The ability of mesenchymal stem cells to self-renew and differentiate into specialized cell lineages makes them promising tools for regenerative medicine. Local injection and use of scaffolds had been employed earlier to deliver these cells; yet, an optimal delivery system remains to be identified. Here, using genipin, which is a non-toxic natural cross linker for proteins, we prepared alginate-chitosan polymeric microcapsules (GCAC) to develop an efficient stem cell delivery system. We investigated the properties of this membrane along with the encapsulated adipose tissue-derived stem cells (ASCs) and compared that with the widely used alginate poly-lysine (APA) membranes. The GCAC membrane was able to support cell viability, augment cell growth, and showed better results under external rotational and osmotic pressures with about 30% of the ruptured capsules in comparison to 60% ruptured APA capsules. The membrane also provided immune-protection to the entrapped cells as demonstrated by the lymphocyte proliferation assay. The capsule also has potential for long-term storage. The encapsulated four million ASCs also showed steady secretion of approximately 4600pg vascular endothelial growth factor (VEGF) over 15-day time period comparable to that of free cells. Furthermore, the encapsulated ASCs showed around 3.8-fold increase in VEGF secretion after 72h hypoxic conditions in comparison to normoxic conditions. This increased VEGF expression resulted in improved angiogenic potential of the bioactive capsules as noted by enhanced endothelial cell growth. GCAC encapsulation also did not show any effect on their differentiation ability. Thus, because of these biocompatible and bioactive attributes, genipin cross-linked polymeric microcapsules can emerge as a potentially important tool for improved stem cell-based therapy and cell delivery applications.