The Government of Nepal has given its approval to India-based GMR for construction of the $1.15bn Upper Karnali hydropower plant, which will be the country's largest hydro facility.
The project will have 900MW of power generation capacity and is expected to ease the country's chronic electricity shortage.
This would make the largest private overseas investment in Nepal so far.
Nepal Planning Commission member Govinda Pokhrel was quoted by Associated Press as saying: "This agreement would open the door for more foreign investment to enter Nepal to develop hydropower projects."
China has been looking to make investments in Nepal's power sector, but India has taken the lead with this investment.
The plant is expected to be developed in five years.
GMR would operate the plant for 25 years and will then hand it over to the Government of Nepal.
Most of the electricity produced from this facility would be transmitted to India through lines built along the borders.
Under the deal, Nepal will have 27% stake in the plant and received 12% of the power produced for free of charge.
Nepal is facing acute power shortages, with power cuts going up to 12 hours a day as the existing hydro plants are not able to meet growing demand.
Nepal allowed GMR to construct the plant in 2008. However, due to political instability, the project has been delayed six times.
A project development agreement (PDA) will be signed by GMR with Investment Board of Nepal.