Decentralized wastewater treatment and reuse (DWTRU) using small-scale on-site sewage treatment plants (STPs) is an attractive solution addressing the problems of water pollution and scarcity, especially in rapidly urbanizing cities in developing countries, where centralized infrastructure for wastewater treatment is inadequate. But decentralized systems face several challenges (economic feasibility, public acceptance) that need to be better understood. The city of Bengaluru in India provides an excellent opportunity to evaluate such systems. In 2004, in an effort to curb the alarming levels of pollution in its water bodies due to untreated sewage disposal, the environmental regulatory agency mandated apartment complexes above a certain size to install STPs and reuse 100% of their wastewater, resulting in the installation of more than 2200 on-site STPs till date. This study attempts to analyze the factors influencing the extent of treatment and reuse in such systems, through structured surveys of residential associations, STP experts and government officials. The results are analyzed using a framework that integrates the technology adoption literature with the monitoring and enforcement literature. The study indicates that, while no apartment complex is able to reuse 100% of its treated water, there exists significant variation across apartment complexes in the level of treatment and reuse (from partial to poor) due to a complex mix of economies of scale, the price of fresh water, the level of enforcement and awareness, and technological choices made under information asymmetry. Only apartments dependent on expensive tanker water supply had clear economic incentives to comply with the order. Yet many large complexes that depended on low-priced utility or borewell supply were partially compliant, owing partly to lower (although positive) costs, higher level of formal enforcement and perhaps greater environmental awareness. On the other hand, the high treatment cost pushed smaller complexes to curtail the operation of their STPs (and the lower levels of enforcement further worsened this), resulting in inadequate treated water quality and consequently low reuse levels. The study recommends relaxing the infeasible 100% reuse criterion, and raising the threshold size above which DWTRU should be mandated so as to reduce the cost burden and increase enforceability. Subsidies towards capital costs and enabling resale of treated water will enable wider adoption. DWTRU is an apparently attractive solution that however, requires judicious policy-making and implementation to succeed.