Nepal and the East India Company expanded into the Himalayan foothills and adjoining tarai in the late eighteenth century by employing a number of similar strategies but quite divergent understandings of state formation and power. Nepal dismantled a number of hill polities consisting of self-proclaimed Rajput lineages that controlled trans-Himalayan trade routes along with some area of agricultural land in the tarai; disputes between the Company and Nepal formed around these tarai holdings of the former principalities. The former hill polities had gained authority over largely indigenous groups of subjects, as well as an increasing monopoly on local property regimes, from the sixteenth century. In order to gain political traction in the northern tarai and southern Himalayan foothills, both Nepal and the East India Company had to negotiate with former sovereigns who lost exclusive command over their rajyas and sought refuge either under the conquering power, were killed, or, quite frequently, shifted their households into exile in neighboring territories. These Rajas, however, continued to be recognized by multiple actors, including subjects, personal servants, and local landlords, as retaining vestiges of sovereign power in the decades preceding the Anglo-Nepal War. An often overlooked but key event destabilizing the relationship between Nepal and the Company was Nepal’s final military occupation of Palpa, a substantial hill principality covering an area spanning the current India-Nepal borderland. Nepal’s annexation of Palpa in 1804 lengthened its fuzzy zone of direct territorial contact with the Company as the latter, under Governor-General Wellesley, in 1801 had annexed large portions of the independent state of Awadh’s territory around Gorakhpur. Further, the exiled heir and surviving members of the Palpa Sen family settled in Gorakhpur after 1804. When the East India Company attempted to collect revenue in Palpa’s former tarai which it considered to be part of its newly annexed territories, disputes arose between Nepal and the Company over the meaning of sovereignty and rights to collect land revenue. Incompatible notions of sovereignty and its relationship to rights in land underscored the conflicts leading to the Anglo-Nepal War of 1814 to 1816. Drawing upon colonial British archives as well as published and archival sources in Nepali, this paper examines changing notions and practices of sovereignty and political exile in the nascent India-Nepal borderland from the end of the eighteenth century through the Ango-Nepal War of 1816.