Hello Lovaraju_KB,
As per the documentation and Naveen, you need Basic Authentication for the Federated Search to work with SDM 12.9.
However, is this a concern? Wouldn't your SharePoint and your SDM be behind firewalls?
If my understanding is right (And it may not be on this point, but putting it out there to prompt discussion) it is the SDM application communicating to the SharePoint server that uses this. It isn't the end users on their web browsers going straight to the Sharepoint(???).
Putting on Wireshark may help to answer this if you wish to test.
Thanks, Kyle_R.