Capital controls against `participatory notes' were introduced in October 2007 [link, link]. At the same time, progress does seem to be taking place on easing restrictions against various kinds of foreign financial firms stepping forward and becoming `registered' FIIs.
Today, Business Standard has a story about a series of hedge funds, including Renaissance, obtaining a SEBI FII registration. Ganesh Mani pointed me to this Bloomberg story which gives the fascinating background story about this remarkable firm. Also see useful material on VC Circle.
I think the convertibility which has been given to FIIs has been one important element of the revolutionary progress that was achieved on the Indian equity market in the 1990s. Conversely, holding back foreign financial firms from other parts of the financial system involves an opportunity cost.