Rainbowing is a comb filter artefact (caused by hi-frequency luminance information affecting the chroma demodulator). When I looked at the specs for the SAA7135 chipset it said it supported 3D (motion-adaptive) y/c separation, but also went on to mention a built-in 4-line adaptive (2D) comb filter.

What is the actual make/model of your capture card?

You could try using a comb filter in another device. For example, feed the composite signal from the LD player into a DVD recorder, then connect the s-video output from that to your capture card.