More than 1.5 million people live in the Kathmandu valley. The valley is facing an extreme shortage of water supply. At the same time the demand is escalating rapidly. To address this issue of scarcity of water, the government of Nepal has proposed a project of inter- basin transfer of water from Melamchi River located 40 Km north-east of the Kathmandu valley. The project will cover two districts and three municipalities and will potentially have significant impacts on the environment. In accordance with the Environmental Protection Regulation of Nepal (1997), the Melamchi Water Supply Project (MWSP) has undergone an EIA during the feasibility study stage of the proposed project. The recommendations contained in the EIA were integrated into the project design for implementation in 2006. This paper summarizes the background of MWSP, the environmental concerns described in the EIA and the status of Environmental Management Plan (EMP) developed to address environmental compliance and other issues involving participation and support of the local people. This paper also provides some lessons to learn on the modalities of addressing the demands and grievances of the local people concerning environmental management.