The Missing Cap: Designated Partners And Governance Under India's LLP Law

Indian corporate law has over the years developed a relatively robust framework to regulate the concentration of managerial control and oversight responsibilities in companies. One of the most visible manifestations of this concern is the statutory cap on the number of directorships an individual may hold under the Companies Act, 2013 ("Act"). Section 165 of the Act limits a person to a maximum of twenty directorships of which no more than ten may be in public companies. The rationale is self-evident excessive board positions dilute fiduciary attention, weaken oversight and facilitate opaque concentrations of control.

However, this logic encounters a conspicuous silence when the legal lens shifts from companies to limited liability partnerships ("LLPs"). Under the Limited Liability Partnership Act, 2008 ("LLP Act"), there is no statutory ceiling on the number of LLPs in which a person may act as a designated partner. As a result, an individual barred from holding additional company directorships may legally assume dozens if not hundreds of designated partner positions across LLPs without triggering any statutory violation.

Directorship Caps: Rationale and Evolution

Section 165 of the Act introduced a clear quantitative limit on directorships. A person may not hold office as a director in more than twenty companies at the same time with a further restriction that not more than ten of these may be public companies. Dormant companies and certain private company directorships are excluded for counting purposes but the core principle remains intact. The provision reflects long-standing policy concerns about 'over-boarding', a phenomenon where individuals occupy so many board seats that they are unable to meaningfully discharge fiduciary duties. Indian courts and regulators have consistently recognised that directors owe duties of care, skill and diligence under Section 166 of the Act and that these duties are inherently personal and non-delegable. In Official Liquidator v. P.A. Tendolkar¹, the Supreme Court emphasised that directors are expected to apply an active mind to corporate affairs and cannot plead ignorance as a defence. Against this backdrop, the statutory ceiling on directorships operates not merely as an administrative rule but as a governance safeguard designed to prevent excessive aggregation of decision-making authority and ensure accountability.

The LLP Framework

The LLP Act introduced a hybrid business form combining limited liability with partnership flexibility. LLPs are body corporates distinct from their partners, but their governance structure differs materially from companies. Management vests primarily in designated partners, who are responsible for compliance, filings and statutory obligations. Section 7 of the LLP Act requires every LLP to have at least two designated partners, one of whom must be resident in India. Designated partners bear responsibility for regulatory compliance under the Act, including annual filings, statements of account, and solvency declarations. In substance, they perform a role analogous to directors in companies, at least insofar as statutory responsibility and governance oversight are concerned. Notably, the LLP Act contains no provision equivalent to Section 165 of the Act. There is no statutory limit on the number of LLPs in which an individual may act as a designated partner. Nor do the LLP Rules, 2009 impose any numerical restriction or disclosure obligation akin to directorship disclosures under Section 170 or Section 184 of the Companies Act. This asymmetry creates a situation where the same individual may be barred from accepting an additional company directorship but may simultaneously assume control or compliance responsibility across an unlimited number of LLPs.

Functional Parity: Are Designated Partners Comparable to Directors?

A central question in assessing the governance implications of unlimited LLP designations is whether designated partners are functionally comparable to company directors. While the two roles arise under different statutory regimes there are significant overlaps.

Designated partners are responsible for ensuring compliance with the LLP Act, maintaining statutory records, filing financial statements and representing the LLP before authorities. Failure to comply can attract civil and criminal liability, including fines and imprisonment. In Ravindranath Reddy v. State of Telangana², courts have treated designated partners as the persons 'in charge' of the LLP for purposes of statutory compliance mirroring the approach adopted for directors under company law. From a governance perspective, designated partners exercise substantial control over LLP operations particularly where the LLP agreement vests management authority in a small group of partners. In many LLPs, especially those with institutional investors or complex ownership structures designated partners function as de facto directors. If the law recognises that directors must be limited in number to ensure effective oversight and accountability it is difficult to justify why designated partners who often perform analogous roles should be exempt from similar constraints.

Control and Concentration Problem

The absence of statutory caps on LLP designated partnerships creates the possibility of indirect concentration of control. An individual may remain within the formal limits imposed by the Act while simultaneously exercising effective control over a vast network of LLPs. This raises several governance concerns.

First, the aggregation of control across numerous LLPs undermines the spirit of Section 165 of the Companies Act. While the letter of the law is not violated its underlying purpose to prevent excessive managerial concentration is arguably circumvented. Second, such structures may complicate regulatory oversight. LLPs are subject to fewer disclosure requirements than companies. There is no equivalent of a public register of significant beneficial ownership comparable to Sections 89 and 90 of the Act. When combined with unlimited designated partnerships this opacity can make it difficult for regulators, creditors and counterparties to assess where real control lies. Third, excessive concentration of designated partnerships raises concerns about effective fiduciary performance. Just as an over-boarded director may struggle to discharge duties across multiple companies, a designated partner spread across dozens of LLPs may be unable to meaningfully supervise compliance, financial integrity and risk management.

Regulatory Arbitrage and Structural Incentives

The current framework may also incentivise regulatory arbitrage. Business groups seeking to consolidate control while avoiding statutory caps may increasingly favour LLP structures over companies. This is particularly relevant in promoter-driven groups, family offices and closely held investment networks. Such arbitrage is not illegal but it raises normative questions about coherence in corporate governance regulation. When two business forms perform similar economic functions but are subject to vastly different governance constraints, regulatory choice may be driven by avoidance of oversight rather than business efficiency. The Supreme Court has in other contexts cautioned against permitting form to triumph over substance. In Vodafone International Holdings v. Union of India³ while dealing with tax structuring, the Court acknowledged that legitimate structuring is permissible but emphasised that sham arrangements lacking commercial substance may warrant scrutiny. Although LLP structuring does not inherently lack substance, the possibility of using LLPs solely to evade governance limits merits closer attention.

Should there be Legal Intervention?

The question is not whether LLPs should be over-regulated but whether governance parity should be preserved where functional roles overlap. There are several potential reform pathways that could address the existing gap without undermining the flexibility that LLPs offer.

One approach could be to introduce a soft cap or disclosure-based regime, requiring individuals acting as designated partners in more than a prescribed number of LLPs to make enhanced disclosures to the Registrar. Another approach could be to align designated partner responsibilities with director disqualification provisions under Sections 164 of the Act, thereby ensuring accountability even in the absence of numerical limits. A more direct approach would be to amend the LLP Act to introduce a numerical ceiling analogous to Section 165 with suitable carve-outs for professional firms or dormant LLPs. While such a move may face resistance on ease-of-doing-business grounds, it would bring conceptual coherence to India's corporate governance architecture. Importantly, any reform must be calibrated to avoid unintended consequences. LLPs continue to serve valuable commercial purposes and excessive rigidity could stifle legitimate business activity. The challenge lies in balancing flexibility with accountability.

Footnotes

1. AIR 1962 SC 1636

2. 2021 SCC OnLine Hyd 566

3. (2012) 6 SCC 613

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