After they killed her, they laid down their arms and turned themselves in.
As for where Khalistan is, it's centered around Punjab, in the northwest, just south of Kashmir and on the border with Pakistan. Khalistan would be an excellent buffer between India and Pakistan.
I can see the Indian fear, though. It seems as if there are separatists in every region (not sure about that) and if every region got their "freedom," there wouldn't be much of India left.
Which would, of course, be followed by much dancing in Pakistan...
My guess is that India is doing something wrong if there are so many serious separatist movements within the country. Part of it, no doubt, is the fact that it's the result of British colonial rule over a bunch of formerly autonomous regions and the modern state of India is relatively young.
We see the same thing in Pakistan which isn't really completely unified today, either.
But India's democracy developed much more fully than what we've seen in Pakistan, and it seemed to be well on its way to becoming a First World country. Apparently, more autonomy needs to be given to these troublesome regions, or the benefits of remaining united with India would be obvious. Pure speculation on my part, though.