Introduction – Layoff Rules in India
For many employers, especially in sectors where the number of workers runs into hundreds, the subject of layoff rules in India comes up only when business slows or production stalls. In law, a layoff is not just any break in work; it has a defined meaning. The Indian Industrial Disputes Act (ID Act) laid down the provisions for layoff, and the Industrial Relations Code 2020 (IR Code) framework carries the idea forward. The core of the provisions remains the same: employers can’t simply send employees home without following the procedure the statute sets.
The legal scheme is not light reading. For some establishments, prior government approval is required before the first employee is laid off. For others, the paperwork is less, but the obligation to pay statutory compensation still applies. Any missed step can attract an unhappy workforce, penalties, orders to reinstate with back wages, and reputational damage.
From a practical standpoint, understanding the enforceability and scope of layoff rules in India is part compliance, part risk control. Some of the things an employer should have straight before acting are:
- Whether a stoppage in work meets the legal test for a layoff.
- Whether the size or location of the unit triggers prior-permission rules.
- How layoff compensation in India is worked out and actually paid.
- Understanding the difference between retrenchment vs layoff in law.
- Internal HR processes to keep notices, records, and recall obligations in order.
This article will help understand the definitions, procedures, permissible grounds, and recent trends so that decisions can be made with a clear view of both the law and the risks.
Defining Layoff in Indian Labour Law
In day-to-day language, “layoff” is used generally to mean job loss. However, in law, it has a precise, narrower meaning, and layoff rules in India are built on that legal definition. Both the Indian Industrial Disputes Act layoff provisions and the newer Industrial Relations Code 2020 layoff framework set out when a workforce stoppage qualifies as a layoff and when it doesn’t. Read our other article: Understanding FEMA Rules for Foreign Investors in India: Key Compliance and Routes
Meaning under the Industrial Disputes Act, 1947
Section 2(kkk) of the ID Act defines a layoff as the failure, refusal, or inability of an employer to give employment to a workman, whose name is on the muster rolls, for reasons beyond the employer’s control. The statute even lists examples: shortage of raw materials, power cuts, breakdown of machinery, natural calamities, or accumulation of stock.
A few important points:
- It’s not the same as retrenchment; the difference in retrenchment vs layoff is that a layoff is temporary in nature.
- The worker must report for duty and be willing to work; if they are absent, the definition doesn’t apply.
- Muster roll presence is critical; if the person is not on it, they are not legally “laid off.”
Definition in the Industrial Relations Code, 2020
The Industrial Relations Code 2020 layoff provision largely mirrors the ID Act definition but modernises language and consolidates related procedural sections. The idea remains the same, temporary inability to offer work, without severing the employment relationship, but the Code folds it into a broader, unified labour law scheme.
Key Differences and Practical Implications
| Aspect | ID Act Position | IR Code Position |
| Definition | In Section 2(kkk) with illustrative causes | Similar wording, moved into integrated Code |
| Procedural Rules | Scattered across Sections 25C–25E, 25M, etc. | Centralised in one chapter |
| Thresholds | Applies where ID Act is still in force | Will replace ID Act on notification |
For employers, the takeaway is that until the IR Code is fully enforced nationwide, both frameworks can be relevant depending on state notification status. This means employer obligations, apropos, layoffs in India, may vary depending on location and timing.
Legal Framework – Industrial Disputes Act vs Industrial Relations Code
For employers trying to follow layoff rules in India, the starting point is still the Industrial Disputes Act, 1947, but that will not always be the case. The Indian Industrial Disputes Act layoff provisions remain the operative law in most states because, although Parliament has passed the Industrial Relations Code 2020 layoff framework, full enforcement depends on both central and state notifications. Labour, being a concurrent subject, means that timing is not uniform.
Applicability and Transition
In states where the IR Code is not yet in force, the older ID Act provisions apply in full. Once the Code is notified, it will fold the existing layoff, retrenchment, and closure rules into a single, consolidated chapter. Until that happens, an employer with units in different states might be dealing with two sets of requirements at the same time, and that’s when mistakes are made.
Employer Thresholds for Layoff Permission
One of the notable shifts is in the size threshold for needing prior government permission:
- Under the ID Act, an establishment with 100 or more workmen cannot lay off staff without prior approval (Section 25M). This is strict, and the permission process can be time-consuming.
- Under the IR Code, the figure jumps to 300 or more workers, which means many medium-sized units would no longer be caught by this rule.
Even where approval is not needed, employer obligations layoff India still exist, keeping muster rolls, serving notices, and paying statutory layoff compensation in India on time.
Penalties for Non-Compliance
The ID Act has long allowed fines, and in some situations, even short imprisonment (as provided under Section 25Q) for employers who lay off without approval when it’s required. The IR Code moves towards monetary penalties in a more standardised form, but the amounts can still be significant, especially for repeated breaches.
Other Key Provisions to Keep in Mind
This is where practical compliance often slips:
- Muster rolls must be up to date and open to inspection; failure here can create its own liability.
- Notices have to go not just to the affected workmen but also, in many cases, to the labour authorities.
- Where the layoff is genuinely temporary, many statutes preserve the right of those workers to be recalled first when work resumes.
Grounds for Layoff: Legal Conditions
For an action to count as a “layoff” under the law, and to fall within the scope of layoff rules in India, it must be based on reasons the statutes recognise. Both the Indian Industrial Disputes Act layoff provisions and the Industrial Relations Code 2020 layoff framework identify specific grounds, and if the reason doesn’t fit, the action may be treated as illegal or reclassified as retrenchment. That’s where the retrenchment vs layoff difference becomes critical.
Recognised Valid Reasons
The law is quite specific about what counts as valid:
- Shortage of raw materials – often seen in manufacturing when supply chains break down.
- Shortage of power or fuel – common in energy-intensive industries.
- Breakdown of machinery – provided it is genuine and documented.
- Natural calamity – floods, earthquakes, or other acts of God.
- Accumulation of stocks – where production has to be paused because goods aren’t moving.
Courts have generally accepted these as legitimate, but they still expect proof, like internal memos, production logs, and supplier notices, to back the decision.
Prohibited or Invalid Reasons
Not every business difficulty justifies a layoff. Examples that usually fail the legal test include:
- Laying off to avoid paying statutory dues like gratuity or bonus.
- Targeting certain employees under the guise of operational needs.
- Cutting the workforce purely to bring in cheaper replacements.
Where reasons fall into these categories, it’s not just a breach of employer obligations for layoff in India; it can attract penalties and orders to reinstate.
State-Specific Exemptions and Restrictions
India’s labour system leaves room for state-level rules.
- Gujarat – Certain Special Economic Zones have relaxed approval requirements, making layoffs easier if criteria are met.
- West Bengal – Known for tighter controls, including in some cases stricter closure and layoff permissions.
- Other states may have exemptions for seasonal industries.
Table – Layoff Grounds Snapshot
| Ground | Statutory Recognition | Notes |
| Shortage of raw materials | Yes | Must be documented |
| Machinery breakdown | Yes | Repair timelines should be shown |
| Natural calamity | Yes | Proof of disruption needed |
| Avoiding statutory dues | No | Considered unlawful |
| Cost-cutting only | No | Risk of reclassification as retrenchment |
Layoff Compensation & Employee Rights
Once a layoff meets legal criteria, layoff compensation in India becomes the next key point. Both the ID Act and the IR Code make it clear that workers affected are entitled to statutory payment, unless a specific exemption applies.
Layoff Compensation under the Industrial Disputes Act
Section 25C of the ID Act sets the baseline:
- Eligible workmen are entitled to 50% of the basic wages plus dearness allowance for the layoff period.
- Eligibility requires the employee to be on the muster roll and willing to work when work is available.
- There’s usually a cap of 45 days in any 12 months, after which further payments may be replaced by other arrangements.
Layoff under the Industrial Relations Code
The layoff model in the Industrial Relations Code 2020 retains the 50% wage principle but adds the idea of a Re-skilling Fund. Employers must contribute an amount equivalent to 15 days’ wages into this fund for each retrenched worker. It’s meant to support re-employment, though the mechanism overlaps with layoff support in some cases.
Preferential Re-employment Rights
Both regimes recognise that if work resumes, laid-off workers should get first call:
- This is not just courtesy, it is part of the employer’s obligations during the layoff process in India, as provided under the statutes.
- Breach of this obligation can lead to disputes and orders for reinstatement with back pay.
Additional Protections under Other Acts
Even during layoffs, other employment rights remain live:
- Gratuity – service period counts if employment is not terminated.
- Provident Fund contributions – rules vary, but employers may still be liable.
- Notice pay – if the layoff turns into retrenchment, notice or pay in lieu applies.
Table – Layoff Compensation Overview
| Provision | ID Act | IR Code |
| Basic compensation rate | 50% of basic + DA | Same as ID Act |
| Payment cap | 45 days (general rule) | Similar, subject to state rules |
| Re-skilling Fund | Not applicable | 15 days’ wages per retrenched worker |
| Preferential re-employment right | Yes | Yes |
Practical Process for Employers
In practice, compliance with layoff rules in India is less about quoting sections and more about following a chain of steps without missing the small ones that trip employers up later. The law is split between the Industrial Disputes Act layoff provisions (for establishments that haven’t yet shifted to the newer framework) and the Industrial Relations Code 2020 layoff rules. Both point to a similar process, but the thresholds, paperwork, and timing differ enough that you cannot simply “copy-paste” one into the other.
Procedure under the Industrial Disputes Act
Government Permission in Certain Cases
If your industrial establishment employs 100 or more workmen, Section 25M makes government approval a precondition before any layoff. The sequence is fairly rigid:
- An application stating the grounds for the proposed layoff must be sent to the appropriate authority.
- Identical copies go to the affected workmen — failure here is one of the most common grounds for challenge.
- The authority has up to 60 days to respond. If no decision comes, the law treats it as approved by default.
Overlooking a filing or sending incomplete details has, in several cases, led to the layoff being labelled “illegal”, with orders for reinstatement plus full back wages.
Muster Rolls and Record-Keeping
Where approval isn’t needed, employer obligations for layoffs in India are still active. This includes:
- Maintaining a current muster roll to show the availability and attendance of workmen.
- Serving written notices to the concerned employees, setting out dates and reasons.
- Keeping documents that evidence why work couldn’t be provided, these tend to surface in court disputes years later.
Process under the Industrial Relations Code, 2020
The Industrial Relations Code 2020 layoff changes the compliance map in two ways: it raises the bar for mandatory approvals and merges procedures.
Threshold Changes
- Under the IR Code, permission is only mandatory if the unit has 300 or more workers.
- Smaller operations still have to meet the notice and payment rules, but the lengthy approval chain is avoided.
One Framework for Three Situations
The IR Code pulls layoff, retrenchment, and closure into a single chapter (Chapters IX and X). That sounds simpler, but it also means a procedural misstep in one area and could have implications across the others.
Table – Permission Thresholds Side by Side
| Law | When Permission is Needed | Core Steps |
| ID Act | 100+ workmen | Apply to authority, give worker copies, await order (max 60 days) |
| IR Code | 300+ workers | Apply to authority, give worker copies, await order (max 60 days) |
Layoff vs Retrenchment vs Closure
Knowing the retrenchment vs layoff difference is essential. Employers often use the terms interchangeably, but in law, they have distinct meanings and distinct compliance paths.
Definitions & Distinctions
- Layoff – Temporary inability to give work to employees whose names are on the muster roll, without ending the employment relationship.
- Retrenchment – Permanent termination of employees for any reason other than disciplinary action, retirement, or closure.
- Closure – Permanent shutting down of a place of employment or part of it.
The difference matters because the layoff compensation formula is not the same as retrenchment compensation, and closure has its own separate obligations.
Legal Impacts and Employer Obligations
Layoff:
- Compensation at 50% of basic wages plus dearness allowance (subject to statutory caps); and
- Preferential re-employment rights when work resumes.
Retrenchment:
- One month’s notice or wages in lieu, plus retrenchment compensation equal to 15 days’ average pay for every completed year of service.
Closure:
- Similar to retrenchment compensation, but payable to all eligible workmen unless exempted.
Key Legal Differences
| Aspect | Layoff | Retrenchment | Closure |
| Nature | Temporary | Permanent | Permanent |
| Employment Status | Continues | Ends | Ends |
| Compensation | 50% wages + DA | 15 days’ pay/year of service | 15 days’ pay/year of service |
| Approval Needed | Yes (if applicable under the above threshold) | Yes (if applicable under the above threshold) | Yes (if applicable under the above threshold) |
State-wise Variations in Layoff Rules
In practice, the layoff rules in India may start from the Industrial Disputes Act or the Industrial Relations Code, 2020, but the real complexity creeps in at the state level. Anyone who has managed a multi-location workforce will tell you that it’s not the central text alone that decides your risk; it’s how state notifications, inspector interpretations, and sector-specific carve-outs actually play out.
A few examples to illustrate the spread.
Gujarat – SEZ-Oriented Relaxations
In parts of Gujarat, especially within Special Economic Zones or large industrial estates, the government has, by notification, eased certain employer obligations layoff India:
- The headcount threshold for seeking prior permission can, in certain notified parks, be calculated differently, which can bring an establishment below the approval radar in borderline cases.
- Labour department approvals are often processed faster than the standard sixty-day period — although this depends heavily on complete paperwork and prior liaison.
- SEZ facilitation desks sometimes fold multiple inspections into a single-window process. That said, muster rolls, notice copies, and justification documents still need to be airtight, because if a dispute lands before an industrial tribunal, the SEZ tag won’t excuse poor record-keeping.
West Bengal – Procedural Caution
In contrast, West Bengal leans conservative.
- For certain industries — especially in heavy manufacturing and public utility-linked sectors — prior government permission is insisted upon even for establishments that might, elsewhere, fall outside the statutory trigger.
- Inspectors have wider latitude to verify claims of “shortage of work” or “supply disruption,” and site visits can be more frequent.
- While not codified, there is an unspoken expectation that management will involve the recognised trade union before the formal notice is even filed. Skipping that step can slow down or complicate approval.
Here, the process often has as much to do with maintaining industrial peace as with legal thresholds.
Other States Worth Noting
- Maharashtra: In belts like Pune or Nashik, the reporting window to the Labour Commissioner can be as short as a week from the intended layoff date — something out-of-state employers have missed in the past.
- Tamil Nadu: Notifications in textile and automobile clusters sometimes tack on industry-specific forms to the layoff process, which, if omitted, can stall your application.
- Karnataka: Even though the IR Code framework applies, the state’s Shops and Establishments inspectors keep a close watch on IT and service sector layoffs, which catches some employers off guard if they think “factory law” doesn’t touch them.
This mix of central law and state adjustment is why any pan-India layoff rules compliance plan should have a state-wise matrix reviewed quarterly — otherwise, a procedural miss in just one location can undermine the legality of the entire layoff decision.
Practical Compliance Checklist for Layoffs in India
In real-world terms, compliance with layoff rules in India isn’t just about knowing the law — it’s about checking, cross-checking, and making sure you haven’t missed one procedural step that could later blow up into a dispute. The list below reflects both central requirements and some state-level traps that employers have stumbled on before.
It’s not a “one size fits all” sheet — but it’s a good starting point.
Layoff Compliance Checks (Central & State Layers)
| Item to Verify | What This Means in Practice | Relevant Law / Code | If You Skip It… |
| Establishment Size Trigger | Count all “workmen” as defined — don’t just rely on HR headcount. Some states interpret fixed-term contracts differently. | ID Act Sec. 25M / IR Code Ch. IX | Layoff can be struck down; reinstatement + back wages. |
| Grounds for Layoff | Must fit the statutory list (e.g., shortage of raw material, machinery breakdown). Seasonal dip in sales may not pass scrutiny. | ID Act Sec. 2(kkk) | Application can be refused outright. |
| Government Permission | Written application with reasons, copy to workers. In some states, form formats differ. | ID Act Sec. 25M / IR Code Sec. 78 | Orders for reinstatement; back pay liability. |
| Documentation | Muster rolls, downtime logs, supplier letters — keep them ready for inspection even years later. | Both | Tribunals may treat absence of proof as bad faith. |
| Layoff Compensation | 50% of basic wages + DA for affected days. Pay timelines matter; late payments attract penalties. | ID Act Sec. 25C / IR Code equivalent | Claims for arrears, interest, and penalties. |
| Preferential Re-employment | If you hire again, ex-workmen get first offer. Maintain evidence you offered it. | ID Act Sec. 25H | Damages and legal costs. |
| State-Specific Add-ons | West Bengal, Tamil Nadu, Gujarat SEZs all have tweaks — ignore them at your peril. | State Rules | Separate fines or even prosecution. |
Six Non-Negotiable Employer Actions
If you’re implementing a layoff under Indian law, these are the key employer obligations for layoff in India that you cannot sidestep:
- Pin down the applicable regime — Are you still under the Industrial Disputes Act, or has the IR Code, 2020, been enforced in your state?
- Verify your headcount against the legal threshold, using statutory definitions, not just payroll numbers.
- Draft and file approvals with enough factual support that an inspector or tribunal won’t call them “vague”.
- Keep contemporaneous records — muster rolls, production stoppage logs, and supplier correspondence matter more than you think.
- Pay statutory layoff compensation promptly, not “once cash flow improves”, as delays create liability.
- Do a state-law check — even if the central law seems to allow it, your state’s notification might say otherwise.
Case Summaries & Regulatory Trends
When talking about layoff rules in India, the statute only tells part of the story. The rest, often the part that bites in real life, comes from how labour authorities, conciliation officers, and courts choose to read those provisions. On paper, many employers are convinced they’ve ticked all the legal requirements for layoffs — but a minor oversight in timing or documentation can quickly undo that confidence. Under the IR Code 2020 layoff provisions, a single procedural lapse has, more than once, turned a planned cost-cutting measure into a reinstatement order plus back wages.
Illustrative Decisions – Recent Experience
- Maharashtra Industrial Tribunal – 2023
A mid-tier engineering company asked for permission to idle two production lines, citing the non-arrival of imported components. The Labour Department rejected it, saying the application was too general and lacked proof. No emails from suppliers, no shipping records. The employer tried appealing, but the tribunal sided with the department. It reminded that the termination and layoff compliance is not a paperwork formality, you must substantiate the “cause” with something tangible. - Delhi High Court – 2022
A digital news platform carried out staff cuts under a “business restructuring” tag. The court dug into whether this was linked to recognised grounds under Indian labour laws for layoffs. Finding no direct statutory match, it held the employer had over-stretched the definition. The takeaway: strategy changes without a qualifying statutory reason are risky.
Trends Emerging Under the IR Code
Looking over orders and notifications, certain threads keep appearing:
- Closer cause scrutiny – “Market slowdown” without data isn’t enough.
- E-permission portals – Faster processing but also faster rejection if filings are incomplete.
- Layoff vs. retrenchment blur – Temporary layoffs that drag on invite challenges as de facto terminations.
- Policy chatter – Proposals on extending notice periods for larger layoffs are back in discussion.
Observed Shifts
| Year | Regulatory Move | Practical Impact |
| 2021–22 | IR Code consolidation | Some harmonisation, but state amendments still add variation |
| 2023 | Online permission portals | Quicker turnaround, higher compliance rejection rate |
| 2024 | Draft longer notice for mass layoffs | Could add cost and planning complexity |
Practical Steps for Employers Before, During & After a Layoff
From experience, employer obligations for layoffs in India go far beyond filing prescribed forms. How the decision is planned, supported with evidence, and communicated, and that exact sequence, often decides whether it holds up when challenged. More than one layoff that “looked fine on paper” has failed because the paperwork didn’t match the reality on the ground.
Strategic Planning Before Pulling the Trigger
- Look at the escape lanes first – redeployment to other units, voluntary retirements, even temporary short-shift models. Sometimes, these avoid a full termination and layoff compliance exercise, which can be costly in time and risk.
- Paper your reason – keep the trail of supplier cancellations, sales drop reports, and production stoppage logs. Later, if asked, you’ll need to show the cause wasn’t vague or post-facto invented.
- Sound out the department – a quick, informal call or pre-filing meeting with the state labour office often saves weeks of objections later.
Drafting and Announcing the Decision
- Notices need precision — if the Act says use a term, use it, but make sure workers can understand it without a lawyer at their elbow.
- Avoid “market slowdown” type phrases with no numbers — authorities and unions treat them as placeholders, not reasons.
- Sequence matters — once approval is granted, do not sit on it for weeks before informing staff; delay creates distrust.
Executing the Compliance Steps
| Step | Why This Matters in Practice | Linked Rule |
| Check the headcount trigger | Misreading it can make you think permission isn’t needed | ID Act / IR Code 2020 |
| File within statutory days | Even a day late gives grounds for rejection | State-specific layoff rules |
| Pay dues before or with notice | Late payment often leads to immediate claims | Sec. 25C ID Act / IR Code equivalent |
Managing Risks After the Event
- Keep an eye on rehiring, some rules give laid-off staff first preference if you start recruitment.
- Hold all layoff files for 3–5 years; claims don’t always arrive in the same season as the layoff.
- Maintain a line to union reps or worker leaders — sometimes reputational damage, not legal challenge, is the real cost.
Frequently Asked Questions (FAQs) – Layoff rules in India
Is Government Approval Always Mandatory for a Layoff?
Not in every case, but once your establishment crosses certain size limits set in law, the requirement usually kicks in. Under the Industrial Disputes Act, 1947 (and now, in most states, read alongside the Industrial Relations Code, 2020), certain industries, particularly manufacturing plants, mines, and plantations, employing more than 100 workmen (or 300 in states that have raised the limit) must obtain government approval before declaring a layoff.
For smaller service sector companies or IT firms, the thresholds may not apply in the same way, but that depends heavily on state notifications. Several states have issued exemptions for particular industries or categories of work. Missing this step can be costly, as we’ve seen cases where the labour department intervened directly, and in a few, even ordered reinstatement with back wages.
What Is the Compensation If I Lay Off an Employee?
The broad principle, unless your state law says otherwise, is that the eligible workmen are entitled to 50% of their basic wages plus dearness allowance during the layoff, for up to 45 days in 12 months. Beyond that, the employer generally has to seek permission from the government to continue the layoff.
Reference Table – Layoff Compensation
| Period | Payment | Notes |
| First 45 days in a year | 50% of basic wages + DA | Subject to eligibility; no approval needed |
| After 45 days | Same rate | Written government approval required |
| Seasonal undertakings | Usually exempt | Check state-specific rules |
Can a Laid-Off Employee Be Rehired Automatically?
No, there is no automatic reinstatement at the end of a layoff. But under Section 25H of the Industrial Disputes Act, if you do hire again for the same or similar work, you must first offer those roles to retrenched or laid-off workmen. Ignoring this has led to disputes, and in some cases, tribunals have ordered reinstatement with arrears.
Does the IR Code Change Severance Pay Rules?
In substance, not really. The IR Code, 2020, retains the formula of 15 days’ average pay for every completed year of service when retrenching. The “change” is more in the way the procedure is centralised and streamlined, but states still have leeway to notify their own rules. For employers, the risk lies in assuming “streamlined” means “relaxed” — in practice, compliance checks remain strict.
What If My State-Level Law Differs?
India’s labour law is a mix of central and state powers. The central law sets the floor, but states can, and often do, change the numbers and procedures. That’s why a manufacturing unit in Madhya Pradesh (where the permission threshold is 300) is in a different position from one in Kerala (still at 100).
Before you make any move:
- Check the latest state amendments or notifications.
- See if your sector has an exemption.
- Confirm whether your operations are classified as seasonal or intermittent, that can change the applicability entirely.
Conclusion – Layoff Rules in India
Recap of Key Legal Obligations
In practice, a lawful layoff in India isn’t just a matter of sending out a formal letter or cutting a cheque. It means lining up each step with your employer obligations for layoffs in India, and being able to show, on paper, that the termination and layoff compliance process was followed. That often includes:
- Filing or securing government approval for layoffs where the statute requires it;
- Working out payments strictly under the layoff compensation rules in India; and
- Checking the fine print of state-specific layoff regulations, which can differ in thresholds or timelines.
Many disputes start not because the employer refused to pay, but because the paperwork or approvals weren’t in order.
Balancing Business Needs with Statutory Compliance
Layoffs tend to be triggered by business realities, like falling orders, high costs, and restructuring. But how the process is handled decides whether it ends quietly or with a tribunal summons. The industrial relations code layoff rules were drafted to give companies some operational room while still protecting workers from the abrupt loss of their livelihood.
If the decision is driven only by cost-cutting and skips the procedural rails, the employer is exposed, not just to legal claims, but to reputational damage with employees, unions, and sometimes even customers.
Documentation & Expert Legal Advice
Keeping your records straight is critical. Approvals sought, notices served, correspondence with workers, payment proofs, all of it. These become your defence file if questioned. In grey areas, where state-specific layoff regulations have recently changed or are being harmonised under the IR Code, a short consultation with a labour-law specialist can prevent months of back-and-forth with the authorities.
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