real Estate properties within India, mortgage, housing lease, backed securities, equity shares,bonds,debentures of listed and unlisted Companies.which deals in real estate properties and also undertake property development and other other securities.

FDI in Real Estate – Issues to be addressed  ‘Built up area’ condition - To be fulfilled at initial sanction stage or at time of completion?  Whether ‘date of commencement of business’ implies ‘start date of construction activities’ or ‘date on which agreement for construction/ acquisition of land are signed’?  What constitutes ‘commercial premises’? Whether FDI permitted in malls/ shopping centres?  For sale of serviced housing plot, completion certificate to be obtained for entire project or only the land to be disposed? Whether State laws to be amended to provide for requirement of issue of ‘completion certificate’?  Whether FDI allowed in project specific SPV or also permitted in existing listed/ unlisted real estate companies engaged in prescribed activity?  Definition of Industrial Parks for the purpose of FDI policy?  In the definition of ‘undeveloped plots’, what does the word ‘other conveniences’ include?  Whether FDI permitted for acquisition of SPV’s which owns developed/ partly developed property and intends to develop future properties?

Future Trends for FDI Japan has committed over US$ 2.04 billion as assistance to develop nine infrastructure projects in India. Japan has committed over US$ 2.04 billion as assistance to develop nine infrastructure projects in India. Government Initiatives The sweeping economic reforms undertaken by the government aimed at opening up the economy and embracing globalization have been instrumental in the surge in FDI inflows. The sweeping economic reforms undertaken by the government aimed at opening up the economy and embracing globalization have been instrumental in the surge in FDI inflows. Restructuring the Foreign Investment Promotion Board. Restructuring the Foreign Investment Promotion Board. Establishment of the Indian Investment Commission to act as a one-stop shop between the investor and the bureaucracy. Establishment of the Indian Investment Commission to act as a one-stop shop between the investor and the bureaucracy. Expanding the number of industries for which 100 per cent FDI is allowed through the automatic route. Expanding the number of industries for which 100 per cent FDI is allowed through the automatic route. Progressively raising the FDI cap in other sectors like telecom, aviation, banking, petroleum and media sectors among others. Progressively raising the FDI cap in other sectors like telecom, aviation, banking, petroleum and media sectors among others. Removal of the investment cap in the small scale industries (SSI) sector. Removal of the investment cap in the small scale industries (SSI) sector. With government planning further liberalization measures across a broad range of sectors and continued investor interest, the inflow of FDI into India is likely to further accelerate. Already, buoyed by the growth in FDI into the country, the government has put a target to attract US$ 30 billion in the current financial year ( ). With government planning further liberalization measures across a broad range of sectors and continued investor interest, the inflow of FDI into India is likely to further accelerate. Already, buoyed by the growth in FDI into the country, the government has put a target to attract US$ 30 billion in the current financial year ( ).

Japanese Investment in India 328 Japanese-affiliates in India (as of Jan. 2006) 328 Japanese-affiliates in India (as of Jan. 2006) Location: Delhi 67 Location: Delhi 67 Bangalore 57 Bangalore 57 Mumbai 45 Mumbai 45 Chennai 36 Chennai 36 Major Sectors : Major Sectors : Automotive Components, Automotive Components, Trading, Trading, Machinery, Electrical Goods, Machinery, Electrical Goods, Transport, Transport, IT, IT, Infrastructure NO REAL ESTATE INVESTMENTS Infrastructure NO REAL ESTATE INVESTMENTS Many investment from Japanese Affiliates in ASEAN, which does not appear in statistics. Many investment from Japanese Affiliates in ASEAN, which does not appear in statistics.

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