We propose a novel capsule network based variational encoder architecture, called Bayesian capsules (B-Caps), to modulate the mean and standard deviation of the sampling distribution in the latent space. We hypothesize that this approach can learn a better representation of features in the latent space than traditional approaches. Our hypothesis was tested by using the learned latent variables for image reconstruction task, where for MNIST and Fashion-MNIST datasets, different classes were separated successfully in the latent space using our proposed model. Our experimental results have shown improved reconstruction and classification performances for both datasets adding credence to our hypothesis. We also showed that by increasing the latent space dimension, the proposed B-Caps was able to learn a better representation when compared to the traditional variational auto-encoders (VAE). Hence our results indicate the strength of capsule networks in representation learning which has never been examined under the VAE settings before.