Seems like an asshole move by the Nizam. The prime minister had to eventually offer to sell it to him for a fraction of the price. I can't find any more info but I'm sure there has to be more juicy behind the scene going ons about how the whole situation played out.
The key error is assuming that this was a very awkward situation. First, who was the PM of Hyderabad? Viqar-ul-Umra was from the famous Paigah family of Hyderabad.
The Paigah family and Viqar-ul-Umra were the second most powerful family in Hyderabad behind the Nizam's family. Viqar-ul-Umra was the 4^th prime minister from the Paigah family.
They were also linked to the Nizam's family by several, several matrimonial bonds. Typically, Paigah boys were wedded off to the Nizam's daughters. Viqar-ul-Umra was himself the uncle AND the brother in law of the Nizam in question. This was no ordinary PM.
Irrespective, Viqar-ul-Umra owed the Nizam for making him PM. As a result, when it became clear that the Nizam loved Falaknuma , the PM gifted it to him for free and then at the low price on the Nizam's insistence.
This was very much a family affair.