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This paper intends to explore the social structural causes and conditions of ethnic party formation in Nepali context. The paper argues that the ethnic political parties (EPs), like other kinds of political parties, are one of the manifest products of the social, political and economic structure of the society and their social foundation of formation is different than non-ethnic parties. In Nepal, despite having a number of national political parties, the formation of ethnic parties in Nepal have been growing in number with democratic practices after 1990 and intensifying after the political transition of 2006. Therefore, the paper deals with a key question: why ethnic parties form? To answer the question, the paper argues that there are multiple factors like multiethnic society and non-inclusive state and party structure; democracy and indigenous social movement; failure of existing political parties to address the ethnic concern; rise of new issues such as identity, federalism and proportional representation; and legal-structural changes with international factors are responsible for the ethnic party formation. The paper concludes that the EPs, as a manifest product of democracy, are contributing to the process of democratization in Nepal. In that sense, the rise of ethnic parties is essentially a social phenomenon rooted in the multicultural society of Nepal. The analysis is based on qualitative and quantitative data collected through keen observations, in-depth interview with purposefully selected key informants and required secondary information.