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'Pagdi' in literal sense means 'turban' but in context of Bombay came to mean 'key money'. It was a consequence of the Rent Control Act introduced during the First World War to protect tenants in the face of a steep rise in rents as a result of the adverse effects of the war. Under this system, verbal agreements played a major role in property transfers where in the tenants were given a slip of rent payment and tenants made payments in full to the landlord. 

The pagdi system came to play when any flat or a house that came under the Rent Control Act had to be transferred to someone else. In case of change of tenancy, the new tenant had to pay a lump sum (called 'pagdi') that was related to the market value of the rental property. Generally, one-third of this amount went to the landlord to change the name on the rent receipt and the remaining two-thirds to the outgoing tenant. With the pagdi system, the new tenants, notionally speaking were paying the rents that were much lower than the market price but at the time of moving in had to pay a lump sump amount. This amount could be recovered when they would leave the house and a new tenant be moving in.