Occluding cell-cell junctions are pivotal during the development of many organs. One example are septate junction (SJ) strands which are found in vertebrates and invertebrates. Although several proteins have been identified that are responsible for SJ formation in Drosophila, it is presently unclear how these structures are formed or how they are positioned in a coordinated manner between two neighboring cells and within the tissue. Here we identified a GPI-anchored protein called Undicht required for SJ formation. Clonal analysis and rescue experiments show that Undicht acts in a non-cell autonomous manner. It can be released from the plasma membrane by the proteolytic activity of two related ADAM10-like proteases, Kuzbanian and Kuzbanian-like. We propose that juxtacrine function of Undicht coordinates the formation of SJ strands on two directly neighboring cells whereas paracrine activity of Undicht controls the formation of occluding junctions within a tissue.