Hi Tejas,
Although I was not able to attend the linux event organized recently due to previous commitments, I'm sure Prakhar, Ankur, etc. have done a good job. There are 2 ways to program the solution to this problem: In the userspace and kernel space. A kernel space implementation would be costlier to implement, as it requires tapping into the system calls which are responsible for reading the filesystem (opening of folder, etc.). I would rather suggest a userspace implementation.
You can use the SystemTap libraries to probe (instrument) whenever a folder gets created / opened. To protect the folder, you can simply add an extended attribute to the folder's inode - an encrypted string having the password. You can create a daemon (equivalent to a 'service' on windows), which runs all the time in the background. Once you detect that a folder is opened (using systemtap in your daemon), you can spring up a QT based GUI to ask for the password.
Systemtap:
Creating a daemon:
QT: