We present optical spectroscopic and milli-arcsecond scale radio continuum observations of the quasar M1540-1453 ($z_{em}$ = 2.104$\pm$0.002) that shows associated HI 21-cm absorption at $z_{abs}$ = 2.1139. At sub-kpc scales, the powerful radio source with 1.4 GHz luminosity of $5.9\times10^{27}$ WHz$^{-1}$ shows Fanaroff-Riley (FR) class I morphology caused by the interaction with dense gas within 70 pc from the AGN. Interestingly, while there are indications for the presence of absorption from low-ionization species like FeII, SiII and SiIII in the optical spectrum, the expected strong damped Ly$α$ absorption is not detected at the redshift of the HI 21-cm absorber. In comparison to typical high-$z$ quasars, the Ly$α$ emission line is much narrower. The `ghostly' nature of the HI Ly$α$ absorber partially covering the broad line region of extent 0.05 pc and the detection of widespread HI 21-cm absorption covering the diffuse radio source (extent $>$425 pc) imply the presence of a large clumpy HI halo -- which may have been blown by the jet-ISM interaction. Further observations are needed to confirm the `ghostly' nature of the Ly$α$ absorber, and obtain a better understanding of the role played by the jet-ISM interaction in shaping the radio morphology of this powerful AGN. The study showcases how joint radio and optical analysis can shed light on gaseous environment and origin of radio morphology in AGN at high redshifts, when these are still the assembly sites of giant galaxies.