Here are a couple things to take note of:
Some Li-ion batteries have built-in circuitry (read below for reason) to measure the charge level accurately. With these types of batteries, as was already mentioned in before:
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a full discharge/charge will reset the digital circuit of a 'smart' battery to improve the state-of-charge estimation
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However, not all Li-ion batteries have this circuitry. Maybe economy versions? if that's the case, I'm sure Kobo would have opted for those to keep its price down. With these types of batteries, its just a simple voltage measurement thats used as a rough estimate of charge level:
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It must be noted that utilizing voltage as a fuel gauge function is inaccurate because cells made by different manufacturers produce a slightly different voltage profile. This is due to the electrochemistry of the electrodes and electrolyte. Temperature also affects the voltage. The higher the temperature, the lower the voltage will be.
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Also, here's a charge-profile graph I found for Li-ion batteries:
Most charging systems will indicate full charge when the current hits the low threshold at the end of 'Stage 2'. Some of the 'Turbo' charges will skip stage 2 and indicate full charge using a voltage measurement at the the end of stage 1 (note: The charge level at this point is about 70%).
In any case, given the fact that the Kobo was released pretty bare-bones, with plenty of little kinks and such, I don't think it's a stretch to think they didn't really care about a very accurate battery gauge meter algorithm. The red light could be explained by this as well.