Yes, that indeed was the premise
As for population not being the deciding factor in case of Princely States, it was the British Government policy of not merging the Indian states and retaining their status quo, which of course was far beyond any logical justification. The British attempted to integrate Princely States into India in mid nineteenth century. At least seventy states were merged on different pretexts. This caused political unrest and was one of the major factors behind the 1857 rebellion ... Later, the British (unsuccessfully) tried to use Princes as a counterweight to Indian Nationalism... Even the 3rd June Plan was, on purpose, kept ambiguous about the future of the States. It merely affirmed that the British Government's policy towards Indian states remained as enunciated in the Cabinet Mission's Memorandum of 12 May 1946, which stipulated that paramountcy would lapse with the withdrawal of the British from India and would in no circumstances be transferred to an Indian government...... Jinnah's approach towards the states was purely legalistic.
By cablegram dated 21 August 1948,585 Hyderabad informed the Security Council, under Article 35 (Z), that
a grave dispute had arisen between Hyderabad and India, which, unless settled in accordance with international law and justice, was likely to endanger the maintenance of international peace and security.
http://www.un.org/en/sc/repertoire/46-51/Chapter 8/46-51_08-19-TheHyderabad question.pdf.