Introduction 1.

Overview of Indian financial market Financial market comprise of the primary market, FDIs, alternative investment options, banking and insurance and the pension sectors, asset management segment as well. With all these elements in the India Financial market, it happens to be one of the oldest across the globe and is definitely the fastest growing and best among all the financial markets of the emerging economies. The history of Indian capital markets spans back 200 years, around the end of the 18th century. It was at this time that India was under the rule of the East India Company. The capital market of India initially developed around Mumbai; with around 200 to 250 securities brokers participating in active trade during the second half of the 19th century.The financial market in India at present is more advanced than many other sectors as it became organized as early as the 19th century with the securities exchanges in Mumbai, Ahmedabad and Kolkata. INDIAN FINANCIAL SYSTEM The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

Financial System;

The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below; FINANCIAL MARKETS A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend. Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions. Capital Market - The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer

FIs and NBFCs purvey short. Constituents of a Financial System . medium and long-term loans to corporate and individuals.Credit market is a place where banks. Credit Market.of funds takes place in this market. This is one of the most developed and integrated market across the globe.

To serve this purpose. primary dealers.g. Intermediary Role Secondary Market to Stock Exchange Capital Market securities Corporate advisory Capital Market. custodians. mere issue of securities will not suffice. In the initial stages. Issue of Credit Market securities Subscribe to Capital Market. portfolio managers. However. There should be a proper channel within the financial system to ensure such transfer. the scope of its operations also widened. issuer and the security should be passed on to take place. When the borrower of funds approaches the financial market to raise funds. underwriter. and dealers. FIs. Though the markets are different. self regulatory organizations. However. Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India. as the financial system widened along with the developments taking place in the financial markets. depositories. underwriters.FINANCIAL INTERMEDIATION Having designed the instrument. the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower. registrars. stock exchanges. there may be a few intermediaries offering their services in move than one market e. satellite dealers. etc. investment bankers. Financial intermediaries came into existence. mutual funds. the services offered by them vary from one market to another. Adequate information of the issue. Some of the important intermediaries operating ink the financial markets include. Investment Bankers services. the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount. financial advertisers financial consultants. This service was offered by banks. brokers. Underwriters unsubscribed portion Money Market of securities Market .

Intervening holidays and/or Sunday are excluded for this purpose. Depositories. (irrespective of the number of intervening holidays) is "Call Money". . When money is borrowed or lent for a day. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost. Thus money. No collateral security is required to cover these transactions. it is "Notice Money". Custodians Capital Market Primary Dealers Money Market Satellite Dealers Forex Dealers Forex Market Issue securities to the investors on behalf of the company and handle share transfer activity Market making in government securities Ensure exchange ink currencies FINANCIAL INSTRUMENTS Money Market Instruments The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. it is known as Call (Overnight) Money.Registrars. borrowed on a day and repaid on the next working day. Call /Notice-Money Market Call/Notice money is the money borrowed or lent on demand for a very short period. Some of the important money market instruments are as follows: 1. When money is borrowed or lent for more than a day and up to 14 days.

as per existing regulations. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India. . Certificate of Deposits Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in dematerialised form or as a Usance Promissory Note.. and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. The rate of discount and the corresponding issue price are determined at each auction. as amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs).. Treasury Bills. less than one year). issue of CD together with other instruments viz. term deposits. the specified entities are not allowed to lend beyond 14 days. Treasury Bills are short term (up to one year) borrowing instruments of the union government. for funds deposited at a bank or other eligible financial institution for a specified time period. term money. Banks have the freedom to issue CDs depending on their requirements. They are issued at a discount to the face value.2. commercial papers and intercorporate deposits should not exceed 100 per cent of its net owned funds. 4.e. i.e. Inter-Bank Term Money Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. as per the latest audited balance sheet. The entry restrictions are the same as those for Call/Notice Money except that. and on maturity the face value is paid to the holder. 3. An FI may issue CDs within the overall umbrella limit fixed by RBI.

convertible preference shares.in) and Securities Exchange Board of India (SEBI) [www. (for more details visit www. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. Examples are convertible debentures. The minimum maturity period of CP is 7 days. warrants etc. 4 crore. deep discount bonds etc.indianmba. non-convertible preference shares etc and in the debt segment debentures. Conclusion In India money market is regulated by Reserve bank of India (www. preference shares.com faculty column) Capital Market Instruments The capital market generally consists of the following long term period i.5. A company shall be eligible to issue CP provided . This kind of instruments is called as hybrid instruments.in ] regulates capital market. In the equity segment Equity shares.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces.e. On issuing commercial paper the debt obligation is transformed into an instrument. (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs. financial instruments.sebi.gov. Capital market consists of primary market and secondary market. more than one year period.(a) the tangible net worth of the company. Hybrid Instruments Hybrid instruments have both the features of equity and debenture.org.. All Initial Public Offerings comes under the primary market and all . zero coupon bonds. as per the latest audited balance sheet. CP is freely negotiable by endorsement and delivery.rbi. is not less than Rs. Commercial Paper CP is a note in evidence of the debt obligation of the issuer.

bonds. To be able to trade a security on a certain stock exchange. A stock exchange is often the most important component of a stock market. In the secondary market transactions BSE and NSE plays a great role in exchange of capital market instruments.secondary market transactions deals in secondary market. it must be listed there. derivatives. Supply and demand in stock markets is driven by various factors that. as modern markets are electronic networks. Usually. pooled investment products and bonds. as in all free markets.e. Secondary market comprises of equity markets and the debt markets. and other securities. which gives them advantages of increased speed and reduced cost of transactions. Introduction of stock exchange Stock markets refer to a market place where investors can buy and sell stocks. Trade on an exchange is by members only. there is a central location at least for record keeping. The price at which each buying and selling transaction takes is determined by the market forces (i. . demand and supply for a particular stock) stock exchange is an entity that provides "trading" facilities for stock brokers and traders to trade stocks. but trade is increasingly less linked to such a physical place. Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. 2. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments. unit trusts. affect the price of stocks (see stock valuation). and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market.

which existed for centuries before the Empire was founded. Cicero mentions "shares that had a very high price at the time. . Some see the key event as the Dutch East India Company's founding in 1602. in Malmendier's view. One such service was the feeding of geese on the Capitoline Hill as a reward to the birds after their honking warned of a Gallic invasion in 390 B.There is usually no compulsion to issue stock via the stock exchange itself.There is little consensus among scholars as to when corporate stock was first traded. Economist Ulrike Malmendier of the University of California at Berkeley argues that a share market existed as far back in ancient Rome. stock exchanges are part of a global market for securities. In one speech. as evidenced. The societas declined into obscurity in the time of the emperors. while others point to earlier developments. Such trading is said to be off exchange or over-thecounter. there were societas publicanorum.C. as most of their services were taken over by direct agents of the state. Participants in such organizations had partes or shares. The idea of debt dates back to the ancient world. a concept mentioned various times by the statesman and orator Cicero. with fluctuating values based on an organization's success. This is the usual way that derivatives and bonds are traded. suggests the instruments were tradable. organizations of contractors or leaseholders who performed temple-building and other services for the government. Increasingly. nor must stock be subsequently traded on the exchange. 3." Such evidence. History of stock exchange Securities markets took centuries to develop. spearheaded by the Italian city-states of the late medieval and early Renaissance periods. In the Roman Republic. Tradable bonds as a commonly used type of security were a more recent innovation.

In 1171. Venice never missed an interest payment. The forefront of commercial innovation eventually shifted from Italy to northern Europe. The bond market had begun. the authorities of the Republic of Venice." which has become synonymous with "stock market. known as prestiti. and when the market was restored. paid 5 percent interest per year and had an indefinite maturity date. . Venice's bonds traded at steep discounts for decades thereafter. Still. nobody's quite sure. drew a forced loan from the citizenry. and the Black Death. it came to be seen as a valuable investment that could be bought and sold. Some scholars place its origins as far back as ancient Rome. Initially regarded with suspicion. often as a means of paying for warfare. the idea of debt as a tradable investment endured. Other Italian city-states such as Florence and Genoa became bond issuers as well. Such debt. an alliance of mercantile towns such as Bruges and Antwerp. concerned about their war-depleted treasury." arose in Bruges. which caused monarchs of France and England to default on debts to Italian banks. Such arrangements. Other blows to financial stability resulted from the Hundred Years War. typically extended only to a handful of people and were of limited duration. War between Venice and Genoa resulted in suspension of prestiti interest payments in the early 1380s. operated counting houses to expedite trade. the concept of stock developed gradually. The term "bourse. it was at a lower interest rate. The Hanseatic League. a business facilitated by bankers such as the Medicis. again with Italian city-states in the vanguard. From 1262 to 1379. however. Bonds were traded widely in Italy and beyond. As with bonds. which ravaged much of Europe. Partnership agreements dividing ownership into shares date back at least to the 13th century. either from a sign outside a trading centre showing one or a few purses or because merchants gathered at the house of a man named Van der Burse. solidifying the credibility of the new instruments. as with shipping partnerships that applied only to a single sea voyage.

However. with ordinary shareholders not having much influence on management or even access to the company's accounting statements. one such was the Muscovy Company. The Dutch West India Company was formed in 1621. bringing a new issuer to the burgeoning securities market.400 florins. also known as Joseph Penso de la Vega and by other variations of his name. dating from 7 November 1623.By the late 1500s. A bond issued by the Dutch East India Company. was an Amsterdam trader from a Spanish Jewish family and a prolific writer as well as a . The next big step was in Amsterdam. In 1602. which sought to wrest trade with Russia away from Hanseatic dominance. Amsterdam's growth as a financial center survived the tulip mania of the 1630s. The Dutch East India Company. Financial innovation in Amsterdam took many forms. the Dutch East India Company was formed as a joint-stock company with shares that were readily tradable. a purview that included conducting military operations against recalcitrant natives and competing colonial powers. the company was expanding its securities issuance with the first use of corporate bonds. Control of the company was held tightly by its directors. In 1609. The company paid an average dividend of over 16 percent per year from 1602 to 1650. By the 1620s. for the amount of 2. New techniques and instruments proliferated for securities as well as commodities. shareholders were rewarded well for their investment. in which contracts for the delivery of flower bulbs soared wildly and then crashed. investors led by one Isaac Le Maire formed history's first bear syndicate. but their coordinated trading had only a modest impact in driving down share prices. including early forms of options trading and margin trading. operated as a colonial ruler in what's now Indonesia and beyond. The stock market had begun. which tended to be robust throughout the 17th century. Joseph de la Vega. formed to build up the spice trade. British merchants were experimenting with joint-stock companies intended to operate on an ongoing basis.

The year that de la Vega published also brought an event that helped spread financial techniques and talent from Amsterdam to London. London's first stockbrokers. operating out of Jonathan's Coffee House. was posting regular lists of stock and commodity prices. At the centre of it were the South Sea Company. English joint-stock companies began going public. By 1698. This was the "glorious revolution.successful businessman in 17th-century Amsterdam. and de la Vega offered advice to his readers on such topics as the unpredictability of market shifts and the importance of patience in investment. In 1720. His 1688 book Confusion of Confusions explained the workings of the city's stock market. a shareholder and a philosopher. were barred from the old commercial center known as the Royal Exchange." in which Dutch ruler William of Orange also ascended to England's throne. and thus the kingdom's first government bonds were issued in 1693 and the Bank of England was set up the following year. focused on commerce with France's Louisiana colony and touted by transplanted Scottish financier John Law. One of history's greatest financial bubbles occurred in the next few decades. the book described a market that was sophisticated but also prone to excesses. Those lists mark the beginning of the London Stock Exchange. It was the earliest book about stock trading. and whatever else was available. there was even an offering of "a company for carrying out an . however. set up in 1711 to conduct English trade with South America. reportedly because of their rude manners. who was acting in effect as France's central banker. Soon thereafter. the new trade was conducted from coffee houses along Exchange Alley. taking the form of a dialogue between a merchant. and the Mississippi Company. NASDAQ was the first electronic stock exchange. Investors snapped up shares in both. William sought to modernize England's finances to pay for its wars. at the height of the mania. a broker named John Castaing. Instead.

NASDAQ. and by the 1790s shares were being traded in the young United States. Yet the market survived. 4. share prices were collapsing. the world's first electronic stock exchange. started its operations.undertaking of great advantage. In Paris. are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture. it leads to a more rational allocation of resources because funds. resulting in stronger economic growth and higher productivity levels of firms. The role of stock exchanges Stock exchanges have multiple roles in the economy. which stated that only royally chartered companies could issue public shares. which could have been consumed. Mobilizing savings for investment When people draw their savings and invest in shares. Stock trading was more limited and subdued in subsequent decades. as it became clear that expectations of imminent wealth from the Americas were overblown. or kept in idle deposits with banks. . On February 8. Parliament passed the Bubble Act. Law was stripped of office and fled the country." By the end of that same year. 1971. but nobody to know what it is. commerce and industry. In London. This may include the following: Raising capital for businesses The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public.

Sunbeam (2001). The dot-com bubble in the late 1990's. Parmalat (2003). One. companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders. some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. Webvan (2001). Despite this claim. increase its market share. through dividends and stock price increases that may result in capital gains. American International Group (2008). share in the wealth of profitable businesses. . Enron Corporation (2001). Bear Stearns (2008). and the more stringent rules for public corporations imposed by public stock exchanges and the government. and the subprime mortgage crisis in 2007-08. increase distribution channels. Profit sharing Both casual and professional stock investors. it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately held companies (those companies where shares are not publicly traded. General Motors (2009) and Satyam Computer Services (2009) were among the most widely scrutinized by the media. or acquire other necessary business assets.Tel (2001).Facilitating company growth Companies view acquisitions as an opportunity to expand product lines. Companies like Pets. Lehman Brothers (2008). hedge against volatility. are classical examples of corporate mismanagement. or otherwise by a small group of investors).com (2000). Adelphia (2002). Consequently. MCI WorldCom (2002). often owned by the company founders and/or their families and heirs. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion. Corporate governance By having a wide and varied scope of owners.

Creating investment opportunities for small investors As opposed to other businesses that require huge capital outlay. when poor financial. These bonds can be raised through the Stock Exchange whereby members of the public buy them. ethical or managerial records are known by the stock investors. to directly tax citizens to finance development²though by securing such bonds with the full faith and credit of the government instead of with collateral. share prices rise and fall depending. shareholders of underperforming firms are often penalized by significant share price decline. Therefore the movement of share prices and in general of the . on market forces. and they tend as well to dismiss incompetent management teams. In the stock exchanges. the government must eventually tax citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature. Barometer of the economy At the stock exchange. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Government capital-raising for development projects Governments at various levels may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. An economic recession. The issuance of such bonds can obviate the need. the stock and the company tend to lose value. largely. or financial crisis could eventually lead to a stock market crash.However. in the short term. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. depression. thus loaning money to the government.

Major stock of Stock exchanges of India » Bombay Stock Exchange » National Stock Exchange » Regional Stock Exchanges » Ahmedabad » Bangalore » Bhubaneshwar » Calcutta » Cochin » Coimbatore » Delhi » Guwahati » Hyderabad » Jaipur » Ludhiana » Madhya Pradesh » Madras » Magadh » Mangalore » Meerut .stock indexes can be an indicator of the general trend in the economy 5.

One of the advantages of corporate organization is that stakeholders may sell their interest to another party. Power plants. computer chip manufacturers and many other endeavors require tens or hundreds of millions of dollars of investment before they can produce any profit.» OTC Exchange Of India » Pune » Saurashtra Kutch » UttarPradesh » Vadodara 6. brokers and other agents of the system work. many of these projects would not be possible. Stock exchanges put in place the infrastructure necessary to connect these buyers and sellers. Other exchanges occupy no centralized physical location and operate through telecommunication and computer networks. At any one time. Connecting Traders The stock exchange also facilitates trading. which accumulates capital (money) while dispersing ownership. hundreds or even thousands of individuals may wish to sell their shares of stock. . Without corporate organization. This refers to the accumulation of vast quantities of money necessary to start large ventures. Many stock exchanges occupy physical buildings in which traders. while as many investors may wish to purchase the same security. Objectives of stock exchange Capital Formation One of the most important objectives of a stock exchange is capital formation. automobile production facilities.

They also obligate people who have entered into contracts to honor those contracts or face criminal prosecution. Economic Indicator Though not originally intended to function as such. Even a casual observation of the general trends on major stock exchanges can give some insight into the state of a national or regional economy. because they trust the system. The goal of regulation is to allow people who may not always trust each other to do business with each other. at least incrementally. in cooperation with their governments. the "uptick rule" states that before a short contract (a "bet" that a stock will decline) can be written on a security. the price must increase. Some regulation is put in place to protect against unintended consequences of an unregulated market. stock exchanges also work as instruments to quantify the state of an economy. which can decrease confidence in its strength and lead to more shorting and a further decline. These rules are intended to protect the investor from unfair advantages taken by people possessing special knowledge. 7. NSE Milestones November 1992Incorporation April 1993Recognition as a stock exchange May 1993Formulation of business plan . This prevents a struggling stock from being shorted.Security The operators of stock exchanges. have designed and implemented laws and regulations determining how the system should function. or even the global economy. For example.

co-promoted by NSE November 1996Best IT Usage award by Computer Society of India December 1996Commencement dematerialised securities of trading/settlement in December 1996Dataquest award for Top IT User December 1996Launch of CNX Nifty Junior February 1997Regional clearing facility goes live November 1997Best IT Usage award by Computer Society of India May 1998Promotion of joint venture.June 1994Wholesale Debt Market segment goes live November 1994Capital Market (Equities) segment goes live March 1995Establishment of Investor Grievance Cell April 1995Establishment Corporation of NSCCL. India Index Services & Products Limited (IISL) May 1998Launch of NSE's Web-site: www.co. the first Clearing June 1995Introduction of centralised insurance cover for all trading members July 1995Establishment of Investor Protection Fund October 1995Became largest stock exchange in the country April 1996Commencement of clearing and settlement by NSCCL April 1996Launch of S&P CNX Nifty June 1996Establishment of Settlement Guarantee Fund November 1996Setting up of National Securities Depository Limited.in .nse. first depository in India.

a joint venture between NSE. and i-flex Solutions Ltd.IT Ltd. December 2000Commencement of WAP trading June 2001Commencement of trading in Index Options July 2001Commencement of trading in Options on Individual Securities November 2001Commencement Individual Securities of trading in Futures on December 2001Launch of NSE VaR for Government Securities January 2002Launch of Exchange Traded Funds (ETFs) May 2002NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category October 2002Launch of NSE Government Securities Index .July 1998Launch of NSE's Certification Programme in Financial Market August 1998CYBER CORPORATE OF THE YEAR 1998 award February 1999Launch of Automated Lending and Borrowing Mechanism April 1999CHIP Web Award by CHIP magazine October 1999Setting up of NSE.IT January 2000Launch of NSE Research Initiative February 2000Commencement of Internet Trading June 2000Commencement Futures) of Derivatives Trading (Index September 2000Launch of 'Zero Coupon Yield Curve' November 2000Launch of Broker Plaza by Dotex International.

com CRISIL announce launch of June 2007NSE launches derivatives on Nifty Junior & CNX 100 October 2007NSE launches derivatives on Nifty Midcap 50 January 2008Introduction of Mini Nifty derivative contracts on 1st January 2008 March 2008Introduction of long term option contracts on S&P CNX Nifty Index April 2008Launch of India VIX April 2008Launch of Securities Lending & Borrowing Scheme August 2008Launch of Currency Derivatives August 2009Launch of Interest Rate Futures November 2009Launch of Mutual Fund Service System . by Asia Risk magazine January 2007Launch of NSE ± CNBC TV 18 media centre March 2007NSE. IndiaBondWatch.January 2003Commencement of trading in Retail Debt Market June 2003Launch of Interest Rate Futures August 2003Launch of Futures & options in CNXIT Index June 2004Launch of STP Interoperability August 2004Launch of companies NSE¶s electronic interface for listed March 2005µIndia Innovation Award¶ by EMPI Business School. New Delhi June 2005Launch of Futures & options in BANK Nifty Index December 2006'Derivative Exchange of the Year'.

2010Introduction of Call auction in Pre-open session October 28. 2010Real Time dissemination of India VIX. 2010LOI signed with London Stock Exchange Group October 12. 2010Commencement of trading of S&P CNX Nifty Futures on CME July 19. July 28.SGX product cross listing agreement April 2010Financial Derivative Exchange of the Year Award' by Asian Banker July 19.CME Group & NSE . 2010Introduction of European Style Stock Options October 29.December 2009Commencement of settlement of corporate bonds February 2010Launch currency pairs of Currency Futures on additional March 2010NSE. 2010Introduction of Currency Options on USD INR .

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