Police said Baptist University's student union, Keith Fong, was taken to Mong Kok police station on the early hours of Tuesday after he failed to explain why another person's wallet was with him.
Polcie, who released him unconditionally on Tuesday, said officers had to take Fong to the police station, before they can locate the owner of the wallet.
District commander for Mong Kok, Bradley Wright, said the police action was per rules.
"The police gave the person every opportunity, at the time, to explain why he was in possession of that property, but was unable to do so. As such, in accordance with the law, he was brought back to the police station for further inquiry," he said.
Soon after Fong's arrest in Mong Kok, the university's student union announced that he had kept the wallet to return it its owner.
The student group also offered a screen cap of conversation to clarify that Fong intended to return the wallet.
In a letter sent to students, staff and alumni, Baptist University president Roland Chin said the university was "deeply concerned" about the case and called for Fong's release.
It's the second time in a month that Fong has been detained by the police.
Last time, he was arrested on suspicion of possessing offensive weapons, after being found carrying 10 laser pointers in Sham Shui Po last month.
That arrest sparked a siege of the Sham Shui Po police station, as well as a lighthearted protest involving the use of laser pointers in Tsim Sha Tsui.