India's stock market regulator said on Wednesday that the limit on individual foreign fund investments in local companies excluded their holdings in derivatives instruments such as options and futures.

But this rule will hold only as long as derivatives contracts continue to be settled in cash, the Securities and Exchange Board of India said in a circular posted on its web site, www.sebi.gov.in.

All contracts in the derivatives segment are currently settled in cash, and physical delivery does not take place.

A foreign fund can now hold up to ten per cent of a company's equity and their sub-accounts can hold up to five per cent.

Analysts said the notification would help foreigners increase their exposure to individual stocks by taking futures positions in companies where they have reached the prescribed ceiling in the cash segment.

India allowed derivatives trading in June 2000 and permitted offshore funds to trade in the segment last year. This segment now has four products: index futures, index options, stocks futures and stock options.