People  always seem to use the term "hundi" without really understanding what it means.

I think It is perfectly fine to give your (your here being your family's etc) money to someone in Nepal and have the recepient (or his/her accqaintance) give money to you here. People have the right to give their money to whoever they want. If I am wrong please point out the exact law that is being violated here.

Only if that is your business, (i.e facilitating money transfer for other people, or serving as a clearing house for transactions of other people), then you are acting as a banking facility, and it is illegal to operate that way without registering as a financial institution.

Similarly, if you are a business (for example, involved in garments export from Nepal), then it is illegal to hide your financial transactions by using informal money transfers in order to evade taxes or capital flow controls.

It is also illegal to artificially overvalue or undervalue the price of goods/services you export or import in order to enable money transfer for other people.

It is also illegal to give money to someone when you know that that money is going to be used for crime for any nature. Then you would be accused of abetting the crime.