Nepal's government has signed an agreement with Indian company GMR to build the Himalayan nation's largest hydroelectric plant in a small step toward easing chronic power shortages and attracting new investment.

The $1.15 billion Upper Karnali Hydro power plant would be the biggest private foreign investment in Nepal.

The agreement was signed by officials from Nepal Investment Board and the Indian company in the presence of Nepal's Prime Minister Sushil Koirala and Indian Home Minister Rajnath Singh.

'This agreement has opened doors for future utilisation of Nepal's natural resources for benefit of Nepal and its people. It will play an important role for the prosperity of Nepalese people,' Nepal's Deputy Prime Minister Bam Dev Gautam said.

Nepal's Cabinet had endorsed the draft agreement to allow the company to build the plant with a 900 MW capacity.

The Cabinet in the same meeting also endorsed a draft of a power trade agreement to be signed with India later in the year.

Nepal has been trying to woo investment from foreign companies as it recovers from years of political instability. Its main options are India and China, the only countries with which landlocked Nepal has borders.

Most of the power generated from the Upper Karnali hydropower plant that will be built by GMR would be exported to India.

Under the agreement, Nepal would get 12 per cent of the electricity free of charge and would be able to buy more to ease power shortages. Nepal would have a 27 per cent stake in the project.-Reuters